Condo-buying mistakes

I have been re-assessing my living situation lately. I mentioned in a previous post my building underwent major repairs that directly impacted my unit. The bulk of the work is done, but deficiencies have yet to be addressed. That was not a fun experience, and the contractor doing the work was just plain dreadful.

Unfortunately, this was only the first of a series of repairs our building needs. It has been estimated each unit will have to fork $ 29 000 over the next 10 years or so to fix the building envelope and the roof. This does not include any repairs of the mechanical components such as the furnaces or the pipes.

Needless to say I am thinking about selling my unit, which was not exactly what I had planned on doing just yet. Back in 2013, when I bought, the engineers had just started doing the building envelope assessment. Their final report and recommendations came in in April 2014. There was no way I would have known the condition of the building before buying.

That being said, I realize I made a few mistakes and oversights when buying my condo:

  • Getting a 5-year fixed rate mortgage: The majority of first-time home-buyers do this. I thought it would be easier to have a fixed payment each month, but I am paying a wack load more in interests. The Bank of Canada lowered its rate twice….I didn’t benefit from it. If I want to break my mortgage, I will be faced with a stiffer penalty (I.R.D.).
  • Buying with a 5% down-payment: Unfortunately, 5% is really low. I had to pay for mortgage insurance and it will take me more time to see some significant equity in my condo. I may have to hold-on selling or turn down offers if I can’t “break even”.
  • Not paying sufficient attention to the Contingency Reserve Fund (CRF): Each strata corporation must set money aside each month to fund for larger repairs. When I bought my condo, the CRF had about 10K, and no major repairs had been done.
  • Buying into a “rental building”: Almost half of my building is tenanted and there is no rental restriction. The majority of owners is uninterested in the building and don’t want to spend any time or money on it. The turn-up at our AGMs is very low, except when money is asked for. Tenants don’t care and have no problems damaging the property.
  • Not fully considering whether condo living actually suited me as an owner: in a condominium building, you cannot choose your neighbors or do what you want. More and more things are just irking me. I bought on the ground floor, meaning constant pacing, stomping, vacuuming from the unit above. When buying, I didn’t meet with any Council member or other owner. Most people don’t.

After being a Council Member for over 2 years, I can also add the following points to consider:

  • Most Council members have no clue what they are doing: this probably sounds very negative. What I mean by this, is that Council members usually volunteer their time and come from all walks of life. They are not necessarily licensed Realtors, property managers, engineers etc…No formal or informal training is provided on how to manage a strata corporation. If you think it is scary, you are right!
  • Consultants, contractors and other agents are not always acting in the strata’s best interest.

This definitely gives me a lot to ponder. If I sell my unit, I may not be able to buy again in Vancouver. On the other hand, I am not sure I want to fork $ 29 000 over my building.

Strata myths debunked

As both a condo owner and council member, I have learnt a lot on strata living over the last couple of years. I  noticed people definitely have some misconceptions about condo living. Some of them could be very costly!

  • The strata’s insurance covers everything. This is by far the biggest myth around. Your belongings and furniture will never be covered, as well as any improvements you or a previous owner made. Most corporations also have a deductible to lower premiums. If you cause significant damage to common property, strata has the right to charge the deductible back to you. Take your building’s insurance document to your own insurance broker, so that you can have the adequate coverage.
  • Strata will fix everything. This is very unlikely. Both owner and strata responsibilities are spelled out in the by-laws. Check them! Usually, strata is only responsible for maintaining and repairing common property, and limited common property to a certain extent.
  • It is my unit and I can do whatever I want to! This line of thinking could be very costly too. The key work in strata living is “communal”. There are by-laws and rules you must follow. You will also need authorization from Council if you want to do any renovations such as changing the floors or taking a wall down. You will also need approval if what you want to do impacts the common property. Failure to do so could result in strata asking you to restore the property to its original state.
  • My unit has 2 parking stalls and I can rent them out. Do you have written confirmation from strata? Have you checked the by-laws? Since 2014, Form B requires all strata corporations to disclose parking and storage allocation.
  • I can rent my unit. Council will give me an exemption, if it turns out I couldn’t rent it. Once again, check your by-laws for rental restrictions. An illegal rental is very costly. Strata has the right to fine you on a weekly basis until your tenants move out. Council has no authority to give any exemption, other than the one(s) stated in the by-laws.
  • If strata receives a settlement from a lawsuit or if a special levy has a surplus, I will receive a refund, even if I sold my unit. Reimbursements are made to the current owner of the unit.
  • I am selling my unit; I don’t have to pay for this special levy. Yes, you do! Levies always have a due date. You could be charged interests and strata can also put a lien on your unit as well as start foreclosure proceedings. If you sell before the due date, the levy is payable at the time of conveyance.
  • Of course, pets are allowed. Have you checked the by-laws?
  • Of course, there is no age restriction. Repeat: have you checked the by-laws?

When it comes to strata living  never assume anything or go by hearsay. Always get everything in writing and check the current by-laws. It will save you a lot of headaches…and money.

Numbers to look at when condo-buying

Condo-living has become increasingly popular in Vancouver. It is not surprising when the price of a single, detached home is close to $1 million in the city.

If, like many, buying a condo is your only option, you need to look at more than the contents of the minutes when making a decision. In British Columbia, strata corporations are under no obligation to give more than 2 years of minutes to prospective buyers. In my (humble) opinion, this time frame is not enough to get a real sense of a building’s history.

For being a council member in my strata, I can also tell you a number of items never make their way into the minutes….

Here are a few financial pointers:

  • Strata fees: low strata fees are never a good thing, including in newer buildings. They need to reflect the actual cost of maintaining the building, as well as future repairs. The fees should be around 30 cents per condo square feet outside of Downtown Vancouver, and around 45 cents Downtown and in North/West Vancouver.

 

  •  Strata fees, part 2: Each month, a portion of the strata fees is transferred into the Contingency Reserve Fund or CRF. The CRF is a savings account for bigger repairs such as replacing the roof. Check the amount that is transferred. If it is too low, it is a red flag. It means owners are not planning ahead.

 

  • Financial statements-deficit or surplus: Strata financial statements are pretty basic, and you don’t need to be an Accountant to understand them. However, you need to look at the number at the bottom of the page, after all income and expenses have been entered. If it is negative, the strata is in deficit, meaning there were more expenses than income. Obviously not an ideal situation.

 

  • Financial statements-Accounts Receivable: this account is what owners owe to the building. The amount needs to be as low as possible.

 

  • Financial statements- CRF account: This account has 2 components, the trust accounts and the reserve. The trust accounts held monies collected for special projects and major repairs. The reserve is what you need to look at, as it indicates the available savings. The amount should be as high as possible. If it is not, check if major repairs have recently been done, or look for a major expenditure. If it is not the case, it is an indication of poor planning and management.

 

As an Accountant, I believe it is way more difficult to manipulate the numbers than it is to manipulate the minutes of a strata corporation. When it comes to condominium, numbers (usually) don’t lie.

Condo insurance

A lot of condo owners have a misconception of what condo insurance is, and the type of personal coverage they need.

Before I elaborate on this, I would like to do a brief clarification on semantics. Depending on where you live, the “condominium world” has different names. In British Columbia, where I live, it is called Strata. This is the term I will use.

When you buy a condo, you become a member of the strata corporation. You own a share of the building and are entitled to vote on its affairs.  One of your responsibilities as an owner is to pay monthly fees.

These fees usually cover for all repairs and maintenance, electricity, landscaping, caretaking and insurance. In British Columbia, insurance is mandatory for strata corporations. Owners are automatically named as insured.

However, the strata insurance does not provide coverage for anything and everything. The policy usually covers the original structure of the building and its original fixtures. It also covers for the replacement of the building at cost. If your building burns down, the insurance will pay for this. Note that if you have a mortgage, the money will be sent to your lender first.

The policy will also have a deductible. To keep costs low, most corporations choose a higher deductible. My strata’s is at $ 10 000. In order to trigger a claim, the total cost of repairs needs to exceed this amount. The corporation may also elect not to file a claim, particularly if an owner is responsible for the damage. Filing repeat claims has an impact on the price at renewal.

As an owner, you need to have coverage for both property damage and deductible assessments. You also need to include your personal belongings. The strata insurance will definitely not pay for them.

As mentioned above, the strata insurance only covers for original fixtures. If you change the floorings, the kitchen cabinets or the blinds, these are no longer covered. You need to include the value under improvements on your policy.

I would suggest you also include additional living expenses. If your condo sustains massive damage, it might become uninhabitable.  The Province of British Columbia will only pay for relocation for 3 nights.

Obviously, your personal insurance could include many more items, but these are the basics. As a council member of my strata, I sometime encounter disgruntled owners who don’t understand why they have to file a claim with their own insurance company, or why they actually need personal coverage.

They are under the assumption that because they pay monthly fees and the building has insurance, they are not responsible for anything else. It is not the mandate of a strata corporation to pay for and be responsible for anything that happens in a building.