A news article posted by the CBC came to my attention a few days ago and echoed what I have been thinking about condominium (condo) ownership over the last few years. This article was about a 42 year old building in Toronto needs $14 million in repairs as determined by an independent appraisal. The building already has $9 million in debt and is broke. It has $1.75 in its reserve fund and $5,000 in its operating fund. The condo corporation has had to issue special assessments to owners, mostly seniors and those with limited means, in the neighbourhood of $35 thousand. Those who have turned to the bank to obtain a loan to pay the assessments have been declined due to the financial status of the condo corporation and the state of the building. They have no where to turn, and if they don’t pay the special assessments, they may lose their homes. While this is a really extreme example, it does make one stop to think.
In my community, condos have had a furious build cycle. While most are well built, there are those who are not. Yet they usually sell out in days. Most of the purchasers are forgoing their due diligence to get a unit which are in a huge state of demand. Not wise. So, if you own a condo, and you run into major faults with the building, what are your implications.
Last June, in Florida, a 12 story condo building partially collapsed killing many people. Fortunately, there has never been a similar tragedy in Canada. Water leaks, popped out balconies, and windows that fall out are about as bad as it has gotten here so far. The Canadian Condominium Institute, which advocates for condo owners, says that among the condo corporations across the country, there has never been a major structural failure in a condo building.
Provincial governments generally have stricter regulation over condo corporations that require regular inspections spot potential problems before they become catastrophic. And almost all condo buildings must put money aside in a reserve fund to pay for future repairs. But these more rigid rules don’t mean there aren’t significant gaps or that condo boards have an easy time when it comes to telling their neighbours that major costly repairs are needed, which might lead to increased condo fees or even a special assessment.
Ontario has one of the more stringent sets of condo rules in the country. The province stipulates that boards must regularly commission reserve fund studies, which only designated professionals such as engineers can carry out. Reserve fund studies typically approximate the replacement value and lifespan of building components. While these studies must be updated every three years, a physical assessment involving a site visit by an expert is necessary only once every six years.
All the law requires is that there be a plan in place to fund the repairs. There is leeway in the act that allows the boards of directors to develop a plan that differs from the engineer’s recommendations. That is definitely one of the things that need to be changed. The current laws also don’t ensure that owners heed warnings from consultants hired to evaluate if enough money is being set aside for major repairs. The rules talk of there being adequate money in the reserve fund, but there is no actual definition about what is adequate.
The diversity of people who own or live in condos can be one of the biggest problems in tying the hands of a strata corporation board when it comes to depreciation studies and repairs. Of the people who live in strata, you can have, for example, retired empty nesters, young people just able to find the money to pay the mortgage, and investors who own the units but may not even live in the country. While the long-term interests in keeping the building maintained properly are the same, the short-term interests of the various owners can be very different.
If you want to buy a condo, and you’re looking for one with a reserve fund that is funded to the max, you are going to have a hard time finding one. Most responsible boards are moving towards reliable funding of their reserves for significant repairs. Still, it will take time in many cases because if you tried to fund them properly right away through increased fees, most condo owners would go bankrupt.
Some provinces require developers must specifically set aside money for reserve funds and a reserve fund study in its initial budget. Developers typically determine and set the first-year budget until an owner-represented board of directors is elected. Traditionally, a lot of the developers would provide budgets that didn’t include monies for reserves or the reserve fund study. So now, when they market the condo, buyers are getting a more realistic picture of what their contributions are likely going to be because it includes provisions for reserves and a study.
Owners and operators of office or rental apartment buildings have a clear financial interest in ensuring the structural integrity of their assets. But condos are directed by unpaid individuals, most of whom have no technical knowledge, and some may not even live in the building. The speculative nature of the condo market where investor owners could be looking for top margins at the lowest costs adds another layer of complexity.
Sometimes those who end up on condo boards don’t understand what they’ve signed up for. They are responsible for relatively large budgets and have a duty to work in the interests of the condominium owners. Yet, they are the neighbours of other owners who may think very differently about what needs to be done and how much needs to be spent on maintenance.
So, besides painting a scary picture, what should condo owners and those contemplating purchasing a condo know about the their financial implications?
A condo is a sellable property that is similar to an apartment. Homebuyers may opt for a condo over a single family home for several reasons. A condo can provide a less expensive way to enter the housing market. Or, a condo can be a low maintenance downsizing option for seniors. However, misconceptions about condominium ownership often keep potential buyers from considering them as an option. Here, we dispel some of the most common misconceptions about condo living.
Here are some of the key takeaways I want to leave with condo considers:
- A condo is similar to an apartment, except that it is a sellable property.
- Condo owners pay a fee, which covers some maintenance and other costs associated with the property, such as heat, water, sewer, and garbage collection fees.
- Condo buyers should consider the condo fees before buying a condo and any special assessments that might arise that would require additional funding.
- Fees are typically paid monthly and are decided by a board of directors composed of condo owners.
A condo is home ownership
This is a tough one. When you buy a unit in a condominium, you do become a homeowner and gain access to most of the rights that come along with buying a freestanding property. If you’re wondering which rights condo owners do not have, these are related to the fact that a condo involves shared ownership. So, while you have the right to make changes to your unit you won’t have quite as much free rein as you would in a house.
You may not have the option of making changes to the plumbing or electrical by yourself, as most condo rules require the use of a qualified professional. You also may not have control over the portions of your unit that are referred to as common property, which may include windows, patios, and balconies. This communal ownership also means that you’ll have to pay condo fees, which are used to maintain the property.
Condo fees
Many homebuyers look at condo fees as an additional expense, compared to owning a house. However, before assuming these fees are a drain, it’s important to look at what they cover. Typical condo fees generally always include a contribution toward the building’s upkeep and maintenance, but they may also include common expenses. Consider how much these line items would cost if you lived in a home. Also, consider that, in a condo, you don’t have to mow the lawn or shovel snow yourself, which ultimately means you will have to chip in to hire someone.
Condo fees that are too high can be a sign of poor money management on the part of the condo board, but you will have to review the condo documents before being able to say for sure. Also, remember that condo fees are determined by the condominium’s board of directors, which is made of owners just like you. In other words, no one is profiting from these fees—they are decided by owners who have to pay them just like you do.
Special assessments
Even a well managed condo can fall prey to what is called a special assessment. This is an additional, often large, fee that condo owners must pay when the regular condo, and the reserve fund they contribute toward, are insufficient to pay for a major repair. Many condo owners assume that their fees will take care of everything, but as an owner in the condo, you are ultimately responsible for its upkeep, no matter what happens. This is not unlike living in your own single family home. Even if you routinely save money for repairs, a major unforeseen expense such as a foundation or roof repair, can still leave you out of pocket. In fact, special assessments are often much better for condo owners than the alternative of raising condo fees over the long term. This is because a one-time fee will cover whatever repairs need to be done without putting a often much bigger dent in the overall value of each unit in the property.
Increasing condo fees
Unfortunately, condo fees, like most expenses, tend to rise on a regular basis. This is based on inflation and the costs of running the building. Condo fees are calculated based on projected costs for the coming year, and should include additional amounts to put toward larger repairs. Remember that no one is making any money on these fees, and if they are not appropriate for the building requirements, whether they are too high or too low, owners will eat this cost when they try to sell their units.
In other words, most condo owners will have a hard time escaping from a necessary cost, whether this occurs because the board tries to avoid repairs to keep costs down, or owners try to sell to get out of paying their share. Savvy buyers will want a discount for a poorly maintained building or one with soaring condo fees. As is often the case in real estate, this discount is likely to cost more than just paying for the problem in the first place.
The bottomline
Many of the misconceptions that prevent homebuyers from considering a condo, or leave them frustrated and angry when they do own one, often stem from a misunderstanding about how condo ownership works and what owners are ultimately responsible for. Many condos are poorly managed, which can lead to money problems. However, no condo board is really looking to extract a pound of flesh from owners, as this punishment will also apply to board members themselves.
In a single family dwelling, owners will have more control, which can make expenditures easier to swallow and perhaps less noticeable. Perhaps that’s why homebuyers are left mistakenly believing this type of ownership is so much cheaper.
The old adage of buyer beware is prudent. Ideally, people considering a condo purchase should do their due diligence and look seriously at the financial status of their perspective condo. In an age of huge demand and quick sales, this is easier said then done but is so critical. Engage with your financial planner who can guide you. Of course, also be in close consultation with your lawyer and real estate agent. All these professionals are there to ensure that bad deals can be walked away from. Their client focused intention is to assist you in making decisions that are Keeping Life Current.
