Condo Buyers Should Consider These Items

[Jucius Maximus]

The first thing I should say is that I am not a real estate agent! If you are looking for a real estate agent to help you buy/sell a condo, please do not contact me. I cannot help you on that. Follow any of the information in this thread at your own risk, I am not a professional in the condo or construction industry.

So I have been involved with condos for a while now so I thought I would do a little write-up to help other prospective buyers. This thread is primary targeted toward Ontario buyers, but much of the material applies throughout Canada.

1. Buy based on pre-built plans or wait till it's done?

I would never buy a Condo based on the plans alone. While it's true that you can buy several years before the building is built and get big discounts, I don't recommend that for several reasons:

• Construction is often delayed. You could be waiting for over a year after the date they originally promised due to construction delays. Some builders are better and more organised than others with this, but still, I would not buy early due to this uncertainty.
• (Ontario-specific) Even if you do get to move in on time, you will probably have to pay residence fees. Basically you have to rent your unit for a period of time before you can start paying your mortgage. This is because they can only transfer the unit title to your name after the Condominium Corporation registers registers as a Corporation with the City. They can only register after 50% of the units are occupied. Therefore if you bought into a lower floor, you will move in earlier, but you'll be waiting for quite a while before 50% of the units are occupied and your money will be bled away on occupancy fees.
• Uncertainties exist in the features and amenities of the building. They may promise that you'll get a nice rooftop garden, a card-playing room, etc. but things change over time and what the sales people promise may not actually be in the legal description of the building. Also it is possible for the City planners to nix part of the design or force the builder to change it for various reasons. You only really know what's there once it's built.
• The contracts for the design of units have a lot of plan, generally in the favour of the developer. The fine print generally says that they can change anything they want in your unit and you can't complain. Do you really want to buy something that is so uncertain?

That's why I say that you should wait for investors to buy early, and only after that you should evaluate whether the building is something that you want. Then wait for investors to flip their units and you can buy in.

2. How long after it's done should you buy?

For Ontario, I would consider buying into building that are old enough to have reached their 3rd year budget, AND have registered after 1998. Why is this?

• There's 2 reasons why you should wait until the 3rd year budget has started (Ontario-specific):
  
  (1) The first year budget of a Condominium Corporation is called a "developer budget". This is a budget that the Developer concocted well before they ever dug a hole in the ground. Since nobody can really predict what each building's unique expenses will be, the developer budget generally wrong. In many cases they low-ball the costs so it appears that the condo fees are pretty low, enticing more people to buy. Fortunately for buyers, the developer must cover the cost of any overruns in the developer budget in the first year. But owners must subsequently cover the costs in future years, and that's why condo fees normally go up 10-15% starting with the 2nd year budget.
  
  (2) One thing that Condo Corporations MUST do according to the Condominium Act is run a Reserve Fund Study. This means that they hire an Engineering Company to analyze most everything in the building for the purpose of determining the replacement costs of everything for the next 30 years. This study is generally done by the end of the 2nd year. The problem is that in many cases, the study reveals that the amount the corporation is putting away into its reserve fund is drastically too small, so a HUGE increase in maintenance fees is necessary. That's why sometimes you see maintenance fees go quite a lot (~50%, I have heard of more) at the end of the second year.
  
  So you see now why it is a good idea to wait at until they are in their 3rd year budget. It gives you a good idea what the realistic amount of maintenance fees will be.
  
  
• I would only buy into Ontario condominiums that registered after 1998 because that is the year when the new Condominium Act came into effect. This is important because older corporations were not required to do a reserve fund study! This means that they may not have budgeted for big-ticket items like repaving the parking, replacing the air conditioning chillers, replacing the windows, re-doing the roofs, etc! So when these things become necessary, they will have to do a Special Assessment. This can mean that additional fees are levied from each unit owner that are required for covering these un-budgeted costs. Some special assessments require payments for many years. And what do you think this does to your resale value? Good luck selling the unit to get out of having to pay the money!!

3. What to look for in condos that you are buying.

4. Condo maintenance issues to consider.

5. Why do condo fees keep increasing ever upward?

CONTINUED HERE... PART 2

AND CONTINUED HERE... PART 3

AND CONTINUED HERE... PART 4

[a in yul]

thks, looking forward to reading up on more...!!

[pitz]

I would personally want to see any management contracts, maintenance contracts, leases on HVAC equipment, or other things of that nature that might encumber the condo corporation. Especially if there are escalation clauses.

For instance, theoretically, a HVAC system lease could have low (or even no) payments for the first 5 years (in order to make the condo fees look very low), but the fees could rapidly escalate after that, in order to provide the HVAC lessor with a very lucrative rate of return. Kind of like the water heater rental from hell, condo style .

Lessors, in this fashion, could even be providing large kickbacks to the developer, on a financial timebomb that would only be discovered if a potential buyer read through every last line of the 'fine print'.

[jasira]

Thanks.

This has been a really helpful post.

[belowzeros]

*GREAT* post...these are many things I have learned through trial and error and are invaluable advice. Kudos to the OP great item.

[dux]

Thanks Jucius. I am considering buying a condo under contruction in the Ottawa area, projected to be done by 2010. I knew about points 1.1 and 1.2 that you made, but I was not aware of the last two points. Very helpful, looking forward for the rest.

[dux]

Question:
I am looking to invest in a condo in the downtown Ottawa area. They are planning to build a series of condos in an area called Lebreton Flats. The first building should be done by the end of this summer, and Phase 2 should start shortly after and it is projected to be done in 2010.
So I am looking to get into the Phase II project, they require a 15% deposit, which will be about 30k for a 1 bedroom. Is it usually a wise decision to put the deposit with the intention to sell if the housing market has been steadly going up and if I could make a decent profit from my intial deposit. But on the other hand I would not mind moving in either if prices has not gone up too much, since this will be my first house and I plan to be renting for the next 2 years.

Thanks.

[hymack]

This is terrific! I'm starting to look for a condo as my first purchase and any information is greatly appreciated

[thelefteyeguy]

1. Buying presale condo can net significant savings in a booming condo market (however that is not the case for a stale market). Just budget a 1 year delay on the occupancy in your timetable. In the meantime, you can save a lot more on the downpayment to reduce your mortgage.

2. residence fee = "interim occupancy" fee
if you are worried about the monthly fee, buy a suite 2/3 way up the condo to avoid

3. Buy from a reputable builder. That rarely happens because customer service and satisfaction are extremely important for the top 10 condo builders (ie Power Surveys). In fact, some condos now have bonuses tied to customer service standards.

4. That's not totally true, any *significant* changes in the suite can result a breach of the contract. Talk to your lawyer. There are ways out of the condo contract, a significant change is one.

[circa76]

1. Buy based on pre-built plans or wait till it's done?

I would never buy a Condo based on the plans alone. While it's true that you can buy several years before the building is built and get big discounts, I don't recommend that for several reasons:

• Construction is often delayed. You could be waiting for over a year after the date they originally promised due to construction delays. Some builders are better and more organised than others with this, but still, I would not buy early due to this uncertainty.
• (Ontario-specific) Even if you do get to move in on time, you will probably have to pay residence fees. Basically you have to rent your unit for a period of time before you can start paying your mortgage. This is because they can only transfer the unit title to your name after the Condominium Corporation registers registers as a Corporation with the City. They can only register after 50% of the units are occupied. Therefore if you bought into a lower floor, you will move in earlier, but you'll be waiting for quite a while before 50% of the units are occupied and your money will be bled away on occupancy fees.
• Uncertainties exist in the features and amenities of the building. They may promise that you'll get a nice rooftop garden, a card-playing room, etc. but things change over time and what the sales people promise may not actually be in the legal description of the building. Also it is possible for the City planners to nix part of the design or force the builder to change it for various reasons. You only really know what's there once it's built.
• The contracts for the design of units have a lot of plan, generally in the favour of the developer. The fine print generally says that they can change anything they want in your unit and you can't complain. Do you really want to buy something that is so uncertain?

Personally I have no problems buying a floor plan, the discounts more than outweight the occupancy fees you'll pay. Keep in mind the occupancy fees are just the maintenance fees and interest on the mortgage (property taxes are not assessed yet). Also, if you buy on a high enough floor, you can avoid occupancy fees altogether, as most developers move people in from the bottom up.

I may be mistaken, but I thought that the condo required 66% occupancy before it can be registered?

With regards to the amenities, once the condominium corporation is registered (the developer will register it because it also contains the plans), a declaration and description are provided. Within the declaration are things like what common elements are available, and fees associated with it and what not. In order to amend the common elements, change your floor plan, etc. The developer will have to get it approved by an approval authority, subject to section 51 of the Planning Act. That section also states that the developer has to provide "the nature and extent of any restrictions affecting the land proposed to be subdivided, including restrictive covenants or easements" (i.e. your declaration and description)

Changing the floors plans is not a trivial task, and does cost the developer money to do so. That means that its unlikely that your common elements are going to change unless something major is f*cked up.

2. How long after it's done should you buy?

For Ontario, I would consider buying into building that are old enough to have reached their 3rd year budget, AND have registered after 1998. Why is this?[LIST][*]There's 2 reasons why you should wait until the 3rd year budget has started (Ontario-specific):

(1) The first year budget of a Condominium Corporation is called a "developer budget". This is a budget that the Developer concocted well before they ever dug a hole in the ground. Since nobody can really predict what each building's unique expenses will be, the developer budget generally wrong. In many cases they low-ball the costs so it appears that the condo fees are pretty low, enticing more people to buy. Fortunately for buyers, the developer must cover the cost of any overruns in the developer budget in the first year. But owners must subsequently cover the costs in future years, and that's why condo fees normally go up 10-15% starting with the 2nd year budget.

Agreed, though 10-15% is pretty generous. I've seen condos go up as high as 40%. However, note that the board of directors has a lot of power in this regard. After the turn over meeting, the board can nullify all contracts signed to date by the developer and establish new ones within 30 days. This can save you alot of money.

(2) One thing that Condo Corporations MUST do according to the Condominium Act is run a Reserve Fund Study. This means that they hire an Engineering Company to analyze most everything in the building for the purpose of determining the replacement costs of everything for the next 30 years. This study is generally done by the end of the 2nd year. The problem is that in many cases, the study reveals that the amount the corporation is putting away into its reserve fund is drastically too small, so a HUGE increase in maintenance fees is necessary. That's why sometimes you see maintenance fees go up 50-100% at the end of the second year.

A condo corp is required at a minimum to contribute 10% of the budget to the reserve fund. If the study finds that the reserve fund is too small, then you may see an increase in the maintenance fees. But to suggest that the fees could go up 50-100% is ludicrous. A 50% increase would imply that your reserve fund contribution is now 60% of your maintenance fees. That is absurd.

[circa76]

Question:
I am looking to invest in a condo in the downtown Ottawa area. They are planning to build a series of condos in an area called Lebreton Flats. The first building should be done by the end of this summer, and Phase 2 should start shortly after and it is projected to be done in 2010.
So I am looking to get into the Phase II project, they require a 15% deposit, which will be about 30k for a 1 bedroom. Is it usually a wise decision to put the deposit with the intention to sell if the housing market has been steadly going up and if I could make a decent profit from my intial deposit. But on the other hand I would not mind moving in either if prices has not gone up too much, since this will be my first house and I plan to be renting for the next 2 years.

Thanks.

I don't understand your question. You have to put the deposit down in order to meet the conditions of your Purchase and Sale agreement. No Deposit = No Unit.

[dark169]

I'm about to take ownership of a condo I bought in Sept 2005 (32 months) its 6 months late (not surprising in Calgary). BUT when you consider the only money locked into the condo for the past 32 months is the 5% down I have no complaints. Any appreciation on the unit is on the 100% value while only 5% is my money, so rather then having a 75% mortgage. I look at it like this: my 10k has been locked up, but that 10k has allowed me to secure conservativly75-100k in increased equity. even if it was 1/10th of that your still talking 7k return in 3 years on 10k, thats pretty damm good.

residence fees are something that catches people off guard, but they are typically just the interest on the unit, so your not missing out on paying down your mortgage. Its like having an interest only mortgage, except its in someone else name Put the difference into a savings account or if its towards then end of the year your RRSP's.

Condo fees are typically understated IF utilities are included. It's been my observation that if the units have metered utilities condo fees are close or even over stated. People are huge heat/ac/power hogs when they don't see the bill (and still moan about condo fee increases), but don't mind turning off the lights when its their dime directly.

[circa76]

Condo fees are typically understated IF utilities are included. It's been my observation that if the units have metered utilities condo fees are close or even over stated. People are huge heat/ac/power hogs when they don't see the bill (and still moan about condo fee increases), but don't mind turning off the lights when its their dime directly.

New buildings usually have separately metered hydro (smart-meters), but I haven't seen many that also do gas and water.

But yes, typically that is the case. Once you start paying for your own utilities you tend to turn things off when they're not in use!

[thelefteyeguy]

I'm about to take ownership of a condo I bought in Sept 2005 (32 months) its 6 months late (not surprising in Calgary). BUT when you consider the only money locked into the condo for the past 32 months is the 5% down I have no complaints. Any appreciation on the unit is on the 100% value while only 5% is my money, so rather then having a 75% mortgage. I look at it like this: my 10k has been locked up, but that 10k has allowed me to secure conservativly75-100k in increased equity. even if it was 1/10th of that your still talking 7k return in 3 years on 10k, thats pretty damm good.

residence fees are something that catches people off guard, but they are typically just the interest on the unit, so your not missing out on paying down your mortgage. Its like having an interest only mortgage, except its in someone else name Put the difference into a savings account or if its towards then end of the year your RRSP's.

Condo fees are typically understated IF utilities are included. It's been my observation that if the units have metered utilities condo fees are close or even over stated. People are huge heat/ac/power hogs when they don't see the bill (and still moan about condo fee increases), but don't mind turning off the lights when its their dime directly.

btw...you get interest on your deposit.

remember to budget that in your taxes for the year that you take possession of your unit (cause the builder should be giving you a T5). The interest will be a line item on your final cost spreadsheet during closing. If it isnt, talk to your lawyer

[dealguy2]

Over 16,000 listings in Calgary right now. It'd probably take a year at least to sell that condo. I wouldn't count on that appreciation.