When you’re ready to purchase a condo, you should take two important things into consideration: condo fees and reserve funds. Here are six things you should know to preserve and protect your real estate investment.
Also known as co-ownership fees, condo fees are billed to co-owners on a monthly basis. They cover necessary expenses for the regular maintenance of common areas of the building: window washing, pool and lawn maintenance, snow removal, painting the stairways, small repairs, etc.
These fees also pay for major renovations that may need to be done, like replacing the roof or heating system. This type of work requires that the condo corporation establishes a reserve fund in which a portion of the condo fees are deposited.
Condo fees aren’t optional: they’re the law. In Quebec, they’re governed by the Civil Code of Quebec, while in Ontario, by the Ontario Condominium Act. Co-owners must contribute their share of expenses to help ensure the building is properly maintained for everyone. Moreover, if a co-owner is in payment default, he or she could be sued. The condo corporation could even be granted the right to sell a condo to recover debt if its owner is in default.
How are condo fees calculated? Condo fees are calculated based on the assessed value of each co-owner’s unit in the building. Therefore, if the value of your condo equates to 7% of the building’s value, you’ll pay 7% of the common costs.
The value of each unit is specified in the declaration of co-ownership as a percentage or a fraction. Different factors are considered to determine this value, such as the unit’s square footage and its placement in the building. Unsurprisingly, a 1,000 sq. ft. condo on the top floor with a view of the park will have a greater value than a condo that’s the same size, but is on the first floor with a view of the parking lot.
Therefore, condo fees for co-owners in the same building will not always be the same amount.
How much are condo fees? If you’ve established your borrowing capacity to purchase your first home without factoring in condo fees, beware they are an important part of your monthly budget.
In some parts of Ontario, condo fees can be overwhelmingly high. The Greater Toronto Area, for example, averages 65 cents per square foot monthly. That’s $386.60 per month on a 594 sq. ft. one-bedroom unit, $628.02 per month on a 956 sq. ft. two-bedroom unit, or $881.20 per month on a 1,354 sq. ft. three-bedroom unit!
According to the Québec Federation of Real Estate Boards (QFREB), fees in Quebec are more reasonable. The Greater Montreal Area averages 20 cents per square foot with an average monthly cost of $198, while the Quebec region averages 18 cents per square foot with an average monthly cost of $176.
Be wary of the lowest condo fees in town. Have you found the perfect condo and, icing on the cake, its fees are the lowest you’ve seen? Be sure to exercise caution, as some developers of new condos reduce fees in order to sway buyers. While these low fees may look attractive at first, they’re not viable in the long term. At some point, the condo corporation will have to increase them substantially to keep the building in good condition.
For existing buildings, condo fees that are too low could indicate that preventative maintenance is not being done and major renovations are being put off. When a building is neglected, it loses value and puts it owners at a disadvantage.
Don’t forget that as a co-owner, you are responsible for more than what’s within your four walls: you share building responsibilities with the other co-owners.
Savings that protect your investment: Reserve funds, also called contingency funds in Quebec, are separate from the condominium’s operating funds and provide a cushion for major renovations and repairs. Each month, a portion of your condo fees are deposited into the reserve fund to ensure the corporation has enough money to pay for future repairs.
How much money should be in your reserve fund? To get the right idea, it’s best to get a reserve fund study from an architect, engineer, or other expert with a special designation. The Regroupement des gestionnaires et copropriétaires du Québec (RGCQ), the Appraisal Institute of Canada, and the Ontario Association of Certified Engineers accredit firms specializing in this type of study.
After inspecting the building, the expert produces a certificate of the building’s state that includes a repair schedule for common areas, along with an estimate for potential costs. This way, owners know, for instance, that the roof will need to be redone in three years, the railings and stairs in ten years, etc. The condo corporation can then adjust the amount deposited into the reserve fund accordingly, and determine a catch-up strategy if necessary.
Since 2001, reserve fund studies are mandated in Ontario under the Condominium Act and must be carried out every three years. For new condominiums, fees placed into the reserve fund cannot be less than 10% of your condo fees; that is, until the first reserve fund study is conducted and its recommendations are implemented.
In Quebec, the process isn’t required by law and is often neglected as a result. According to a survey conducted by the RGCQ, QFREB, and l’Association des professionnels de la construction et de l’habitation du Québec (APCHQ), only half of condo corporations use this type of planning tool. While the Civil Code of Quebec does require that at least 5% of condo fees be placed into the reserve fund, many experts believe this amount is simply not enough.
Prepare for unexpected costs When extensive renovations are necessary and there is not enough money in the reserve fund, the condo corporation could charge a special assessment. This often comes as an unpleasant surprise because it means having to contribute a large sum all at once. If you don’t pay, you risk the same consequences as neglecting to pay your condo fees.
According to the RGCQ, QFREB, and APCHQ survey, in 2015 around 61% of condo corporations in Quebec had to resort to a special assessment. Meanwhile in Ontario, this solution has primarily occurred with condominiums that were built before 2001, when reserve fund studies weren’t mandated. As a result, many condo corporations failed to build up their reserve funds.
To alleviate the risk of a special assessment being collected, well-managed condo corporations establish monthly fees that are slightly higher in order to accumulate money in the reserve fund. Still, you should do your part to avoid the rug being pulled out from under you: by saving a small amount every month, the basic principle of systematic savings, you can ensure you’re prepared for this eventual need.
A good deal or a money pit? Before buying a condo, you’ll have the advantage of looking at the reserve funds. If they’re all dried up or there is very little money in the fund, find out about any major work that has been carried out over the past years. A well-organized condo corporation should be equipped with a briefing note containing information on past renovations and future work to be done.
If the reserve fund is full and there have been no recent major renovations, you should be prepared to eventually pay large special assessments. If you have a tight budget, it could be difficult to have to unexpectedly spend a large amount of money.
You should also verify if the seller of the condo you’re interested in is up to date with their condo fee payments. If they have an overdue account, you will be left with the bill as the new owner. This is crucial information to have when negotiating the selling price of the condo.
In short, condo fees are an important element to consider when purchasing a condo, as is the health of the reserve fund. Now that you know more about condo fees, you can ask the seller the right questions to make an informed decision.