DUSTY WALLET

Real estate gains in Canada aren’t nearly as healthy as they seem once all the costs of buying and selling are factored into the equation

Real estate gains aren’t nearly as healthy as they seem to be.

It took just over 24 hours to sell a house in midtown Toronto for $1.15 million. Considering the same house sold for $1.05 million about two years earlier, it looks like a sweet deal until you realize there’s not much profit at all once you factor in transaction costs.

The same property has now switched hands five times over the past two decades and with each sale there are myriad costs — fees the often-maligned mutual fund industry could only dream of. In real estate, the costs of selling and buying can easily eat up to 10% of home equity. This is especially true in Canada’s largest city with its double land transfer tax system to go along with the usual realtor commissions, legal fees, moving costs, appraisals, inspectors and minor maintenance to spruce up a home.

The land transfer tax on $1.15 million comes out to $38,200: $19,475 to the province and $18,725 to the city. The buyer pays it, but it’s hard to believe it’s not baked into the price in some way. If you’re buying again, you’ll certainly pay it on your new home. The real estate commission is typically 5% in Toronto, although in other jurisdictions it starts with a base rate of 7% on the first

$100,000 and the percentage then goes down on every dollar over. On this deal, the fee could easily have been $57,500. Then, every time you sell, you’ll need a mover for $2,000, a lawyer for $1,500 and perhaps another

$3,000 to fix up your house for sale. “To get in and out of selling, can easily cost

9%[ each time]. You do it five times and that’s a huge number, 45% of an investment gone,” says LawrenceDale, president of ZoloRealty, and a long-time advocate of lower commission rates. He worries about the buyers who might have to turn around and sell in a short period. If the buyer purchased costly mort-

“TO GET IN AND OUT OF SELLING CAN EASILY COST 9% EACH TIME. DO IT FIVE TIMES AND THAT’S A HUGE NUMBER, 45% OF AN INVESTMENT GONE”

gage default insurance — as high as 3.15% of the mortgage — the costs go up even more. “That’s a real problem; you’re in the hole before you ever get going,” he says.

To go back to the house in question, it sold in 1994 for $370,000, again in 1997 for $422,000, and once more in 2004 for

$614,000 before its two most recent sales. There wasn’t always a double land transfer tax so the previous sales might have only generated 7% in costs.

Add it up, using the 7% figure for the first three sales and 9% for the last two, and that house that sold for $1.15 million has had close to $300,000 sucked out of it over the past decade through taxes, realtor fees and other costs. And, it should be noted, the owner who sold for $1.05 million in 2012 put $100,000 worth of renovations into the home. As long as real estate prices rise 5% to 10% year over year, the fees seem tolerable if you hold for a decent stretch of time. But moving five times in a couple of decades can destroy your equity gains even in the best of times.

“Nobody cared about mutual fund fees when [the returns] were 20%,” notes Peter Hodson, chief executive of 5i Research Inc. and a long-time commentator on those fees. “When returns went down to 4% or 5% or negative, people cared. When you make 4% net with a 2% fee, you suddenly care because your mutual fund manager is making 33% of what you made.”

Will there ever be the same type of revolt against real estate fees? There has been some pushback on the government transfer tax and legal fees have been whittled down over time. But real estate commissions seem to have barely budged even though they are calculated as a percentage of the sale price and, therefore, have soared with the housing market. “It’s like the old days of mutual funds when there weren’t that many alternatives,” Hodson says.

Some people have turned to the renovation market to avoid the costs of moving. Renovation spending reached an all-time high of $63.4 billion in Canada in 2013. “I think a shift is occurring, but it’s going to take like 15-20 years, just like it did with mutual funds,” Hodson says.