Understanding Condo Fees
When considering the purchase of a condominium in Canada, it is essential for potential buyers to understand condominium fees. These fees are a significant component of condo ownership, affecting both budgeting and financing. Here, we will explore the nature of these fees, their calculation, and their implications for mortgage underwriting.
What is a Condominium?
A condominium, often referred to simply as a “condo,” is a type of residential property ownership where individuals own their private residential unit and share ownership of common elements such as lobbies, elevators, gyms, and other amenities. Condominiums can be part of a larger multi-unit complex and are governed by a condominium corporation that manages the property and enforces the rules and regulations.
There are many different types of homes that may be a condo, such as high-rise buildings, low-rise buildings, townhouses, and even detached homes where there are shared elements like roads, recreational facilities, or other common elements, such as you might find in a gated community.
What are Condominium Fees?
Condominium fees, often referred to as condo fees or maintenance fees, are monthly charges that each unit owner in a condominium complex must pay. These fees cover the costs of maintaining and repairing common areas and shared amenities such as lobbies, elevators, gyms, pools, and landscaping. They also often include utilities like water and heating, and sometimes even cable TV and internet services.
There are different kinds of condo fees in Canada, and they generally fall into a few key categories, reflecting the varying costs and purposes associated with maintaining and operating a condominium complex. Here are the primary types:
Regular Monthly Fees
These are the standard fees paid by all condo unit owners, calculated based on the unit’s proportionate share of the common elements. These fees cover:
Special Assessments
Special assessments are levied in addition to the regular monthly fees when unexpected repairs arise or when the reserve fund (a mandatory fund that covers major repairs and replacement of common elements over time) is insufficient to cover necessary expenses. Examples might include urgent roof repairs or upgrading security systems.
Reserve Fund Contributions
A portion of the monthly condo fees is allocated to the reserve fund. This fund is critical for financing future major repairs and replacements, such as fixing the roof, replacing windows in common areas, or upgrading the building’s heating system. The amount contributed to the reserve fund is determined by a periodic reserve fund study, which assesses the lifespan of all significant components of the building and plans financially for their eventual replacement.
Utility Fees
In some condos, especially older buildings or those in certain regions, utilities such as water, heating, and sometimes electricity are included in the condo fees. In newer developments or certain management models, these costs might be separately metered and not included in the condo fees.
Insurance
Part of the condo fees typically goes towards purchasing insurance for the common areas of the building. However, condo owners must purchase separate insurance for their personal property and for any incidents within their own units.
Amenity Fees
Some condominiums might have additional fees for amenities that are beyond the standard offerings, such as fees for parking, storage, or the use of premium facilities like a special rooftop garden, a large swimming pool, or a high-end gym.
Understanding these various types of fees is important for potential condo buyers and owners, as they impact the overall cost of living in a condo and could influence decisions related to real estate investments and budgeting for housing expenses.
Who Creates and Charges Condo Fees?
Condo fees are set by the condominium corporation, which is a legal entity that manages the building’s common elements and ensures the property is well-maintained. This corporation is typically governed by a board of directors, elected by the condo owners from among themselves. The board assesses the operational costs and plans the budget, which includes the condo fees.
Who Pays Condo Fees and How?
All condo owners are required to pay condo fees. These fees are typically paid on a monthly basis directly to the condominium corporation. The amount each owner pays is proportional to their “unit factor,” which is often related to the size of their unit compared to others in the building.
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Do Some Lenders Pay Condo Fees Like Property Taxes?
Lenders do not typically pay condo fees directly, as they do with property taxes in some mortgage arrangements. Condo fees are the responsibility of the condo owner and are paid directly to the condominium corporation or the property management company.
Understanding the Distinction
Why Condo Fees Are Different:
Homeowner’s Responsibility
It is crucial for homeowners to manage their condo fee payments diligently. Failure to pay these fees can lead to penalties, legal action, or even a lien on the property by the condominium corporation, which can complicate matters with the mortgage lender.
In conclusion, while lenders may take responsibility for property taxes to protect their collateral, condo fees remain the responsibility of the homeowner due to their variable nature and direct relationship to the internal management of the condominium complex.
How to Find a Unit’s Condominium Fees?
There are many sources of information on the condominium fees for a particular unit. These sources include:
But the best source are the condominium documents: Status Certificate or Estoppel Certificate. These documents include detailed information about the financial status of the condo corporation, including the current monthly condo fees, the status of the reserve fund, and any pending special assessments.
You can contact the condominium corporation directly or reach out to the property management company overseeing the condominium. They can provide specific details about the monthly fees, what these fees cover, and any upcoming changes or assessments that might affect these costs.
Calculation of Condo Fees
The calculation of condo fees is based on the annual operating budget of the condo corporation. This budget includes all anticipated costs of running the condominium, such as utilities, management fees, salaries for onsite employees, maintenance and repairs, and contributions to the reserve fund. The total budget is then divided by the unit factors of all the condos to determine what each unit owner must pay. To get an idea of how much you’ll pay per square foot, you can divide your condo fee by the square footage of your unit.
Typical Cost of Condo Fees
Condo fees in Canada can vary widely from approximately $150 to $1,000 per month, which is not uncommon.
Condo fees vary depending on several factors, including the location, amenities, and size of the unit.?On average, condo fees in Ontario are around?86 cents per square foot but can range from $0.50 to $1.00 per square foot. Condo fees can be as low as 30 cents per square foot in Montreal.
Here are some factors that affect condo fees:
You can expect condo fees to increase annually by 2–5%
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Condominium Fees in Mortgage Underwriting
Condominium fees play a crucial role in mortgage underwriting. Lenders consider these fees when assessing a borrower’s ability to service a mortgage. Under Canadian mortgage qualification rules, condo fees are included in the calculation of the Total Debt Service (TDS) ratio. This ratio includes the prospective homeowner’s mortgage payments, property taxes, heating costs, and half of the condo fees, along with any other debt obligations. The inclusion of condo fees can significantly impact how much a borrower can qualify to borrow.
When underwriting a mortgage, lenders will require the condominium status certificate or estoppel certificate as part of your mortgage application to be able to verify condominium fees. Once submitted as part of your mortgage application package and accepted, you may receive a mortgage commitment from your lender.
Condominiums and Appraisals
Like every property you can put a mortgage on, your mortgage approval is highly contingent on the value of your property as determined by a professional appraisal. A big problem with condominium is that their values fluctuate more than the value of a single-family detached residential home in a subdivision. As such, what you agreed to pay for the condo, whether new construction or even a resale unit, may be below the current market value of the unit. At times, especially in new condo construction, appraisals come in very short, causing buyers to walk away from deposits.
For example, a buyer of a new condo unit may purchase a 1,000-square-foot unit for $1.2 million dollars pre-construction. However, years later, when the unit is ready for occupancy, the unit may only be worth $950,000, a shortfall of $250,000. Since lenders will only lend against the $950,000 appraised value, the buyer must come up with the $250,000 from other non-secured sources (because the $250,000 cannot be secured by the value of the condo unit). If the purchaser does not have the $250,000 on hand or does not want to take the loss (or minimize their loss), they may decide or have no other choice than to ‘walk away’ from their deposit (5% to 20%).
Summary
Understanding condominium fees is crucial for anyone considering the purchase of a condo in Canada. These fees are not merely an additional expense but an integral part of condo ownership that contributes to the maintenance and enhancement of the property’s value and living environment. Prospective buyers should thoroughly investigate these fees, understand what they cover, and how they are calculated to avoid any surprises after purchase. By familiarizing oneself with the different types of fees, such as regular monthly fees, special assessments, and reserve fund contributions, buyers can make informed decisions about their potential new home and its ongoing costs.
Additionally, the role of condominium fees in mortgage underwriting cannot be overstated. These fees are factored into debt service calculations, potentially influencing the approval and size of a mortgage loan. Understanding this can help buyers better prepare for the financial commitments they will face. Given the variability in fees based on location, amenities, and other factors, obtaining a detailed breakdown through the status certificate or directly from the condominium corporation is advisable. Lastly, considering the potential impact of condo fees on property appraisals, especially in volatile markets, should be part of every buyer’s due diligence process. Armed with this knowledge, buyers can navigate the complexities of condo ownership with confidence, ensuring a sound investment and a comfortable living situation.