Were you surprised to spend more money than originally budgeted for that land, house or condominium unit? Or were you startled at the net amount received from the sale of your property? Were you shocked by the hidden costs?
Purchasing and selling property entail knowing what these extra costs are, especially for first-timers. Although they are not really hidden, you may have arrived at that perception due to your broker’s failure to properly disclose the costs.
In reality, these costs are manageable and are a fraction of the purchase price. Understanding what they are, how much extra needs to be spent, and who is responsible for paying them is essential.
Pre-purchase expenses
• Earnest money. Oftentimes, sellers ask for a security deposit. It is an upfront sum requested even before any deal is concluded, to show that the buyer is really serious in making the property purchase. As there is no standard figure or percentage, the amount and terms of the deposit are negotiated, including its partial or full refund to the potential buyer in case the transaction is not consummated.
• Due diligence expenses. It is important for any buyer to properly research the property being offered for sale. Such review entails costs for title tracing, traveling expenses and per diems for out-of-town inspections, verifications and the like.
• Legal fees. Certified documents, whether from the Registry of Deeds, Land Management Service, Tax Mapping Department, Assessor’s Office, Treasurer’s Office, etc. have to be secured. While these amounts may be small, nonetheless they form part of buyers’ expenses.
• Miscellaneous fees. Many times, third party professionals like a para-legal staff, lawyer or firm will be used by buyers to assist them in the title research and verification. These professionals may also be requested to prepare or review the transactional documents like Reservation Agreement, Contract to Sell and Deed of Absolute Sale. Depending on who you hire, what their experiences and charge rates are, these costs can easily add up.
Purchasing costs
• Capital gains tax (CGT) or creditable withholding tax (CWT). Sellers not habitually engaged in real estate business pay CGT equivalent to six percent of the gross selling price or fair market value, whichever is higher. While exemption is given to such seller who is disposing of his principal residence and intends to use the proceeds to build or purchase a new property as principal residence within 18 months of the date of sale, the exemption may be availed only once every 10 years.
Meanwhile, a creditable withholding tax (CWT) is imposed on sellers habitually engaged in selling real estate. Unlike the CGT, which is considered a final tax, the six percent CWT is but an initial tax, and will be incorporated and adjusted according to the total yearly income of the sellers’ business, and subjected to corporate income tax. For a P5 million sale, six percent amounts to P300,000.
• Documentary stamp tax (DST). DST is a tax seller’s payment on documents covering the sale or transfer of properties such as Deed of Sale, conveyances, and donations, but excluding government-issued grants, patents or original certificate of adjudication. Payable to the BIR, the DST is P15 for every P1,000 or fraction thereof, based on the property’s selling price, zonal value, or fair market value, whichever is higher. For a P5 million sale, this amounts to P75,000.00.
• Value added tax (VAT). Sellers of real properties mainly held for sale and not utilized for low-cost or socialized housing are subjected to 12 percent VAT of the gross selling price of the property, except for the sale of house and other dwellings with prices of not more than P3,199,200 in compliance with the Tax Reform for Acceleration and Inclusion (TRAIN) Law and Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law.
• Notarial fee. Public notaries charged between 1 and 1.5 percent of the selling price indicated in the Deed of Absolute Sale. For a P5 million sale, 1.5 percent amounts to P75,000.
• Transfer tax. Prior to any title registration, Registry of Deeds requires proof that transfer tax of 0.5 to 0.75 percent of zonal value or selling price, whichever is higher, had been paid by the buyer to the city/municipal treasurer. The variation is due to differences in the tax ordinances passed by local governments. For a P5 million property, a 0.75 percent tax amounts to P37,500.
• Registration fee. Payable to the Registry of Deeds by the new owner/buyer, the fee is based on whether the amount is above or below P1.7 million. Sale prices up to P1.7 million are charged based on the Registration Fee table as shown in the Land Registration Authority’s website. Meanwhile, a base of P8,796 plus P90 for every P20,000 in excess of P1.7 million or fraction thereof is due for larger transactions. For a P5 million transaction, the fee totals P23,646. Incidental fees may also be charged for services like issuance of title, entry fee, research fee, release of encumbrance, annotation on additional copy of title, certification, etc.
Post-purchase expenses
• Property taxes. Properties for sale need to have their “amilyar” updated as of the quarter of the year the transaction is consummated, before it can be registered under the name of the new buyer. A Metro Manila property with a fair market value of P5 million and assessed value of P1 million has a realty tax obligation of P7,500 per quarter, excluding advance payment discount.
• Broker’s commission. Paid by the seller, this commission adds another three to five percent of the total contract price. A P5 million sale with a five-percent commission equates to P250,000.
• Move-in fees. Depending on the type of property, say a house within a subdivision or condominium unit, the new owner may be required to pay for association or condominium membership fee, monthly dues, and hopefully none of the unpaid fines and interest charges your seller failed to settle. Utility deposits for water, power, cable and internet have to be paid as well.
• Repairs and maintenance. Often overlooked during the due diligence period, repairs can be expensive, especially for clogged or burst pipes, leaking roofs, etc. Funds are needed for periodic maintenance to keep the property in good condition.
Bank charges and other considerations
• Escrow fees. Not all transactions are made between the sellers and buyers only, especially for large transactions where parties do not know each other. A third-party escrow agent is normally tapped to safe keep the title, cash and monitor the adherence of the parties’ obligations prior to releasing such title or payment to the other party. The fee is dependent on the transaction value, scopes and services, and duration. Employing the services of an intermediary bank for P5 million can cost around P10,000 to P20,000.
• Loan-to-value ratio. Banks rarely lend the whole amount needed for any property purchases, usually between 60 percent and 90 percent of the total contract price only. Thus, it is vital that buyers have upfront funds for the planned transaction.
• Loan origination fees. Banks charge fees for loan processing, title handling, investigation and registration, property inspection and appraisal, notarial fees and documentary stamps. Separately, these fees cost from a few hundreds to thousands each, and more if the property is located outside of Metro Manila or distant away from their branches. To entice more loans, however, some banks charge a lump sum, all-inclusive fee for these services, while others offer promotional rates to reduce their fees.
• Mortgage rates. Mortgages use fixed or variable rates, thus interest may be fixed throughout the whole term, or applied for a specific period only and thereafter readjusted annually based on prevailing rate. Interest rates determination is affected by the state of the economy. Borrowers are advised to weigh the risks properly before deciding which type of rates to choose.
• Insurance. Banks require buyers to pay for insurance premiums such as Credit Use Insurance (CLI) or Mortgage Redemption Insurance (MRI), and expanded Fire Insurance (eFI). The amounts of the CLI/MRI are equivalent to the value of the loan and used to cover against potential disability or death of the borrowers, while eFI is used to indemnity losses due to fire, water damage, flood, calamities, and catastrophic events. With rates varying based on the borrowers’ age and insurers used, levels of coverage and previous records of claim, if any, premiums can run into several thousand pesos, too.
Bottomline
There is a need to allocate extra budget for all the costs prior to, during and after purchasing a property. Moreover, the responsibilities and assignments ought to be clearly negotiated and delineated among buyers and sellers.
Remove any potential confusion and misunderstanding. Consult experienced professionals like brokers, lawyers, even tax consultants for a smooth and worry-free transaction.
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Henry L. Yap is an architect, environmental planner, real estate practitioner, and former professorial lecturer.