How to Avoid Pitfalls When Buying a Condo

Many new investors begin with single family homes because the required cash investment is smaller than that required to purchase and apartment building, or a shopping center. Many also chose to buy condos, whether in an apartment or town house complex because their cost is even lower than a single family home. But, condominium buyers need to do more diligence in buying a condo than when buying that detached home. (Not all townhouses are condos, but all apartment condo buildings are, except for co-ops, simply be their design.)

These comments use terminology that is in practice in British Columbia. However, each jurisdiction, while the language and specifics may be different, will have essentially the same requirements.

So, where do you start? First, I would suggest that you start with a real estate agent who understands, and specializes in strata (condo) sales. They need to know the law, and how to interpret bylaws for you. They need to know what a strata plan is. (The strata plan is explained below.) By way of example, too many uneducated agents think that a patio belongs to the unit it is attached to. It may, but only if the strata plan says it does. There have been numerous law suits and complaints against Realtors because they represented parts of a condo building as being part of a unit, when in fact those parts were either common property or limited common property.

Next, you should get copies of at least two years of minutes of the strata corporation, including all General Meeting minutes. You need to scour those with a fine tooth comb, and look for signs of ongoing and serious maintenance issues. Be careful of smoke and mirrors language. In BC, there are perhaps hundreds of “leaky condo” buildings, and some strata councils try to hide bad news by using indirect language, such as referring to a soaking wet area as “damp”. They want to avoid scaring off not so savvy buyers.

The minutes should tell you what the maintenance history of the building is, and whether the owners are active in keeping the property maintained, or do they defer maintenance issues, hoping the problems will go away. One high rise building I am familiar with had the rebar in its parking garage begin to surface through the concrete. The estimated cost to repair was about $200,000. The owners delayed making the repair. But, when they finally decided to the repair three years later, the damage had increased and the cost went to $800,000. Postponing does not make the problem go away or become less expensive.

Next you need to examine the bylaws. There are several things to look for here:
1. Rental restrictions
2. Pet restrictions
3. Age restrictions
4. Renovation restrictions
5. How reasonable are the bylaws and rules?

In BC, owners have had the ability to severely restrict rentals, even after you buy. And, there is no such thing as being “grandfathered”. I won’t go into the complicated mechanics of how this works. The point is you need to know if there is a rental restriction clause in the bylaws before you buy. If there is no rental restriction, you need to find out what percentage of the building is investor owned. If it is a high percentage, the chance of these owners enacting rental restrictions is much lower. If there are rental restrictions, move on… plain and simple.

Even if there is no rental restriction when you buy, if legislation allows it, that could be changed by the owners at any time. Do your home work.

When examining the strata’s documents, be sure to go over the strata plan very thoroughly. That is the drawing that identifies what parts of the building actually belong to “your unit”, what part is for “your exclusive use”, and what is common property. Exclusive use property is referred to as “limited common property” (LCP). It does not belong to you, although you have exclusive use of it. Patios and parking are good examples, but neither is always LCP. Some developers do not sell parking stalls, but keep ownership of them and rent the stalls to residents and non-residents alike. This is rare, but is done. Check!

Locate the parking and lockers on the strata plan. Are they part of your “strata lot”, or you unit, or are they LCP or CP (Common Property)? If they are CP, the council may have the right to reallocate or move you at any time. Check!

Ask for and inspect engineering reports and financial statements. What do the engineering reports have to say about the condition of the property? Are there significant long term issues? How well funded is the Contingency Reserve Fund? If it is low, did the owners do major repairs recently? The answers will be in any engineering reports, the minutes, and financial statements.

New to BC this year, but mandatory in several other provinces, is a compulsory Reserve Fund Study. Ask for a copy. This report will also be a help for you to see the current state or repair of the property, and what expected capital expenditures over the next 20 years will be.

In BC, strata corporations may opt out of having a Reserve Fund Study done. Be cautious of these owners. Are they trying to hide something from prospective buyers? I suspect opting out will be a short term thing because I believe lenders will demand Reserve Fund Studies as a condition of the loan. That will have an obvious effect on real estate values. Those with well funded CRF’s will find their values above those comparable buildings with low CRF accounts.

Finally, try to find some owners or residents, or even neighbours who will talk to you about the building and its pros and cons. Be extremely cautious if you seem to be getting the run around from a seller or a strata council when you are asking for information. They have an obligation to provide it, and avoiding direct answers may be a tip off of problems. Numerous councils (condo boards) have directed their property managers not to release engineering reports because they contain bad news and may scare off buyers.

There are many well run strata corporations across the country with proactive owners. There buildings are well maintained, and the units in those building will maintain their value over the years. That is the type of building you want to invest in. Do your due diligence before you sign on the dotted line, or have the satisfactory answers to all of these items, and more, as a condition to your offers. You do not need to run from condos simply because they are condos. But, you need to be educated in their pitfalls.

Dan Eisenhauer is an experienced real estate investor and property manager, based in Vancouver, BC. He is currently a Senior Strata Manager with Touchstone Property Management Ltd.