What you need to know before you buy a condo
This concept of condominium ownership is relatively simple and has been around for a long time.
Here is what Wikipedia has to say:
A condominium, or condo, is the form of housing tenure and other real property where a specified part of a piece of real estate (usually of an apartment house) is individually owned. Use of land access to common facilities in the piece such as hallways, heating system, elevators, and exterior areas are executed under legal rights associated with the individual ownership. These rights are controlled by the association of owners that jointly represent ownership of the whole piece.
Scholars have traced the concept of selling part of a building to a first century Babylonian first century record. “Condominium” is a legal term used in the United States and in most provinces of Canada. In Australia, New Zealand, and the Canadian province of British Columbia, it is referred to as “strata title“. In Quebec, the term “divided co-property” (French: copropriété divisée) is used, although the colloquial name remains “condominium”. In France, the equivalent is calledcopropriété (co-ownership), usually managed by the syndic. In Italy the equivalent term is “Condominio” (not surprisingly, as “Condominium” comes from Latin). InHispanic regions, the traditional term propiedad horizontal is retained since horizon in this case signifies “defined”. In South Africa, this form of ownership is called “sectional title”.
The difference between an “apartment” complex and condominium is purely legal. There is no way to differentiate a condominium from an apartment simply by looking at or visiting the building. What defines a condominium is the form of ownership. The same building developed as a condominium (and sold in individual units to different owners) could actually be built at another location as an apartment building (the developers would retain ownership and rent individual units to different tenants). As a practical matter, builders tend to build condominiums to higher quality standards than apartment complexes because of the differences between the rental and sale markets.
Technically, a condominium is a collection of individual home units and common areas along with the land upon which they sit. Individual home ownership within a condominium is construed as ownership of only the air space confining the boundaries of the home (Anglo-Saxon law systems; different elsewhere). The boundaries of that space are specified by a legal document known as a Declaration, filed on record with the local governing authority. Typically, these boundaries will include the wall surrounding a condo, allowing the homeowner to make some interior modifications without impacting the common area. Anything outside this boundary is held in an undivided ownership interest by a corporation established at the time of the condominium’s creation. The corporation holds this property in trust on behalf of the homeowners as a group–-it may not have ownership itself.
Condominiums have conditions, covenants, and restrictions, and often additional rules that govern how the individual unit owners are to share the space.
It is also possible for a condominium to consist of single-family dwellings. So-called “detached condominiums” where homeowners do not maintain the exteriors of the dwellings, yards, etc. or “site condominiums” where the owner has more control and possible ownership (as in a “whole lot” or “lot line” condominium) over the exterior appearance. These structures are preferred by some planned neighborhoods and gated communities.
The purpose of this post is to give you some insight on how a condo corporation is run, and some of the pit falls that can occur if you are a condo owner.
I have served time on some condo corporation boards. This allowed me to learn a lot about how condo corporations work. It is important for all unit owners to understand the condo laws for the area they are in, also the by-laws for the specific condo corporation.
The most important document you need to see and understand before you buy a condo is called the “reserve fund study”. In my home province of Nova Scotia, we are quite fortunate since 2002, every condo corporation needs an updated reserve fund study to be signed off on by an engineer. It is a requirement of the province to have the study updated every five years.
The reserve fund study is basically a guide to the useable life of every major component of the building, and the amount of money that is being saved to allow for the cost to fix the problem. For example if you are looking at a condo in a building and you notice the shingles are old and worn out on the roof, you can check out the section on roof replacement in the reserve fund. If it states the roof needs to be replaced within the next year and they only have $10000 saved for a $50000 roof, you need to realize that there are two main ways that a condo corporation will fund a project if they do not have cash. One is to raise condo fees and the other is to do a special assessment. There are pros and cons to each.
The unfortunate part of condos in our area is that several condo corporations were formed before 2002, and the unit owners in an effort to keep condo fees low, did not put enough money aside to replace things like windows, doors, siding, roofs, parking lots, etc. Now many new unit owners are paying large condo fees and special assessments to replace these items.
I want to share a story that was a major learning experience for us. It took place several years ago, when Shelly and I were flipping a condo.
The condo was a mid-eighties two bedroom, that was in excellent condition, but very dated. Our plan was to modernize it and sell it. We looked at the reserve fund study and noticed a couple of flaws, such as they had an upcoming window replacement project that appeared to be under funded. We figured no big deal, a $5000 special assessment would likely handle any short falls. The condo was in a nice area and many of the unit owners were retired professionals, plus we also knew that any newer, younger owners could get the amount added on to their mortgage (most lenders are pretty cooperative around special assessments). The condo corporation was also managed by a well known large property management company, so we figured it would be all good.
We purchased the condo, submitted our renovation plan to the board, had it approved and got to work. I went to the annual general meeting shortly after the purchase and got on the board. I will note that most owners do not want to volunteer for the board, so it is usually easy to get elected. In my opinion all unit owners should serve time on the board of directors. It is a thankless job, where you get to hear all the complaints from unit owners about everything from a noisy dog to the grass not being cut to the right length. Most condo boards hire an outside property management company, so you end up working closely with them. If you are a property manager of a condo corporation your role is more of a mediator between the unit owners, board of directors and vendors doing the work keeping the common areas maintained.
When I joined this particular board I quickly realized they were in a time of turmoil. Most of the current board members were on the board for a long time and made an effort to keep condo fees low, plus avoid any special assessments. They seemed to be completely unaware of the pending financial problems, and were quite defensive when I asked about some of the upcoming projects that were clearly underfunded. Shortly after I joined the board a couple of the long term members quit. We ended up with a small board and our property manager.
We decided that we would bring the issues to the attention of the unit owners on a one on one basis. In my head I figured the action needed would be obvious. We would go over the reserve fund study, talk about the possible options, then hold a general meeting, everyone would agree to a special assessment.
My vision of what I thought would happen and what actually happened were completely different.
When we met with the individual owners they seemed to understand what needed to be done, however, some of the old board members formed an unauthorized committee to contradict everything we were saying. We miscalculated the human factor in this business deal.
The new unauthorized board appeared to have an intent to defend the point of view that we would not need a special assessment or increased condo fees to deal with the problem.
I was on the board with two other long term owners that were feeling betrayed, so we decided to have a meeting with our property manager to discuss options. We decided it was counter productive to go against the past board members. This was due to the legislation in place that would force our condo corporation to have a reserve fund study completed within the next year.
We all resigned from the board of directors, which forced an emergency owners meeting. A new board was elected and they ordered a reserve fund study.
The reserve fund study lead to a special assessment of about $5000.
I was happy to see the outcome was exactly as we predicted. This situation was also an important part of my growth as a businessman. It was quite stressful at the time, however, I learned some valuable lessons.
Here is what I learned:
Do not forget to calculate the human ego factor: When I look back I can see how I clearly stepped on toes and did not consider the feelings of the past board members. They had volunteered countless hours of time trying to do the right thing. They felt they were working in the best interests of the unit owners. The unfortunate part of condo boards, is that they are made up of owners who quite often have very little business, and property management experience. If I could go back in time, I would have consulted with the past board members and got them involved in helping resolve the problems. At the time I was younger and more stubborn. I saw a problem with an easy fix and I just flexed my ego and went after the solution.
Renters mentality: This is a common problem in most condo corporations. Many people will buy a condo and do not realize that they are buying part of a building. They do not understand that making sure the common areas plus roof, windows, siding, doors, hallway carpets etc… are all part of the ownership experience. When we were meeting people to gain support for a special assessment, many people did not feel it was their problem. They felt it should be taken care of by “the board”. Some people had never attended an AGM or volunteered anytime. It is a challenge getting money for capital projects from people who do not feel they should have to pay. We ran into many people who figured that if the condo fees did not cover all the costs then a magic fairy should come and pay. They had no idea that they were part owner of a giant building and they needed to protect and maintain there own investment.
Do not conclude that the property manager will make decisions in the best interests of the owners: When a condo corporation hires a property manager, they are a customer. The property management company wants to keep the board happy. They take on a more neutral role. The job of the property management company is to make sure all financial reports are accurate and provided. They also arrange any work and manage contractors and vendors. They supervise the daily operations of the building. The condo property manager will also help solve disputes between owners and act as a mediator between the unit owners, board of directors and vendors.
Make sure to question the reserve fund study before you buy: If you are reviewing a reserve fund study before you purchase a condo, make sure to question any problems. Make sure the current board has an answer for any areas that appear to be underfunded. A well run board will be more than happy answer any questions from potential buyers.
Buyer beware: I will have to admit that after this project was completed, and we got lucky and only lost a few thousand dollars, we became a lot more cautious. If you decide to buy a condo, no matter how big or small the building is, make sure to get a good understanding of the maintenance record and future capital expense plan. Now that we own several buildings we realize it takes a lot of cash to keep them operating properly. Make sure to talk to the current board members, and if possible current unit owners.
Those were the main lessons we learned. A friend of mine has a great saying, it reads something like this: There are no good experiences or bad experiences, just learning experiences.
Michael P Currie