CONDO VS HOUSE
If you’re thinking of buying a condo, you will want to know about the financial differences between condos and houses that can substantially impact you, which we will go over in this article. Over the past decade, there has been a push through government policies towards supporting condo style living; they take up less land space, can intensify the city’s population effortlessly, and can easily be built at the heart of urban centers. With the Toronto core being the largest job hub in Ontario, it is no wonder that the underlying policies would support this style of living. Condos are a more cost effective way for buyers to enter the Toronto real estate market. That being said, with the increase in development of condominium properties, and the slowdown in new house builds, traditional home purchases have become out of reach financially – especially for first time buyers. Over the past 5 years, the gapping between condo and single family home pricing has widened – but that doesn’t mean that traditional houses are out of reach, or that all in condos are much more affordable. Read on to see how condos differ from a financial standpoint, and what you can do to mitigate your risks upon purchase.
CONDOMINUIM MAINTENANCE FEES
When you purchase a condo, you do not only have ownership over your unit – you share ownership over the common elements with other titleholders. Common elements can be described as anything shared among tenants: main hallways and corridors, entranceways and lobbies, amenities like a gym, pool room, or sauna, and even parking areas. These areas need to be heated, cooled, repaired, staffed, or in other words; maintained. Hence the maintenance fee. The maintenance fee is an amount decided by the board of the condo corporation, which works to replenish the reserve fund used to monetarily supply the common elements.
THE CONDO CORPORATION AND RESERVE FUND
When you purchase a condo unit, you are not only buying the dwelling that you inhabit, you are buying into what is called the condominium corporation. The condo corporation is as it sounds: a corporation, whose “shareholders” are made up of the unit owners. That said, when you become a shareholder in the condo corp, you inherit all of the benefits (shared amenities, concierge, underground parking, snow removal etc), in addition to all of the risk. Since you are a shareholder, and thus an owner in the condo corporation, you are held financially responsible in part with all of the other owners. Financials you will be responsible for as an owner are: repairs, expense increases, and lawsuits. Normally, these items would be paid for through the condo’s reserve fund (which is like a bank account funded by your monthly maintenance fees) – but sometimes if expenses are unexpected, or the corporation is poorly managed, this fund could be depleted. If the fund is depleted there are two options the corporation can take, 1. Increase monthly maintenance fees for each unit to cover the additional expense, or 2. Ask each unit owner for a lump sum amount to cover the expenses, otherwise known as a special assessment. For an example of the lump sum payment, please see below:
Unfortunately, the condominium at 123 Fake Street had a huge leak in the lobby area which caused the ceiling to collapse and the entire area to need renovation. The damage is estimated at $1.2M. This expense was not budgeted for in their reserve fund, and the corporation is already running quite low on cash. In order to pay for this unexpected expense, the condo corporation has decided to get the residents to pay a lump sum amount. The calculation is as follows:
*Assumption to simplify this calculation is that all units are of the same size
COST: $1, 200, 000
# OF UNITS: 463
= COST / UNITS
= $1, 200, 000 / 463
= $2, 591.71 per unit
As per the calculation above, the condo corporation would send a notice to each unit owner stating they now owed $2, 591.71 to cover the cost of the damage.This is just one example of how the reserve fund can be replenished for a condo corporation, but shows that it is very possible for unexpected expenses to arise. There are quite a few ways to mitigate your risk when it comes to purchasing your condo, first and foremost starting with the review of the status certificate.
NOTE: Calculations are an example of a way the condo corporation may choose to bill owners, and in no way stipulates that each and every condominium will operate in this exact manner.
The status certificate is a snapshot in time of the condo corporation, intended to give the prospective unit owner a better idea of its standing. The status certificate will detail how much the maintenance fees are, if there are any increases expected, and will show how much money is currently in the reserve fund. This document is also important because it will illustrate any liens against the unit that the current owner hasn’t cleared up (which could be inherited upon purchase), and gives an outline of the rules, guidelines, and condo bylaws.
Prior to putting in an offer on a unit, a clause should be entered into your agreement of purchase and sale indicating that the offer is conditional for a period of time until your lawyer gets to review the status certificate. This way, you will have a clear idea of what you are buying into so you can protect yourself against a decision that may have poor financial consequences.
MITIGATING YOUR RISK
As previously mentioned, viewing the status certificate prior to purchasing your condo unit is going to be one of the best predictors of the financial health of your proposed building – but remember, the status certificate is a snapshot in time; unfortunately, you will never know exactly what is going to happen in the future (as shown in the example above through the special assessment). Fortunately, as a buyer there are other ways to mitigate your risk, which are the basis of Realosophy’s defensive home buying strategy and are worked into the way we operate here at She Sells Toronto.
DEFENSIVE HOME BUYING STRATEGY
Ask yourself the following questions, and move away from answering the question “is it the right time to buy” to thinking about “is it the right time to buy for me”
- Do you have a stable, and steady income? Could it change in the near future?
- Are you planning to stay in your new home for at least five years? If you are purchasing as an investment, are you planning to hold title to the home for five years or more?
- Do you have at least 10% to put down?
- Do you have an emergency cash cushion?
- Are you basing your maximum purchase price on what you can afford based on running your own numbers, as opposed to what the bank said you can afford?
If you answered yes to the previous questions, you are well on your way to beating out any short term blips in the market. By purchasing for the long term, you are able to ride out any waves if they occur, and you are putting yourself in the best position for your own personal state of affairs.