This is a summary of the course notes for the “How to Buy a Condo” training seminar that I ran on Saturday, November 26. If you would like to be invited to future seminars, send me an email at Peter.Sigurdson@Century21.ca. Be sure to put “Training Seminar Request” in the subject line.
Many people look at condo ownership as a way to be in the heart of downtown Toronto, enjoy a luxury lifestyle, or purchase a first home at an affordable rate. There are a lot of choices to you - from new buildings to condo conversions and re-sales. Whichever route you go, you need to start with a basic framework of knowledge to be comfortable that you are buying the right property, for now, and for the time to want to sell and enjoy some return on investment.
There are 2 key knowledge areas I teach my clients to understand, in terms of condo unit ownership:
1. Knowing the detailed workings of the condo corporation they are buying into. This is done by understanding the "Status Certificate, which is the topic of this article.
2. Ensuring that you are buying in an area with strong growth appreciation. This will be the topic of my next seminar, on Saturday December 10.
Condominium Status Certificates.
The Condominium Act (see my webpage to read it http://www.petersigurdson.com/Condominium_Ownership.html) says the Status Certificate must be delivered within 10 days.
The Status Certificate should be not more than 2 months old must include:
- the Declaration,
- Reserve Fund study summary – Are there any pending special assessments to pay for unusual or unexpected costs? For example, of the corporation is sued, the unit owners will be liable to pay out settlement costs such as the insurance policy deductible. A reserve fund should be about 20% of the Annual Budget.
- Rules and regulations
- Insurance Certificate
All these documents must be reviewed by your lawyer to ensure that all your interests and anticipated future considerations are taken care of. Your lawyer will examine the Status Certificate, and contact the property management company, to identify whether there are any pending special assessments. A special assessment is an additional charge to each unit owner to cover extra costs related to building ownership and operation.
Review the Audited Financial Statement (And DO MAKE SURE THAT YOU ARE GETTING AN AUDITED FINANCIAL STATEMENT), with an eye on the notes about the Building Engineering reports. The building engineering company that inspects the building annually will make recommendations regarding required and recommended maintenance, which will be reflected in the operating budget costs. In particular – Are the Engineers’ recommendations being followed?
In a condominium corporation, good property management is critical to the appreciation of the value of your unit. Some indicators of good property management include:
- The budget is on track.
- There is less than a 5% variance in the previous year’s budget between the planned and actual expenses.
There is no cooling off period, as in a new construction deal, so dissatisfaction with the condominium documents is often a Purchaser's exit point if issues arise during the conditional period.
The Agreement should be drafted to give the solicitor at least 3 days for him/her to review (3 days after receipt). That is, ensure your condition is 3 days after Lawyer’s Receipt of the Status Certificate.
The status certificate and condominium documents will disclose what exclusive use is and what is owned. This is important when dealing with parking and lockers. It is important to know what you are actually buying.
The status certificate and condominium documents may be relied on by any purchaser and/or mortgagee regardless of who actually purchases it. The title insurance policy for example will rely on the Status Certificate.
7. If there are arrears of common expense payments, draft an amendment to the Agreement stating "...any arrears of common expenses, together with interest and any costs incurred should be payable to the Condominium corporation out of the purchase monies unless the purchaser's solicitor receives a clear status certificate prior to the closing..." That is, ensure that when you are buying, the Seller will pay for the Seller’s outstanding debts to the condo corporation.
8. When the market is very active or it is a multiple bid situation, and a conditional offer is not possible, draft the offer so that any special assessment levied or contemplated by the Board of Directors prior to Closing is payable by the Vendor as an adjustment on Closing and an lawsuits by or against the Condominium Corporation could, if they are significant, be a ground for terminating the agreement.
9. The budget and comparison financial statements show the ability of management to run the building. Look for financials to be on budget. A small surplus or deficit is acceptable. The best run building has no surplus or deficit.
10. Increases in common expenses baring increases in reserves or other reasons should approximate increases in the Consumer Price Index (inflation).
11. Condos are required to conduct comprehensive reserve fund studies every 3 years. It is important to know where you are in the cycle, the more recent, the better.
12. Issues relating to Reserve Fund studies are complicated. Lawyers look to see if the Board has implemented the plan contained in the study and what the impact financial impact will be to a unit holder.
13. Calculate the real dollar impact of a special assessment or other out of the ordinary increase in the reserve fund multiplied by the percentage Ownership and have this adjusted on Closing.
14. If there are lawsuits ongoing or contemplated, draft a clause either abating the purchase price or one in which the Vendor agrees that the Purchaser's Solicitor can hold back the unit's proportionate share of the amount claimed plus interest and/or get an indemnity from the Vendor against any special assessments or increases in common expenses, which may be levied to cover the cost of settlement of a lawsuit or judgment against the condo corporation.
15. Leasing of Units statements are there to disclose how many units in the condo are leased. This may affect resale value of the entire building if a high ratio. Ask the property manager about this as an owner may rent and not notify the Board.
16. A solicitor should not complete a transaction for a client without a Status Certificate unless there are exceptional circumstances and a specific direction to this effect is given by a client, (eg. Non arms- length transaction).
Mortgagees require it as do Title Insurers.
17. Long closings (greater than 3 months) require undated Status Certificates and a clause in the Agreement of Purchase and Sale stating that the Vendor will be responsible for any increased costs as disclosed in the updated certificate.
18. Title Insurance will cover for special assessments not disclosed in a Status Certificate if levied prior to the issuance of the policy (Closing Date) as they can form a lien on the Property.
19. Status Certificates do not make mention of improvements or additions to the specific units. Therefore, a condition should be included that the Purchaser receives, on or before closing a clearance letter from the Board of Directors stating that any work done by the Vendors and any previous unit owners (ie. Additions, removals or other improvements) has met the requirements of the corporation's documents and the Board of Directors and has received approval of the Board, if necessary or that the unit does not contravene any provisions of the Act or the Condominium documents, (eg. Candy Factory-wood shutters/Hardwood flooring). If a condition cannot be obtained, then draft a Vendor's Warranty into the Agreement that the Act, Declaration, By-laws and rules of the condo corp. have been complied with and that no improvements, additions or repairs which require the consent of the condo corp. have been carried out without the consent of the condo corp. and that the Vendor is not party to any agreement with the condo corp. that might affect the Purchaser.