You are ready to have a place to call your own. After studying hard, landing a good job and enjoying life as a renter, you want your own piece of equity. A condo is the ideal place to start. A condo can be a great purchase and investment, but you must be sure to keep some important things in mind. We lay them out in this article.
- 1 Know Why You Want To Purchase a Condo
- 2 Common Pitfalls of Condo Ownership
- 3 Mistakes That Condo Purchasers Often Make
- 4 Protecting Your Interests
- 5 Concluding Thoughts
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Know Why You Want To Purchase a Condo
Condo prices are usually more affordable than houses. The average price for a resale condo unit in April 2014 in Toronto was $ 384,758, while the average price for a detached house in the 416 area code neared $ 965,670.1 For first time home buyers who may not have the budget for a house, condos are a great way to own a home at a more accessible price.
Little to No Maintenance Work required
Condos can appeal to a wide-ranging demographic of single individuals, young couples, or retired seniors due to little to no required maintenance. Canadians spend about $ 3 billion per year on lawn care and an average of 25 hours per year on yard work.2 Subject to the municipality’s bylaws, homeowners and businesses have an obligation to clear sidewalks of snow and ice within a certain time frame (such as 12 hours) after the end of a snowfall or ice storm.3
On the contrary, condo owners can enjoy a stress-free lifestyle by not having to worry about maintaining the premises, because the condo management takes care of such costly and labour-intensive duties. Bottom line: enjoy your life and avoid the hassles !
Condos offer exciting amenities. Examples are swimming pool, sauna, tennis court, TV room, bowling alleys, party rooms, and guest suites. You’ve worked hard to save money for this condo, and it is now time to enjoy it! Condo living is great for a busy worker like you.
Rental Income Potential
Condos have excellent rental income potential (provided that rental is permitted in your Condominium – be sure to check your Condominium Documents with your lawyer). If you move up later on, you can keep the condo, rent it out and build equity. It can therefore be a good wealth-building strategy. The rental market is strong in the GTA and we can expect it to be strong for awhile.
Increasingly Popular Choice for Homeowners
As a result, condos are increasingly becoming a popular choice for home owners. According to Statistics Canada’s 2011 National Household Survey, one in eight households lived in condominium and just one-quarter of the households in condominium dwellings were renters and not owners.4
Common Pitfalls of Condo Ownership
How does shared ownership work? You can think of every condo building as having its own government, with the power to legislate, enforce and regulate its own laws. Under the Condominium Act, 1998,5 a condominium corporation has its own bylaws, declaration and rules (we will call them “rules” for short) and is operated by a board of directors elected by individual condo owners. All owners in a condo are subject to a condominium corporation which manages, regulates and enforces its rules. So while you own your own unit, your freedom to do as you please is limited by the rules of the condo corporation.
You will have to pay monthly condo fees and possibly more
Each condo owner must make condo fee payments to cover their portion of common expenses which will cover annual maintenance (property maintenance costs such as snow removal) and reserve fund (money set aside for major repairs and replacement in common areas such as roof, electrical or plumbing work, etc). Sometimes, condominium buildings incur unexpected capital expenses and when they cannot be covered by reserve funds, each owner will have to pay his or her own share of such costs (called “special assessment”).
When a condo owner does not pay either the condo fees or the special assessment, the Condominium Act provides protective statutory recourses for the condominium corporation. The condominium corporation may sue the owner for the debt collection, register a lien against the owner’s unit and the owner’s interest in the common elements of the condominium, claim interest on the amount owing, and recover costs for doing so.6
As a potential condo owner, you should find out what the condo fees include so that you can plan financially to assess what other extra costs will be due for you each month. It is important to review the condominium documents thoroughly to gage an idea of the condominium corporation’s plans for the present and future. This is in order that you can understand if your condo fees will likely rise in the future. Depending on factors such as the age of the building and quality of the management, these condo fees can vary and can be very high.
Other Potential Restrictions
If you want to have a pet
This will depend on the condo’s rules, and you may not be able to have pets, or if you do own them, there most likely are rules surrounding what pets you can have, and what you can do with them (probably can’t make them fetch stick in the lobby or jump onto your neighbours). For a more comprehensive discussion on this topic, see our article on owning pets in condos.
If you want to turn a residential unit into commercial usage
Depending on the condo’s rules, you may only have residential usage allowed, so you probably cannot have a dance studio in your unit, but you should check with your lawyer to understand the condo documents and specifically what is allowed and what is not.
Your right to dispose of property can be affected by the condominium board and its rules. In Condominium Plan No. 8810455 v. Spectral Capital Corp.,7 a condo board was successful in suing the unit owner and obtained an injunction against the owner for selling a timeshare interest in the unit. Every condo is different, which is why it is important you read very carefully and understand the Condominium Documents.
There are some restrictions on the renovation
In a single detached house, you can do reno’s in your own four walls on your land, subject to your municipalities and your mortgage financial institution’s requirements. But in a condominium, you most likely cannot tear down your wall or make an addition to your unit, without obtaining written consent of your condo board and your condo board may have rules against renovations or improvements in your own unit.
Mistakes That Condo Purchasers Often Make
Underestimating the written Offer (called “Agreement of Purchase and Sale”)
Lawyers often hear the following: “Oh the Agreement is just a form, don’t worry about not understanding everything that is legal in there”.
We would like to say that when you are filling in the Offer and signing it, you are entering into a legal contract that is binding on you with rights and obligations. It has serious consequences, in that it will carry forward even after your death (it will be binding on your heirs or personal representatives).
In our competitive real estate market, where it is commonplace to see multiple offers for a property, a “good business deal” may be if you want to give an incentive to the seller by making an offer with no preconditions. But at the same time, do not forget that, you do that at your own risk and the consequences may be costly.
For example, Mary and John found a condo of their dreams in the perfect location and with upgrades they desired. From learning that there was another offer, they wanted the place so badly that they made an offer having removed all conditions. Unfortunately, it turned out that after making the offer, Mary and John found out that they could not qualify for mortgage approval. What happens next? Mary and John are on the hook. If this was before they waived conditions, and mortgage approval was in one of the conditions, then this could have made the contract null and void, and Mary and John could have gotten their deposit back. But because this was after they waived conditions, they are personally on the hook.
The magnitude of your legal responsibility from the contract cannot be understated. In 2008, Vancouver experienced a financial crisis and pre-construction condo prices fell as much as by 20%. This put many buyers in a challenging situation when their lenders withdrew mortgage pre-approval because condos were worth less than loan amount. However, buyers were still on the hook to complete the payment for the purchase price they agreed to in writing. If a buyer defaults on the payment, the buyer will lose deposits and the seller can sue for the difference in price.
Not reviewing the condominium documents
We mentioned before that condominiums are subject to their own bylaws, rules and regulations about common areas and as well as issues that can affect your own unit. Therefore, condominium documents are important and you should take them seriously as a potential buyer.
The condo documents – otherwise known as the “Status Certificate” – should contain the following information:Financial information (common expenses for the unit, whether or not the seller of unit is in default of payment of common expenses);
Whether the common expenses will be increased and reasons;
Whether or not assessments have been levied against the unit and reason;
If there has been any judgments against the condominium corporation including status of any legal action to which condominium corporation is currently a party;
Directors and officers of the condominium corporation;
Last annual financial statements of corporation;
Corporation’s current budget;
Condominium’s current declaration, bylaws and rules;
The property management agreement; and
Current insurance certificates.
If it is a new condominium, your condo documents are called “disclosure statement” and should contain:copy of declaration (a document stating the property is governed by the Condominium Act, 1998, and providing the consent of all mortgagees of the property, setting out the percentage of common elements associated with each unit and the percentage of common expenses that each unit owner will be required to pay, providing the address of the condominium corporation, and designation of exclusive use common elements);
bylaws and rules;
a description of contracts involving the condominium corporation;
copy of budget for the year of registration;
copy of insurance trust agreement.
It is important not to make any assumptions. The last thing you want, after making all the investment as a buyer and getting into debt (paying off the mortgage on the property for the next 25 years) is finding out only too late, for example, that:
when you are a dog lover, you cannot have any pets in your unit;
that the condominium board is badly managed and is undergoing lawsuits by former or current owners.
You should review the documents so that as a buyer you are aware of what you are getting yourself into. For buyers of newly built condominiums, you have what is called a “10-day cooling off period” from the receipt of the disclosure statement or receipt of a signed copy of the Agreement of Purchase and Sale (whichever is later). During this time, you should review the disclosure statement very carefully with a lawyer and during that 10-day cooling off period, you have the right to back out without having to provide any reason with a refund of your deposit. After the 10 day period, you are bound to the contract and with it to obligations within it.
Relying on Verbal Promises
All too often, we trust people to stick to their verbal promises. However, I am sure that you have seen cases around you or even in your own situation when the promisor does not hold his or her end of the bargain.
As a buyer, you must make sure that promises you heard verbally also are translated in the agreement. Every promise that was made to you verbally should be put in writing. Did the salesperson or developer make certain promises such as cash back incentive or upgrades? Make sure it’s all on paper.
Protecting Your Interests
During the pre-offer stage, your lawyer can help you draft conditions (called “conditions precedent”) for your protection. Earlier we talked about conditions being important and how that can affect your rights to back out of the contract before it would be too late. Many conditions are important and are geared for the protection of the buyer. Three key examples include:
This is to make sure that before you are bound by your offer that you have sufficient financing to complete the transaction, if you require it. We would suggest making the offer conditional to your approval of mortgage, but more specifically, conditional to your obtaining the mortgage you want in terms of the amount you require or at an interest rate you can afford. That way, you can still back out of the offer and obtain a full refund of your deposit if you do not obtain the necessary financing you would like.
While buyers often choose to forego inspection for condo, it may still be a good idea to seek a qualified inspector’s opinion to examine your potential new home. Normally, inspection would not include common areas in the condominium building but may look at the heating, electrical, plumbing, interior structural elements, ductwork and vents in the unit. Some inspectors encourage potential buyers of condos of less than five years old to check for infrastructural issues and damage. We would suggest putting in a condition that would make the offer conditional upon your obtaining an inspection report that meets your expectations, and if it does not, that you can still terminate the offer without losing your deposit.
This is perhaps one of the most important conditions that should be considered for the offer. You want to be fully aware of what you are getting into, namely understanding condo fees, how the condominium board is managed, and all other relevant factors for your decision. We would suggest making the offer conditional upon your lawyer reviewing the condominium documents and finding them acceptable for you.
An Important Note About The Deposit
You should have a deposit ready when making the offer. The amount of deposit depends on what you feel comfortable with. Obviously, the buyer’s interest is in securing the offer with the smallest deposit possible in case of default, while the seller will want largest deposit possible to make the sure the buyer is serious about following through on this transaction.
You should never make the payment of deposit directly to the seller. If you do, this will expose you to the risk of losing your deposit. As much as we hate to think of the world in a pessimistic light, it could be that a seller is committing a fraud and may not be the true owner of the property. The seller could also be unreasonable.
The deposit must be held in trust by a third party whether it is the seller’s lawyer or listing broker, each of which have professional obligations by their respective licensing and regulatory authorities and who are obligated to follow legal requirements with respect to the deposits held in trust.
For new condos, if the deposit was paid to the builder, the builder is required to provide, within 10 days of cashing in the cheque, to the buyer a notice of receipt for the deposit, with bank address and account number where the money is held in trust.8
Fixtures, chattels and rentals
It is important to find out exactly what is included with your condo purchase. Fixtures are known as immovable property and always remain with the land and building unless they are specifically excluded. Examples are chandeliers and granite counter, which are affixed to the floor or the ceiling.
Chattels are movable property and are not included in the purchase unless they are specifically mentioned in the agreement. Examples are furniture or picture frames. Be as specific as you can in noting details such as items, colour, location, and model and/or serial number (if available).
As for rentals, it is important to be aware that the seller may not own all items in the property, such as hot water tanks, water softeners, and other equipment, and are subject to a rental contract with a third party. The seller should disclose what these items are.
As you can see, what you see is not always what you get in a purchase and it is important that you review the contract carefully before and/or after you sign it. Obviously, we are very biased when we say that a qualified real estate lawyer is the person best suited conduct this review and to protect all of the interests we just discussed. Condo ownership can be wonderful and a great investment, so just make sure that you do everything you can to protect your interests!In the market for a condo? Receive your FREE copy of our exclusive “Ultimate Checklist for Condo Buyers”. We have made this especially for first time home buyers. Protect your interests and ask all of the right questions in this important purchase.
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Park & Jung LLP believes in empowering individuals via legal education. The information contained in the article is for informational purposes only and is not intended as legal advice or a substitute for legal counsel.
Carolyn Ireland, “Bubble? What bubble? Toronto condo sales booming once again,” Globe and Mail. (May 8, 2014), available online <http://www.theglobeandmail.com/life/home-and-garden/real-estate/bubble-what-bubble-toronto-condo-sales-booming-once-again/article18552033/> ↩
Benjamin Gillies, ”Time to turf the lawn?” Winnipeg Free Press (September 10, 2013), available online < http://www.winnipegfreepress.com/opinion/analysis/time-to-turf-the-lawn-223083491.html> ↩
According to City of Toronto By-law No. 530-1999, Chapter 719-2(A) on “Snow and Ice Removal”, home owners are required to remove snow and ice from sidewalks within 12 hours after the fall of snow or ice storm. ↩
National Household Survey, 2011, Condominium dwellings in Canada, Statistics Canada (Minister of Industry, 2013) at p. 3 and 5. ↩
S.O. 1998, Chapter 19 ↩
see s. 85(1) of the Condominium Act ↩
(1990) 112 A.R. 213, 1990 CarswellAlta 314 (Q.B. ↩
s. 81(6) of Condominium Act, 1998 ↩