Servicing a condominium purchase

The condominium market is a typical market for first-time homebuyers and can serve as a stepping stone towards owning a single-family dwelling. Most first-time condo buyers may be able to save the 5% minimum down payment required for a high ratio mortgage, but can find themselves with minimal additional resources for unanticipated expenses associated with the condition of the condominium. It is therefore important that buyers understand the financial obligations associated with condominium ownership before making a purchase.

As mortgage advisors, your role, according to the Real Estate Council of Alberta’s definition of “competent service,” includes providing advice on emerging issues affecting the industry and consumers. Logically, this would extend to advice on condominium ownership.

To determine the acceptability of a condominium property, a thorough review of the condominium documentation is recommended. Generally, in Alberta, the condominium documents that are sometimes requested for review are: the reserve fund study; the minutes from Board meetings held during the last 12 months and last two Annual General Meetings; the information statement (or estoppel if available); and the most recent financial statements, budget and balance sheet. Other documents may be requested depending on the subject property.

A review of these documents will provide information relating to the condominium corporation’s financial position, including reserve fund balance, and the condition of the building. Any single document on its own will have limited value, whereas combined, the documents help provide a more robust picture of the condominium’s overall acceptability.

One of the more important documents among these is the comprehensive reserve fund study. The reserve fund study should reveal the size of the reserve fund deficiency or surplus based on the projected maintenance required over the next several years. It will also include contribution recommendations to try and ensure that major maintenance can be properly attended to over time.  One of the largest reserve fund expenses a condominium board may face is the entire remediation of the building envelope. In many cases, this will entail a large assessment, which can range from $10,000 to $160,000 per unit depending on the current reserve balance and the remediation required. With the limited resources that a typical first-time homebuyer often has at their disposal, such an assessment can be financially devastating for the condominium owner and limit their options for future homeownership.  Proper due diligence will help minimize the risk of such outcomes, and benefit all stakeholders involved.

The rest of the condominium documents provide some colour around the reserve fund study and can highlight any additional items of concern. What are the current issues based on the minutes? Are these issues financially detrimental to the condominium corporation? Do these issues require further investigation by a building science engineer to determine the cost and scope of work? Are there outstanding or planned special assessments? These are just a few of the questions that can be answered by a review of the additional documents. Viewed in conjunction with the reserve fund study, the condominium’s story becomes clearer.

Condominium homeownership can be a positive experience. Managing the buyer’s expectations through open and honest communication will help build trust with your client and prevent disappointment at the end of the road. A thorough document review, not only by the insurer, but also by the buyers themselves, is highly recommended to ensure they fully understand their potential liabilities and to protect their interests.

Genworth Canada is committed to helping first-time homebuyers fulfill their dream of homeownership, and putting the right buyer into the right property helps make that dream a sustainable reality.

By: Jason Espetveidt, CRM, Regional Risk Manager, Prairies at Genworth Canada

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