It is not uncommon for a person selling or purchasing land or an apartment to get surprised that over and above the actual cost of the property that they intend to sell or purchase, other attendant costs arise which must be settled before they can complete the transaction.
These incidental costs will be referred to as ancillary or transactional costs in this article. These costs sometimes attract taxes too. It is therefore imperative that a person undertakes due diligence before deciding to embark on a transaction so that they can make informed decisions.
In exploring these additional costs, we shall look into two distinct scenarios. One, where a party is the one selling property and where a party is the purchaser. Property will refer to either land, an apartment or a maisonnette.
Transactional costs applicable where a person is selling property
- Legal fees
In the event that a person decides to engage the services of an advocate to represent them in the sale transaction, legal fees must be paid. The Advocates Remuneration (Amendment) Order, 2014 is the legal document which guides and controls the charging of fees by advocates in Kenya.
Some of the factors that come into play when charging fees under the said Act include the amount at which the land or apartment in question is being sold at. It is important to note that Value Added Tax (VAT) is charged against these fees at the prevailing rate, currently set at 16%.
The advocate will also charge for disbursements which will be determined by whether or not an application for consent to transfer the property to the relevant land control board is necessary, sums for obtaining land rent and rates clearance certificates if required by the party purchasing the property and charges for printing, photocopying and transport as well as file opening fees. On average, these extra costs payable to an advocate range from between Kshs. 5,000 to 100,000/- depending on the nature of the transaction.
This is a percentage of the actual sale price payable to a real estate agent who will have successfully assisted the seller get a buyer for their property. The percentage may be pegged at 3% of the sale price or such other percentage as shall be agreed between the seller and the agent. Sometimes, this cost can be shared between the seller and the purchaser although it is not always the case.
In other instances, the agent may also require the seller to cater for advertisement costs over and above the commission payable to the agent upon successful completion of the transaction.
- Capital Gains Tax
Capital gains tax is a tax levied on transfer of property situated in Kenya whether it was acquired on or before January 2015. The rate of this tax is 5% of the gain and is paid by the seller or the transferor of the property. It is a final tax and therefore not subjected to further taxation after payment.
There are exceptions though to payment of capital gains tax and your advocate should be able to advise you on whether the transaction contemplated will be subject to this tax or not.
- Replacement of beacons
In some instances, where there are missing beacons in the case of land, the seller will upon a resurvey be required to cater for the costs of replacing the missing beacons or even placing beacons where there were none.
Transactional costs applicable where a person is buying property
- Legal fees
When purchasing property, it is highly advisable that a person engages the services of an advocate to represent them in the contemplated transaction. This will obviously attract payment of legal fees. As previously noted, The Advocates Remuneration (Amendment) Order, 2014 guides and controls the charging of fees by advocates in Kenya.
The purchase price for the property is the guiding factor on what an advocate will charge for providing their services. Again, Value Added Tax (VAT) is charged against these fees at the prevailing rate, currently set at 16%.
- Stamp Duty and Valuation Costs
Over and above the legal fees and VAT, stamp duty at either the rate of 4% or 2% of such value as a government valuer will endorse on the transfer document will be payable.
Valuation costs which also range from between KShs. 3,000/- to KShs. 10,000/- will be applicable as well as registration charges and other disbursements to be charged at the acting advocate’s discretion.
This is a percentage of the actual purchase price payable to a real estate agent who will have successfully assisted the purchaser get a property to purchase. The percentage may be pegged at 3% of the purchase price or such other percentage as shall be agreed between the purchaser and the agent. Sometimes, this can be a shared cost between the seller and the purchaser.
- Costs for undertaking due diligence
The importance of conducting due diligence before making the decision to purchase a particular property can never be overemphasized.
These can range from costs for undertaking a re-survey of land to determine if the acreage and the beacons are in place and a licensed surveyor is usually engaged to undertake this process. The costs will therefore depend on what is agreed between a purchaser and the surveyor. It also depends on the size and location of the land in question.
Undertaking a search on the title for the property as well as on the identification or incorporation documents of the registered owner of property is also part of due diligence and one should keep in mind these costs.
- Cost of Credit
In instances where a purchaser is being financed for part or the full purchase price, there are valuation costs, loan processing fees, legal fees payable to the financier’s advocates and other costs incidental to the borrowing which will obviously affect the overall purchase price.
- Other incidental costs
If the property in question is an apartment, utility costs like water and electricity connection costs are also transferred to the purchaser in proportion to the number of units within a development. Other charges like service charge apply and in most cases developers will ask for both advance service charge and service charge deposit.
In consideration of the foregoing, it is important for both prospective buyers and sellers to ensure that their real estate agent or advocate gives them full disclosure on all possible costs to enable them make available extra funds over and above the actual sale or purchase price.