Personal Finance

Buying real estate? Factor these transaction costs


A couple planning to buy a house. FILE PHOTO | NMG

When you about to undertake a venture in real estate, it is essential you have as much information as possible beforehand so that you can make informed decisions.

Due diligence will be required for you to close the deal on the ostentatious property you’ve eyed and one factor to consider is the costs attached to the transaction process.

In addition to the price of the land or property on offer there are other costs that you should research extensively on.

The transaction costs are expenses that the buyer will incur during the course of acquiring property. Keeping these costs in mind will help one budget and make sure you don’t fall short at any stage of the transaction.

Here are some of the costs buyers should plan for:

1. Hiring a Lawyer

In any real estate transaction, legal representation is crucial to ensure completion. It is advisable to budget at least 1-2 percent of the purchase price for legal fees. The minimum amount payable by law is Sh35,000 as is guided by the Advocates Renumeration Act.

The lawyer will offer services such as due diligence before and during buying. The seller will also incur legal costs when the advocate prepares transfer documents that will be executed by both parties after getting consent from the commissioner of lands.

2. Engaging a Real Estate Broker

If one opts to use real estate brokers, fees for their services when looking for property and during the negotiations for the land should be set aside.

In the case of a seller, the professionals prepare the hous and market it in various platforms and get potential buyers.

Most brokers have a standard rate they charge and it’ advisable to agree on one that corresponds to the value of the property.

3. Financing Costs

Most housing transactions are nowadays financed using borrowed money. As a result, there are some transaction charges that need to be paid to the lender as well.

Consider for instance, the processing fee that is charged by most lenders to process the mortgage agreement. This charge is also substantial usually accounting for between 0.15 percent to 0.25 percent of the property value. Essentially lenders are charging for the cost of collecting a buyer’s documents and running a credit check on them to determine their creditworthiness. Also, this covers the charge of the procedure of loan disbursement that needs to be followed.

Lenders also charge to verify the title of the property in question.

Real estate transaction charges are many and varied. This is what makes real estate investment a long-term game.

Flipping houses like one can stocks or bonds is simply not possible because of the complexity of the transaction costs involved.

Depending on which financing option a prospective buyer opts for, he or she should plan for the interest charges of different loan products you sought.

Most Saccos in Kenya offer between 12-14 percent interest rate on reducing balance.

For a mortgage, the rates are offered differently by various banks. Settle on one that works well with your budget.

4. Search costs of the land

Here, a buyer will have to have some money to carry out a land search for the property to make sure it is registered to the owner.

This search reflects the transactions (change of ownership through deeds) and encumbrances (legal dues) with respect to the land proposed to be acquired. A land search on the eCitizen platform costs Sh500.

Before once can purchase land it is a requirement to book a meeting with the Land Control Board (LCB), which is composed of the assistant county commissioners and village elders. The board meets once a month. These meetings cost Sh1,000.

A buyer can, however, book a Special Land Control Board (SLCB), which involves only the Assistant County Commissioner and the two transacting parties instead of waiting for the monthly meeting. The meeting costs Sh5,000.

5. Taxes to the government

Stamp duty is levied to all land transactions. Once the sale has been completed, the seller’s advocate will present the agreement for stamping of duty at the lands office.

The amount paid will depend on the location and the price of the house. In urban Kenya, the stamp duty rate is four percent while that in rural areas is two percent of the value of the property.

Finally, capital gains tax, which is usually charged at five percent of the value of the net gain should be factored in. One can either pay in instalments, in advance or at the end of the accounting period. Payment should be initiated online via iTax.

6. Utility costs

Upon acquiring the property, a buyer will now incur costs for utilities like electricity, water connection and garbage collection.

Other utilities you could need include Internet connection, security, residential association fees and moving fees from your previous address.

Factoring in all these costs will help one plan your property transactions better for a seamless transition to your new home.

The writer is head of sales and marketing, Centum Real Estate.