Insider’s Guide to Buying a Condo: Key Factors to Consider
Buying a condo is probably the most significant financial decision for most individuals. As such, it should go without saying that proper research of the market and doing the due diligence is critical. Unfortunately, not everyone fully understands the importance of this step and may base their purchase on market trends and popular belief that real estate is always a safe bet. However, it’s important to consider many factors when choosing between different properties. In this post, I aim to provide an insider’s perspective on what to consider when buying a condo to ensure this decision aligns with your goals and priorities.
Most real estate property buyers are aware of the importance of location, the age of the building, and its overall physical shape. However, there are other crucial details that often go overlooked, such as the financial health of the condo corporation, its governing documents, management company, and board of directors. Without taking these factors into account, a property’s location and price tag alone may not make it a wise investment or a desirable place to live. Let’s take a closer look at each of these important aspects.
The Financial Component
Many condominium corporations in Toronto (and possibly throughout Canada) face financial challenges to varying degrees. Unfortunately, some boards prioritize keeping common element fees low, ignoring the experts recommendations and the financial realities. As a prospective buyer, it’s crucial to assess the financial stability of the condo corporation you’re considering. Key indicators to consider include the operating account balance, reserve balance, and the board’s tendency to resort to special assessments as a means of funding.
Financial stability
As a buyer of a condominium unit, it is important to assess the financial stability of the condo corporation you are considering. The law requires every condo corporation to maintain at least two bank accounts, including an operating account for daily operations and a reserve account for major repairs and replacements. Unfortunately, some condo corporations may have allowed their operating or reserve balances to decline due to attempts to keep maintenance fees artificially low. This can impact the overall financial health of the corporation and should be thoroughly evaluated before deciding, or at the very least you should understand its implications.
A financially stable condominium corporation should maintain a healthy operating account balance that is at least equal to 1.5 times its monthly budgeted revenues. For example, if the monthly budgeted revenue is $200,000, the operating account should have a balance of around $300,000. This helps ensure that the corporation has sufficient funds to pay its suppliers and maintain its day-to-day operations. If the operating account balance falls below the monthly budgeted revenue, it can lead to difficulties paying creditors, which may result in sharp increases in maintenance fees to keep the corporation financially afloat.
A healthy reserve fund balance
The reserve fund plays a crucial role in the long-term financial stability of a condominium corporation. It is important to assess the adequacy of the reserve fund balance in order to avoid any potential financial hardships for the owners. It is advisable to review the financial statements and the Notice of Future Funding of the Reserve Fund to understand the corporation’s current situation. If the reserve fund is underfunded, it may lead to special assessments in the future, which could be a burden on the owners.
In the financial statements, pay attention to the expenditures for major repairs and replacements and the year-end reserve fund balance. Now, compare the year-end balance of the reserve account in the financial statements with the next year’s opening balance in the Notice of Future Funding (NOFF Form 15). There should be a table included with the projections of contributions and expenditures and the opening and closing balances for the next 30 years. If the ending reserve fund balance in the financial statements is significantly lower than the opening balance in the following year in the NOFF (which is the closing balance of the current year), this requires further investigation. It could indicate that either the reserve fund study projections are lower than the actual costs or perhaps an improper use of reserve funds to finance items that should not have been covered by them.
Below is an illustration of what I mean. In the reserve fund statement below, you will see that the annual expenditures were just over $412,000 and the ending balance just over $215,000.
At the same time, the closing balance for fiscal year 2019-2020 (which is also the opening for FY 2020-2021) in the Notice of Future Funding table below is $204,000, which is lower than the actual ending reserve balance of the audited statements for the year ending in 2020. This is actually a good thing in that it shows this particular corporation has been meticulous in following the engineer’s recommendations with regard to contributions and expenditures. During the year, $10,000 less than the engineer’s estimates were spent, but at the same time the ending balance is also $10,000 above the ending projection. This is the ideal situation that you should want to see, which speaks of a board making good decisions, but keep in mind that it is more the exception than the rule. As long as the numbers do not differ significantly, it should not be cause for concern.
On the contrary, the corporation will likely require an infusion of funds in the reserve account at the next reserve fund study to address the underfunding of the reserve account. The good news is that the corporation’s auditor will be able to note any underfunding of the reserve account and will report it in the audited statements in the notes section.
Good management
Similarly, a good management company will always bring to the board’s attention the underfunded state of the reserve account as soon as it has been discovered. Likewise, a responsible board will take into consideration increasing the reserve account contribution to match the engineer’s projections. Again, this means only one thing: an increase in the maintenance fees.
As a last point on financials, be sure to review the Status Certificate for any indication of a pending lawsuit or any other relevant financial information that has not become a reality yet but is one which the corporation is required to disclose such as a pending litigation. Your legal counsel representing you in the purchase will be a valuable source of advice. Just the mere presence of a lawsuit does not mean that the property is not a good value, but you must know the effect it will have on the corporation’s finances if it materializes.
The Governing Documents
Potential buyers should also review the corporation’s governing documents, such as the Declaration, the Standard Unit Bylaw, and the Rules. These documents dictate the regulations that every owner and tenant must abide by. Since these documents can be lengthy and filled with legal language, it is crucial for buyers to understand what to look for in each document. This can save time and effort, as the average person may not have the time or ability to thoroughly review and understand these documents.
The Declaration as the most important governing document
When reviewing the Declaration, take note of the Maintenance and Repair sections. These outline the division of responsibilities between the condominium corporation and the unit owner. This is where you can find specific information on what items may be excluded from the corporation’s repair responsibilities, such as windows, doors, fences, and others. Typically, in high-rise buildings, these items are considered common elements and are covered by the corporation through the maintenance fees. However, in townhouse condos, it is not uncommon for these items to be excluded from the coverage.
Another key component of the Declaration, which should be evaluated along with the Maintenance and Repairs section, is Schedule C, which outlines the physical boundaries. This section clarifies the division between the unit and the common elements and specifies which items the unit owner is responsible for, even if they seem to lie beyond these boundaries.
The notion that the more the corporation is responsible for the better it is for the owners is a matter of debate. Ultimately, the funds will have to come from the owners at some point. However, it can be easier to avoid sudden fee hikes if the corporation has fewer responsibilities.
Schedule E of the Declaration is where you will find a list of the regular services covered under the maintenance fees, whereas Schedule D lists each unit’s percentage of contribution based on the square footage of that individual unit.
The Standard Unit Bylaw – What are the standard features in a unit?
The Standard Unit Bylaw is another area of interest, especially the schedule of standard items that comes with it. Again, the more the corporation covers the higher the likelihood of constant future fee increases. Most corporations typically exclude floor coverings since this tends to be an expensive item to replace should it become damaged from a flood arising from a faulty plumbing common element. This is a double-edged knife in that it protects the owner from future fee increases, but at the same time, it means the owner will require unit insurance to cover such damages should they ever occur. Floor damages are not uncommon in high-rise buildings, so it is important to be prepared.
Rules to be followed by everyone
Finally, the Rules document provides information about regulations relevant to your personal circumstances, particularly if you have pets. Many corporations limit the number and type of pets allowed, as well as regulate their size and weight. Some corporations even ban pets altogether. It is important to note that if you have a service animal, it cannot be removed as the Human Rights Code supersedes both the corporation’s governing documents and the Condo Act.
The Management Company
Another aspect to consider is the management company. Typically, management services in the Toronto area cost between 5% – 10% of the total budgeted revenue. Anything higher than that is probably an indication that the corporation is overpaying in management services, but, in my personal opinion, I would be more concerned if the management fees were below 5%. This would mean that either the management company’s services are inferior to those of others, or even worse, that there is something sinister going on in the background. Or both, which is usually the case with the latter scenario.
When considering management companies, it’s important to be cautious of those that offer low fees to win contracts but later use deceitful tactics in their agreements with vendors, especially for significant reserve fund projects. It’s recommended to do thorough research on the company, including checking online ratings and only considering those with a large number of reviews to avoid fake ratings. Many unscrupulous management firms try to get people they know or even employees to leave a good rating, so only take into account those with at least a hundred or more online reviews/ratings, as it would become quite difficult to fake so many reviews. You can also call the management company’s office number to get a general feel of their customer service. If you are unsure who the management company is, go to CAO public registry and look up your specific condo corporation.
The Board of Directors
The final consideration is the board of directors. Try to talk to some of the residents and find out what they think of the board. Is it too lenient or too strict? Does it tend to impose strict rules and regulations? Remember, you’ll be living in the community, so it’s important to have a board that focuses on maintaining a positive and harmonious environment, rather than constantly imposing restrictions. Additionally, ask your realtor about any recent special assessments imposed by the board. While special assessments may sometimes be necessary, they can also indicate poor planning and decision-making.
Conclusion
And there you have it, your private tour inside a condo corporation’s internal operations from a professional’s perspective. When looking to buy a condo, a few aspects to pay attention to are the financial statements, the reserve fund study, the governing documents, the management company, and the board of directors. I hope this will help you with your next big decision of buying a condo in the Toronto area or anywhere in the country for that matter. Apart from a few legal issues, much of the topics discussed here are not that different in all the other Canadian provinces. Feel free to leave a comment below if you liked this article and if it has helped you become better at spotting value when looking to purchase a condo unit.