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What home buyers need to know about unexpected closing costs

Recently, there was a report in the media about a group of condominium buyers who were hit with some unexpected closing costs. That they received a bill just prior to closing was not a surprise, but the size of the bill was.  For some purchasers, the bill was significantly higher than their original down payment.  The result was considerable anxiety and outrage.  After consulting with lawyers, they discovered that these costs, although an unwelcome surprise, are entirely legal.

Closing costs have always been part of the new home buying process. When builders sell condo units, they usually do so months or even years before construction on the condo begins.  The process of construction can also take many more months, even years.  So, builders need flexibility to make adjustments at the time of closing to manage unexpected costs, including municipal levies.

The challenge for buyers is that these costs are not always clear self-evident or even known.  Back in 2012, Tarion wanted consumers to have better disclosure when it came to closing costs.  After consulting with builders, industry members and the public, we made changes to better protect home buyers.

Today, some purchasers are still closing on agreements that pre-date the changes we introduced to the Agreement of Purchase and Sale (APS) in 2012.  That means their closing costs are located throughout their APS and not always clearly explained as costs that amount to an “extra cost” on closing.   The changes Tarion made in 2012 mandate that all fees and charges be itemized on a single sheet, titled “Schedule B” and attached to every APS.  This requirement allows homeowners to view on one page, all the potential additional cost items associated with buying a house or condominium. Tarion also required developers to distinguish between fixed costs and additional charges. Fixed costs, which are known at the time the buyer signs the APS, can include such items as landscaping fees and utility hook ups. Additional charges, which are not known at the time of signing, can include certain taxes, extras and development charges. These are unknown at the time of signing for many reasons. Among them, a municipality can increase its fees during the construction phase, and the builder will be forced to pay the additional charges at closing – which is then passed on to the buyer.

During our 2012 consultations, it was suggested that there should be a requirement to provide an estimate of these unknown costs. That suggestion was considered and not accepted. Many of the kinds of items that are being adjusted are difficult to estimate – such as the example I provided above. However, buyers should remember that they do have some negotiation power when purchasing a new home, and can request an estimate or a maximum amount outlined in their APS for each adjustable item.

I recently received an email from a home buyer on this very subject, with suggestions on how to strengthen the consumer protection around this issue. One of the suggestions included providing home buyers with a draft statement of adjustments some time before closing.  For example, 30 or 60 days prior to closing. This would help lessen the “sticker shock,” and help home buyers prepare for the upcoming bill.  As I mentioned to this buyer, this is something Tarion will look into, as a way to add more transparency and protection to consumers during the new home buying process.

So the debate on how to best deal with these “unknowns” at the time a buyer signs a deal continues. On the one hand, home buyers should be provided with as much clarity as possible on the final price of their new homes. On the other hand, builders need to adjust to costs that may be unexpected or even unknown.


About the Author: Howard Bogach is President and CEO at Tarion Warranty Corporation

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