Now that the kids have grown up and moved, you're probably giving some thought to downsizing from your family home. And there's a good chance that you're looking at a more economical and easily maintained condominium. The condo life can indeed be a great idea, with living becoming simpler and probably cheaper too.
But before you put the "for sale" sign up and start shopping around, you need to consider a few pitfalls. First and foremost, there's the issue of cost – more specifically, the future maintenance and replacement costs that are supposed to be covered by the condominium's reserve fund, as required by law.
In Ontario, the Condominium Act allows developers to initially deposit 10 per cent of the first year's estimated operating budget into the reserve fund. This Act also requires the condominium corporation to conduct a reserve-fund study in the first year of operation, and if there's a shortfall, the condo residents are required to make up any difference.
But that initial deposit is likely to be woefully inadequate. "The first year's reserve process is deeply flawed," says John Warren, a chartered accountant and partner at Adams & Miles LLP in Toronto. "That 10 per cent figure is not right – you need a lot more than that."
Double your reserves
Sally Thompson, vice-president of Halsall Associates Ltd., Toronto-based engineering consultants, agrees. "That 10 per cent is just plain low – they goofed when they created the Act. Once the study is done, most new condominiums end up needing between 20 to 25 per cent." The net result is that new condo buyers often end up paying more than double the initial estimate for the reserve-fund component of their monthly fees!
"A good rule of thumb is that you can expect to pay about $1,000 per unit per year toward the reserve fund; add another $200 to $300 per unit if there are recreation facilities," says Thompson. "But in many cases, the developers are contributing only $300 for the first year, and that's ridiculous. If you own any kind of house, you know that you can't maintain it for $300 a year!"
Accordingly, if you are considering a brand-new condo, take a very close look at the reserve fund. And if it's a used condo, take an even closer look. "Because you can't get a building inspection on a condo, the reserve fund study is very important. It's essentially a long-range capital budget outlining major repairs in the future," explains Warren.
An engineering firm is contracted to survey the common elements and estimate when they will need to be repaired or replaced. These estimates cover a 30-year period and are adjusted for interest and inflation rates. Based on these estimates, a payment schedule is included to build up the reserve fund to cover these future costs.
Warren says you should ask lots of questions: Does the condo have a history of special assessments? Is there an operating surplus to cover unexpected expenses? There should be a reasonable amount in the bank, equal to one or two months of common element fees, to cover emergencies. Do the financial statements show a deficit? If so, then the condo is in a financially precarious state.
"Most importantly, is there a current reserve fund study, and are its recommendations being followed?" continues Warren. "The Condominium Act stipulates that a reserve fund study must be updated every three years. It also stipulates that condos have until 2014 to have their reserve funds fully funded."
Page 1 of 4 -- On page 2, learn what lifestyle changes you may face when downsizing from a house into a condominium.
