When are condo fees high? Assess the true value of condo fees

Buying a condo? Condo fees are always an important subject for discussion. Many buyers tend to draw a quick conclusion that condo fees are too high. Therefore, their focus is on finding a property with low condo fees. However, often the condo fees need a closer look to assess their true value. Sometimes, higher condo fees are better than lower condo fees. The following is a closer look into the true value of condo fees.

Condo fees are essential

Buying a condo means that you are buying into a corporation. Yes, you own the unit, your living space. However, you also own a share in the condo corporation. This condo corporation fulfills many tasks and duties including maintenance and repair. Besides, in apartment style buildings, those condo fees pay for heat and electricity in the common areas.  Meaning, without condo fees you would come home to a dark and cold place.

Two steps to assess if condo fees are too high

A first step is to check what is included and what is excluded in the condo fees. Every MLS listing includes all this information. The second step to assess the condo fees  is to learn about the financials and the reserve fund of the corporation.

Short and long term allocation of condo fees

All condo fees are allocated into two main categories. The first category is for the operational cost. These operation costs are the daily costs such as heat, electricity, snow shoveling, yard maintenance, cleaning of hallways, and general maintenance, such as repairing a broken door or repairing a malfunction in the elevators.

The second allocation of the condo fees is for the reserve fund. As the name suggests, money in the reserve fund is reserved for future, long term maintenance and expenses. Think of roofs, windows, doors, siding, elevators, swimming pool, parkade, etc. All those particulars have a certain expected life span and need replacement in 10, 20 or 30 years.

What amenities are included in the condo fees

So, what is included in the condo fees? Specifically, in apartment buildings, it is important to determine if condo fees include heat and electricity for the unit, or only for the common areas such as hallways and lobby.

Furthermore, a condo corporation offers amenities. Think of elevators, parking, car washes, bike storage rooms, fitness rooms, swimming pool, tennis court, guest rooms, party areas, rooftop gardens etc. Some complexes also have internet and a part time or full time concierge included. There is a cost to all these amenities. The price of the condo fee is dependent on what amenities are included.

A financially healthy reserve fund is crucial for the future

As mentioned earlier, the reserve fund is saved up for the future expenses that every construction requires. A reserve fund study shows what renovations, repairs or maintenance are needed, the future costs of items and how they get funded. It is called a reserve fund study for a reason. It is a rather complex report, covering at least 30 years. Every component of the complex is referred to and assessed.

It is very important that the reserve fund is healthy, and that it can cover future expenses. If the corporation faces a mayor cost, and the reserve fund does not have sufficient funds available, the owners may face a special assessment. Special assessments are often the biggest concern for owners, and for good reason. Special assessments are not necessarily always thousands of dollars. In fact, just as often, a special assessment is only a few hundred dollars to keep the books balanced for a healthier financial future.

Condo corporations in Alberta need to renew the reserve fund study every 5 years. Usually, specialized engineers do these studies. However, if the condo corporation has fewer than 12 units, owners are allowed to create their own reserve fund study.

High condo fees caused by bad management

Good maintenance is key, however; so is spending money. In some cases, high condo fees are caused by bad management. Poor management can lead to neglected or delayed maintenance. This may cause minor issues to escalate into major problems, ultimately resulting in significantly greater costs down the road.

In some cases, the assurance not to overpay may be as simple as asking for several quotes from independent contractors. Although many owners trust their management companies to perform repairs, it is still the responsibility of the board to keep tabs on their management company, their contractors, trades and expenditures.

In essence, bad management can break the financial health of a corporation.

Low condo fees may be appealing. However, they can result in unexpectedly steep hikes in the future to compensate for any shortfall. Or, even worse, a special assessment could come into play.

Unexpected costs in the past

High condo fees can also be caused by an unexpected and large expense. While the reserve fund gives a very good indication of the expenses and schedules of maintenance, unexpected costs can always materialize. Boilers, elevators and HVAC are just a few significant components in a condo building that can break. Repair of those items can’t be neglected, and these are usually costly repairs.

Old versus new and high rise versus townhouse

A few other factors that a buyer should assess are the age of the complex and the type of complex. First regarding brand new buildings; builders keep their condo fees low in order to sell their units faster. These low condo fees are a marketing tool for a builder. However, once the units are sold and the owners take over the board, the condo fees often need a significant increase for maintenance sustainability.

Older buildings tend to have higher condo fees for the simple reason that they have undergone more maintenance. Also, unforeseen repair costs of an older building may be expected to be higher.

High rises vs townhouses

Condo corporations for townhouses have different condo fees than high or low rises.  Low rise and high rise buildings typically share a collective utility room with boiler and electricity. As well, these often offer more (costly) amenities such as elevators, concierge, fitness areas, etc. Consequently, those expenses often increase the condo fees. Townhouses, on the other hand, have their own hot water tanks and furnaces. Here, those costs are for the individual owner. Furthermore, townhouses usually don’t have the same costly amenities as a high or low rise.

To put things further in perspective, every property needs maintenance. Thus, every owner of a single family home needs to create some sort of fund for this. These are not called condo fees. However, the principle remains the same.

The only difference is that in a condo corporation an entire group of owners collectively save up for this maintenance. Any decisions regarding maintenance and expenditures are made by the elected board of a corporation.

Your influence on condo fees

Every condo owner wants to protect his/her investment. Therefore, it is always the best practice to get involved. A condo owner has several opportunities to help keep the condo fees at a healthy level.

One can become a board member to help control any decisions and expenditures. Additionally, every condo corporation needs to organize an AGM, an Annual General Meeting. All owners are allowed to attend this yearly meeting. Everything regarding the corporation is discussed at the AGM. As well, any voting takes place at this meeting.

Furthermore, any condo owner should report any concerns regarding the complex. For example, one should inform the board if something needs repair, or notify the board when other occupants don’t adhere to the bylaws and thus create concerns.

Mortgage lenders also assess the condo fees

Condo fees are a monthly expense for an owner. Therefore, lenders do take the condo fees into consideration and directly influence the size of the mortgage.

Furthermore, usually, lenders do take a look at the condominium documents. If the financials cause red flags, a lender may decide not to issue a mortgage. Therefore, it is important to study the condominium documents before making a purchase.

Condo document review specialist

But how can you understand all this? Typically, the bylaws are easy to read and understand. However, the interpretation of the financials is not for everyone. Yet, financials are so very important. Therefore, Calgary has a handful of companies that specialize in reading, understanding and interpreting the financial situation of a condo complex. Their service includes reading the bylaws and the minutes of the previous 12 months and highlighting the important points.

The financials are scrutinized, and they tell how the future expenses are projected, and if there are any concerns. In addition, a condo doc review specialist confirms whether there is an acceptable insurance policy, and how the complex is managed overall. The cost of the condo document review varies from $300-$500. However, this review is well worth its cost, considering it can save a new owner from being caught in a “money pit”.

Assess if condo fees are high

In conclusion, to review if condo fees are too high, take some time to have a deep look at the financials and the amenities. Low condo fees may be the result of an underfunded reserve fund, increasing the chance of a financial shortfall in the (near) future.

On the other hand, higher condo fees may indicate that the corporation is in a very healthy financial position with fewer chances of future shortfalls. Or, perhaps, higher condo fees were caused by an isolated and costly repair or bad management in the past. And lastly, perhaps the presence of some nice amenities, such as a concierge or a swimming pool reflect the reason for higher condo fees.

 

 

We are Tanja van de Kamp and Ariette van Pelt, working as a team, both buying and selling homes in Calgary. Calgary has been our home since 2004, and real estate our full-time profession since 2009. Tanja was a lawyer in The Netherlands for 12 years, and learned how to negotiate strategically, and to work in the best interests of her clients. Thanks to our honest and transparent approach to real estate and towards our clients, we have built our business.

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