A Condo is an affordable option for many first-time home buyers and for individuals looking to downsize and live a maintenance free lifestyle. They provide security, flexible lifestyle and a community of other individuals at the same stage of life as yourself. However, before you decide to buy a condo, ensure that you are familiar with the following concepts relevant to condos only.
Condo fees paid by the unit owners go towards paying for the common elements shared by the unit owners, reserve fund balance and to provide different amenities in the building such as pool, gym, park settings, patio space etc. The amount of condo fees charged will depend on the amenities offered and reserve fund balance planned at each stage of condo corporation’s life.
When looking to buy a condo, look at what is included in condo fees. Some condo fees include utilities and some don’t. If condo fees don’t include utilities, make sure to get a sense of how much the utilities are and factor that into your monthly budget.
Reserve Fund Balance
A reserve fund is a savings account or other highly liquid asset set aside by a corporation for meeting the future costs of upkeep and any unexpected costs that may arise. If the fund is set up to meet the costs of scheduled upgrades, less-liquid assets may be used.
When looking to buy a condo, ensure that the corporation has healthy reserve fund balance for routine maintenance and unexpected expenses. You should also ensure that reserve fund is appropriately funded by looking at the recommended balance in the reserve fund study to be completed every 5 years. Newer condos will likely have low reserve fund balance and as the condo ages, the reserve fund balance should increase accordingly.
Reserve Fund Study
Reserve Fund study must be completed every 5 years. The reserve fund study will provide information such as what elements will need repair and replacement in the coming years and appropriate reserve fund balance needed to fund regular maintenance, repairs and unexpected costs. Usually the reserve fund study is very conservative and in most cases, the reserve fund balance will be under funded.
The Condominium Act came into effect February 1, 2015 and required all condominiums to complete reserve fund study within 3 years. Therefore, all the condominiums should have the reserve fund study completed by February 2018.
A special assessment is an additional payment or a levy that a condo board may impose when unexpected shortfalls or unexpected expenditures occur in the budget, or when an expensive system must be replaced (i.e., a boiler) and there is not enough money in the reserve fund to cover the expense. Special assessments are like a fee and are proportional to the % of common expenses each unit has, as per the declaration.
When looking to buy a condo, ensure that the unit has not been imposed a special assessment and if special assessment has been imposed, ensure that the current owner pays for it before you to take possession. Also, inquire whether special assessments have been imposed in the past as frequent special assessments might be an indication that board is not managing the condo properly or setting aside enough reserve for unexpected and/or major expenses.
Unit owners in a condominium have ownership interest in the building. The percentage of ownership interest is important as condo fees and special assessments are based on the ownership interest. For the most part, percentage of ownership is based on the sq ft of the units in the building, that is the reason why larger sq ft. units will pay higher condo fees than units with less sq ft. This information is also extremely important in assessing risk as special assessments are based on ownership interest and if a condo needs $200,000 to fix something, an unit owner with 1.45% ownership interest will have special assessment charge of $2,900.
When looking to buy a condo, make sure that you know the ownership interest that your unit has in the Condominium. Usually condo buildings with more units will have low ownership interest due to economy of scale.
When the offer is accepted by the seller, the buyer receives a long list of documents to review pertaining to the condo and the unit he/she intends to buy. The buyer has 7 days to review the documents and can cancel the contract at any time for any reason within these 7 days. This review period is known as cooling-off period.
Most common documents that are part of the disclosure package for the sale of a condo unit are:
Disclosure Statement by a Condo Corporation
Disclosure Statement by the Seller
Financial Statements for the Recent Period and Audit Report
Current Year Budget and Next Year Budget if Available
Current By-laws, Rules and a Declaration
Copy of Reserve Fund Study
Property Management Agreement
If there is a material change in the disclosure documents provided by the Seller above, the cooling-off period commences again and the buyer gets 7 days again to review the new information and has the right to cancel the contract at any time.
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