If you were looking to purchase a home, in virtually any area, of any city, you would most certainly want to conduct a home inspection, right?
So, when you’re considering purchasing a condominium, is there anything to inspect?
Well, consider that when you do a home inspection, you’re looking at the roof, foundation, attic, furnace, air conditioner, hot water tank, plumbing, electrical, and a host of other items that are not applicable when purchasing a condo.
So again, we would ask: is there anything in a condominium to inspect?
Consider that when you purchase a condominium unit in Toronto, you’re buying into a corporation. Like all corporations, the “Condominium Corporation” has associated documentation that shareholders (ie. property owners) would want to read.
Each condominium has a declaration that outlines the ownership structure among the unit holders, the unit boundaries, common expenses, common elements, and more.
There are rules and regulations and by-laws that many prospective condominium owners would want to be familiar with as well.
Like all corporations, there are associated expenses as well as a budget for operations as well.
Lastly, there is a study of the corporation’s reserve fund, which is essentially the pool of money they save for the proverbial “rainy day” when major repairs will be needed.
All of these documents are provided in what’s called a “Status Certificate.”
Now, armed with this information, what are the red flags that buyers should be aware of?
Before we start with the red flags, did you know we have a podcast? If you’re looking for unfiltered real estate insights, check out The Last Honest Realtor podcast on our website or anywhere you get your podcasts!
1) Budget obligations.
Outlined in the status certificate is whether the condominium corporation is currently meeting its financial obligations, specifically, if there is a budget surplus or a budget deficit.
Budget deficits are not uncommon, so the existence of a deficit is not necessarily a reason to walk away from the purchase. But the amount of the deficit is important. A small deficit could simply mean that expenditures exceeded expectations, perhaps due to inflation, turnover of staff in the building, or an increase in utility costs. But a large deficit could mean that the condominium corporation didn’t appropriately plan or forecast costs, or is being mismanaged, or both.
Read more about what status certificates are and why you need them.
2) Maintenance fees.
Every condominium owner pays a monthly maintenance to the condominium corporation that goes toward three major items:
- Common elements – staff and labour costs, common elements, ongoing maintenance, etc.
- Utilities – some condos include heat, hydro, and/or water in the common elements, whereas other buildings see the unit owners pay the expenses themselves
- Reserve fund – a portion of the monthly maintenance fees goes into the reserve fund, attempting to build the fund up over time
Detailed within every status certificate is whether there an increase in monthly maintenance fees is scheduled for the coming year.
An increase of 2-3% is common, and is necessary to combat inflation.
But if fees are scheduled to increase 15% this year, 18% next year, and 21% the following year, then this has to give any buyer pause.
Buyers need to investigate how any increase in fees could affect their affordability in the coming years.
Education equals empowered decision-making when buying a home. Check out these posts next for more tips and advice:
- What to Look for When Buying a Home
- Things that “Fail” a Home Inspection
- What Does SC Escape Clause Mean?
3) Special assessments.
A special assessment is essentially a “bill” issued to the property owner to pay for major repairs in the building.
For example, if the underground parking garage required a $500,000 repair, the condominium corporation might elect to issue a $1,000 special assessment to all 500 property owners, rather than take money from the reserve fund.
The status certificate will note if any special assessments have been levied, are pending, or are being discussed.
A condo buyer can always ask/insist that the seller pays for any pending special assessments.
Now we understand what it means to buy a condo with a special assessment, read about selling a condo with a special assessment next.
4) Reserve fund.
The reserve fund exists to pay for major expenditures and repairs in the future, whether these expenditures are foreseen (like renovating an aging lobby or replacing worn-out hallway carpets) or unforeseen (damage to the roof or major heating/cooling systems).
The more money in the reserve fund, the less chance you have of being called upon to pay a special assessment down the line.
It’s difficult to say how much a condominium’s reserve fund “should” contain, but this is based on the number of units in the building and the age of the building.
A 22-year-old condominium with 330 units having $5,500,000 in the reserve fund is fantastic. The same building having only $700,000 would be cause for concern.
But a newly-registered building in its infancy, having 500 units, might only have $700,000 in the reserve fund, as the building isn’t old enough to have built up the reserve fund over time.
Every so often, we run into a condominium corporation that has a deficit in the reserve fund. This would certainly be a reason to reconsider the purchase.
Do you have specific home-buying questions? Read these posts next:
- What Buyers and Sellers Need to Know About Real Estate Fees in Toronto
- How Much Does a Home Inspection Cost?
- Fixed Rate Vs. Variable Rate Mortgage
5) Lawsuits.
Lawsuits are an unfortunate reality for condominium corporations, and I would speculate that one out of every four or five condominium corporations ends up in some sort of litigation with the developer.
But a condo buyer needs to investigate whether the condominium corporation is suing or whether they are being sued.
If a condominium corporation is being sued for $2,000,000 because somebody slipped on ice outside the building, that’s a concern. It might be covered under insurance, but any deductible would likely have to be paid via special assessment.
If the condominium corporation is suing the developer for $2,000,000, then this is less of a concern, since the condominium corporation stands to gain and not lose. However, there have been cases where a condominium corporation is suing the developer to recoup millions of dollars spent fixing construction problems, and if that corporation loses the lawsuit, then the unit owners have to foot the bill.
Learn more about the role of condo associations and corporations.
6) TARION Claims.
When a condominium is completed, the newly-formed Board of Directors (made up of residents) will conduct a “Performance Audit” on the building, and determine if there are any issues resulting from construction.
If issues are found, then the Board will submit claims to TARION, which provides 1-year, 2-year, and 7-year coverages for various items throughout the units and common elements.
For example, smaller items like water penetration in windows and doors falls under the 1-year warranty, but major structural defects in the building are covered under the 7-year warranty.
These claims need to be filed within the prescribed timelines, not settled. So if a buyer is purchasing a 9-year-old condominium, that doesn’t necessarily mean that all claims have been settled. A claim for something falling under the 7-year warranty could have been filed, but is still pending.
Prospective condo buyers will want to investigate whether there are any claims pending, and what ramifications those claims could have for their unit, the building, and the building’s financials.
7) Rental Units.
While this isn’t necessarily a “red flag” to every buyer, some buyers want to live in a building that is primarily composed of owner-occupants.
Every condominium’s status certificate will detail how many units are being rented to the best of their knowledge. While property management keeps records on the number of rental units that are leased, they can’t always be 100% informed and accurate.
But how many units leased are too many units leased?
If you’re an owner-occupant and you read in a status certificate that 400 units are leased in a 500-unit building, does that turn you off?
Some people would say “yes, absolutely,” whereas others might not have a problem with it. But the bottom line is: this is something that needs to be investigated regardless.
Our Take
When we do home inspections with our clients, we typically tell them, “You’re looking for problematic building materials that could cause major issues today or tomorrow, such as knob-and-tube wiring, aluminum wiring, asbestos, UFFI, vermiculite insolation, clay pipes, lead pipes, etc. On their own, one of these might not be the massive red flag that tells you not to buy the home, but if two or more of these issues arise, it could be a reason to pause.”
The same is true when it comes to the “red flags” found in a condominium’s status certificate.
Nobody wants to be on the hook for a special assessment, but if you’re buying an $800,000 condominium and there’s a $1,000 special assessment being “contemplated by the Board,” is it really a reason to back out of the transaction?
Yes, no, maybe so. The answer is different for every buyer.
But condo buyers absolutely, positively must review the condominium’s status certificate before committing to an unconditional purchase, and do so thoroughly.
After all, those “red flags” aren’t always soaring high for all to see…
Thinking about making a move? Do you have questions about buying a condo in Toronto? We’re happy to help. Get in touch today by filling out the form on this page, calling us at 416.642.2660, or emailing us at admin@torontorealtygroup.com.
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