Real Estate

Condo Reserve Fund Too Low

  • Last Updated:
  • Feb 20th, 2020 7:59 pm
Newbie
Feb 14, 2020
4 posts
5 upvotes

Condo Reserve Fund Too Low

Hello Everyone

I am a first time home buyer.
I made an offer to buy a condo and everything looked fine until the status certificate came back. This building in Waterloo was completed in December 2016. It consists of two towers with a total of 185 condo units. I was surprised to see that the reserve fund at the moment is only $18 (next to nothing).
In August 2019, a reserve fund study was completed and it was recommended that the reserve fund should be at $169100 at the end of the current fiscal year (2020). However, at the beginning of the year, the balance was $8891 but now it is at $18. I am not sure why they made this withdrawal. (Fiscal year end for the corporation is August 31)

Are these issues I should be concerned about?
Last edited by johnnybus111 on Feb 15th, 2020 5:10 pm, edited 1 time in total.
18 replies
Sr. Member
May 3, 2013
760 posts
475 upvotes
Toronto
Yes, this is something to be concerned about. Typically, condo fees for the first 2-3 years is low, as per developer's advertising to promote sales. Once the audit is done, it should jump up to a normal rate. Depending on what amenities the condo building has, a very typical condo maintenance fee should be in the vicinity of 70 to 80 cents per square foot. This may not be a factual statement, but it's something I've observed over the years.

You should raise your concerns with at the next AGM meeting, or talk to the property manager/board about it. Prior to that, I would suggest looking at the statements to trace where the bulk of those funds went.
Newbie
Feb 14, 2020
4 posts
5 upvotes
Thank you for the response. One thing I failed to clarify is that I havent actually bought the condo yet. It was a conditional offer and I have a ten days to review the status certificate before waiving all the conditions. This low reserve fund from the status certificate is making me want to pull out of the deal.

What are some general thoughts on pulling out due to this low reserve fund?
Sr. Member
May 3, 2013
760 posts
475 upvotes
Toronto
As part of the status certificate, I would check if there is a special assessment to cover for the shortfall. Secondly, I would review the budget to see where all the maintenance fee went. Off-hand, if the reserve fund study says $170k is needed by year end, and there are 185 units, that's less than $80/mth by each unit to contribute. So mathematically, it seems reasonable (without reviewing in detail the actual budget). Maintenance fee jumping by $100/mth after 2-3 years is not uncommon. Just expect that in the long-run, in a typical condo, maintenance fee should be 70-80 cents/sqft.
Deal Addict
Jun 7, 2017
1043 posts
836 upvotes
BC
Really good job OP. It is excellent that you are looking into this. It is serious business.
Deal Addict
Oct 14, 2010
1292 posts
1788 upvotes
Toronto
johnnybus111 wrote: Hello Everyone

I am a first time home buyer.
I made an offer to buy a condo and everything looked fine until the status certificate came back. This building in Waterloo was completed in December 2016. It consists of two towers with a total of 185 condo units. I was surprised to see that the reserve fund at the moment is only $18 (next to nothing).
In August 2019, a reserve fund study was completed and it was recommended that the reserve fund should be at $169100 at the end of the current fiscal year (2020). However, at the beginning of the year, the balance was $8891 but now it is at $18. I am not sure why they made this withdrawal. (Fiscal year end for the corporation is August 31)

Are these issues I should be concerned about?
What does your lawyer and RE agent have to say about this that could explain it?

Like others mentioned- fund can be low at start, but I would definitely be worried about why? And inquire about what is the plan to ramp it up. Typically there will be financial disclosure on what is the money being spent on, also a plan and budget of how the monthly fees will be ramped up- usually over 3 years or so....look into that and you should find useful answers to decide on whether you want to buy or refuse to waive the condition and move on.
Deal Expert
User avatar
Aug 18, 2005
21223 posts
5939 upvotes
Burlington-Hamilton
Furcorn wrote: Really good job OP. It is excellent that you are looking into this. It is serious business.
Agreed. There is little reason for a reserve fund to be so low in a young building.
The whole purpose is to replace and maintain worn-out components of the building as they age.
Normally I would expect the reserve fund to grow a lot in the first 10-15 years, because the building components are new and don't need replacement yet.

One possible explanation for this is the construction quality is crap, and they are having to replace things much earlier than expected.

I have seen it before. I used to live in a '2 towers' kind of condo where they were connected in the building.
The '2 towers' were mostly identical on the outside, but the second one had all kinds of cheap parts, and stuff that should last for decades was breaking all over the place.
Why? I think it was because the developer was running out of money for the second building, and started cheaping out on parts and labour.
It just goes to show you how 2 of the 'same' buildings can vary a lot in expense and quality.

OP, if this sort of thing is why they are draining the reserve fund, then I would stay away from the building.
If it was me, I would pull the plug immediately due to the reserve fund issue. No good will come of this.
- casual gastronomist -
Newbie
Feb 14, 2020
4 posts
5 upvotes
Thank you everyone. Upon examination of everything, I decided to pull out of the deal. I also noticed that 89000 was allocated to the reserve fund last year and it was also depleted. Now I'm hoping to get back my earnest deposit without any issues from the seller (which happens to be the builder).
Deal Addict
Jan 26, 2016
2240 posts
2272 upvotes
Toronto, ON
johnnybus111 wrote: Thank you everyone. Upon examination of everything, I decided to pull out of the deal. I also noticed that 89000 was allocated to the reserve fund last year and it was also depleted. Now I'm hoping to get back my earnest deposit without any issues from the seller (which happens to be the builder).
Your deposit should be with your own realtor.
Sr. Member
Dec 4, 2004
730 posts
729 upvotes
GTA
WinterSleep wrote: Your deposit should be with your own realtor.
Deposits are held by the listing agent.
Deal Expert
User avatar
Aug 18, 2005
21223 posts
5939 upvotes
Burlington-Hamilton
_dc_ wrote: Deposits are held by the listing agent.
+1
I've been through this. You will get a bank draft back from the listing realtor's brokerage.

Your own realtor will also set up a mutual release document that all parties will sign.
- casual gastronomist -
Newbie
Feb 14, 2020
4 posts
5 upvotes
Hello Everyone
So I need your advice here. We sent the seller (the builder) the mutual release and they said their lawyer does not agree with the mutual release so they dont want to release me from the purchase. They believe my requirements are unreasonable.
I believe they are flexing their muscles because they are the builder and they probably have loads of money. What are my options here? I dont have much appetite to go to court for litigation. The legal fees I may incur from litigation may not be worth the hassle

Here is the wording of my condition in the offer

"This offer is conditional upon the buyer and the buyers lawyer reviewing the status certificate and attachments and finding the status certificate and attachments satisfactory in the buyer's and the buyer's lawyers sole and absolute discretion. The seller agrees to request at the sellers expense, the status certificate and attachments within 2 days after the acceptance of this offer (if not already provided). Unless the buyer gives notice in writing to the seller personally or in accordance with any other provisions for the delivery of notice in this agreement of purchase and sale or any schedule thereto not later than 8pm on the tenth business day (excluding Saturdays, Sundays and Statutory Holidays) following acceptance of this offer, that this condition is fulfilled, this offer shall be null and void and the deposit shall be returned to the Buyer in full without deduction. This condition is included for the benefit of the Buyer and may be waived at the Buyer's sole option by notice in writing to the Seller as aforesaid within the time period stated herein".
Deal Addict
Oct 14, 2010
1292 posts
1788 upvotes
Toronto
Sole and absolute discretion is with the buyer. Tell them to eff off and give you a mutual release or you will put in a lien on the property... I am absolutely disgusted by what builders are allowed to get away with.
Deal Addict
Jan 12, 2017
1741 posts
1040 upvotes
Definitely tell them to get lost. Taking you to court would be a money and reputation losing approach for this builder - pretty shameless, especially if they're still holding units. I would not be surprised if the condo board was still made up of the developer's staff.

The alternative is you complete the deal but you pay (likely more than legal fees) through special assessments or significant increases in maintenance fees to make up the reserve in the future.

A compromise could be an offer that includes a price drop accounting for the unit's share of the reserve deficiency (don't trust the builder to calculate this - definitely bring your own number).

From a business/investment perspective, so long as you get the benefit of lower contributions to the reserve, increased payments in the future are really just a deferred expense (unless preventative maintenance is unreasonably deferred).

The only risk I can think of (not an expert on this) is I've heard of lenders denying mortgages due to reserve deficiency.

GL
johnnybus111 wrote: Hello Everyone
So I need your advice here. We sent the seller (the builder) the mutual release and they said their lawyer does not agree with the mutual release so they dont want to release me from the purchase. They believe my requirements are unreasonable.
I believe they are flexing their muscles because they are the builder and they probably have loads of money. What are my options here? I dont have much appetite to go to court for litigation. The legal fees I may incur from litigation may not be worth the hassle

Here is the wording of my condition in the offer

"This offer is conditional upon the buyer and the buyers lawyer reviewing the status certificate and attachments and finding the status certificate and attachments satisfactory in the buyer's and the buyer's lawyers sole and absolute discretion. The seller agrees to request at the sellers expense, the status certificate and attachments within 2 days after the acceptance of this offer (if not already provided). Unless the buyer gives notice in writing to the seller personally or in accordance with any other provisions for the delivery of notice in this agreement of purchase and sale or any schedule thereto not later than 8pm on the tenth business day (excluding Saturdays, Sundays and Statutory Holidays) following acceptance of this offer, that this condition is fulfilled, this offer shall be null and void and the deposit shall be returned to the Buyer in full without deduction. This condition is included for the benefit of the Buyer and may be waived at the Buyer's sole option by notice in writing to the Seller as aforesaid within the time period stated herein".
Deal Addict
Jan 26, 2016
2240 posts
2272 upvotes
Toronto, ON
OP, you already know they have no ground to stand on and you will get your money back 100%
Deal Guru
User avatar
Mar 23, 2008
13006 posts
10009 upvotes
Edmonton
johnnybus111 wrote: Hello Everyone
So I need your advice here. We sent the seller (the builder) the mutual release and they said their lawyer does not agree with the mutual release so they dont want to release me from the purchase. They believe my requirements are unreasonable.
I believe they are flexing their muscles because they are the builder and they probably have loads of money. What are my options here? I dont have much appetite to go to court for litigation. The legal fees I may incur from litigation may not be worth the hassle

Here is the wording of my condition in the offer

"This offer is conditional upon the buyer and the buyers lawyer reviewing the status certificate and attachments and finding the status certificate and attachments satisfactory in the buyer's and the buyer's lawyers sole and absolute discretion. The seller agrees to request at the sellers expense, the status certificate and attachments within 2 days after the acceptance of this offer (if not already provided). Unless the buyer gives notice in writing to the seller personally or in accordance with any other provisions for the delivery of notice in this agreement of purchase and sale or any schedule thereto not later than 8pm on the tenth business day (excluding Saturdays, Sundays and Statutory Holidays) following acceptance of this offer, that this condition is fulfilled, this offer shall be null and void and the deposit shall be returned to the Buyer in full without deduction. This condition is included for the benefit of the Buyer and may be waived at the Buyer's sole option by notice in writing to the Seller as aforesaid within the time period stated herein".
Did you have a lawyer and/or realtor? Who did you give the deposit to?

C
Newbie
Feb 18, 2020
5 posts
1 upvote
I can't comment on the legal aspect of this but I will say that my aunt got burned by this a few years back. She lives on the east coast so it's possible the rules are different, but basically her complex suffered damage to the roof and everyone in the building ended up being on the hook for the repair because the fund was too low. I think she was out close to 10 grand when it was all said and done. I've read that reserve funds are usually low for new buildings but $18 dollars is ridiculous.
Deal Addict
User avatar
Jan 2, 2012
4596 posts
3099 upvotes
Toronto
johnnybus111 wrote: Hello Everyone
So I need your advice here. We sent the seller (the builder) the mutual release and they said their lawyer does not agree with the mutual release so they dont want to release me from the purchase. They believe my requirements are unreasonable.
I believe they are flexing their muscles because they are the builder and they probably have loads of money. What are my options here? I dont have much appetite to go to court for litigation. The legal fees I may incur from litigation may not be worth the hassle
You need to have your lawyer respond to them.
Deal Addict
Jun 7, 2017
1043 posts
836 upvotes
BC
_dc_ wrote: Deposits are held by the listing agent.
Deposits are held by the listing agent's broker of record, in trust.

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