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How to lose money on real estate moves

Blog by The Schacter Team | March 6th, 2010

Extra costs mount up, eating away at your profit


i have a buddy who figures he made about $100,000 in the housing market in the past two to three years.

that's not a bad take, but i question whether he really made that much money. no, i don't believe he's lying about what he paid for his house or what he sold it for. i just think he forgot to include a few factors -- the transaction costs associated with his move.

luckily, he's smart enough not to live in toronto, the only jurisdiction in Canada with two land transfer taxes -- one going to the municipality and the other to the province. But even without those extra charges, once you factor in real estate commissions, legal fees and other closing costs, as much as $35,000 of his profit will have been eaten away. so that leaves $65,000, you say. not really.

he made a decision to downsize. he bought his home for about $400,000 and realized about a 25% return in a very short period of time. impressive. But he also sold a previous home. if that first home was worth about $300,000 when he moved, based on a 25% increase in price, he still would be up $75,000 if he had just stayed put. the way i figure it, all this moving has cost him roughly $10,000. of course, there are other reasons for a move, such as a changing family situation, that cannot be helped and you have to bite the bullet.

But continuously selling and buying homes can lead to destruction of wealth over your lifetime.

on average, Canadians move about 4.5 to 5.5 times in their lifetime, according to the Canadian association of accredited Mortgage Professionals.

all that moving could easily wipe out $150,000 in extra costs.

so why do it? "it really depends on what you are accomplishing by the move," says Don lawby, chief executive of Century 21 Canada, pointing out if your company moves you far enough you can write off any costs they don't cover.

"sometimes, you move because of circumstances of life. a child may come along that you didn't plan on. somebody might die. You could have a health problem. there could be a divorce."

Yes, there are ways to make money by moving constantly, such as putting so-called "sweat" equity into a house, improving its value. i wish i were a fix-it guy. since there are no capital gains on a principal residence, this might be the only legal way to make money in this country without paying tax.

" You can make money [buying and selling houses] if you have lots of knowledge, but the average person doesn't. You can't pay the regular rate for a plumber, regular rate for an electrician and make money," says Mr. lawby.

Derek holt, an economist with the Bank of nova scotia, says if real estate commissions come down it would make moving more palatable. he estimates if the Canadian real Estate association's lock on home listings is broken, consumers would see a drop of about $15,000 in costs on each transaction.

the Competition Bureau has lodged a complaint with the Competition tribunal about CrEa's practices. no date has been set for the hearing as of yet.

"[Former U.s. Federal reserve chairman] alan Greenspan once made the comment that the costs of moving absorb 8% of your home equity and that's not far off the Canadian experience. it might be higher," says Mr. holt. "You don't want to do that too many times or you could blow a quarter or a third of your equity."

Despite the expense, Mr. holt said the no. 1 concern for most Canadians when they are moving is whether they can afford the carrying costs on their new home. in his own life, Mr. holt said he's trying to limit how many moves he makes.

"We moved three years ago and my next move is going to be feet first out the door," said Mr. holt. that's one move somebody else will be paying for.

DUSTY WALLET: always try to negotiate the commission rate with your real estate agent. if a buyer and seller are close to agreeing on a price, there is nothing that says the agents can't dip into their commission to bring the two par ties closer toge ther and close a deal. DW is also curious to know if consumers have found it easier to negotiate a lower commission now that the Competition Bureau has the real estate industry in its sights.