Condominiums are becoming an increasingly popular real estate option for homeowners, both new and established.
From the young professional who wants to live closer to the amenities offered by a bustling city core, to retirees who are attempting to downsize their single-family dwelling, condominiums (commonly referred to as a “condo”) offer a wide range of options that suit many different needs.
The appeal is understandable, condos are often affordable and repairs and maintenance are handled by someone else. Condos sometimes also offer amenities such as pools, gyms and lounges that would otherwise be financially unattainable in a single-family dwelling.
Many North American cities are also favoring such living arrangements through incentives and tax breaks. Condo buildings densify residential areas which decreases strain on infrastructure, promotes mass transit and revitalizes neighborhoods.
Condos are also ideal for those who are eco-conscious as heating and cooling costs are typically lower. Condo buildings also require less natural resources and land to house the same number of families compared to a sub-urban single family development.
Although condos are not new to the real estate world, their rising popularity is noticeable. One only needs to open a local newspaper to find a well-populated “condo section” or drive down the highway where condo developments are advertised on billboards at every exit.
While the advantages of condo living are numerous, buying one is unfortunately often perceived as complicated. This is understandable, especially for first time homebuyers who want to see their investment put to good use.
This guide is designed to take people with no knowledge of the condo real estate industry and transform them into well-informed purchasers.
A few reminders
Because there are over 60 different governing real estate laws across the US & Canada, some terms and rules may vary slightly from state to state or province to province. This guide uses the most common language to explain to a beginner the basics of condos. It is recommended that a first-time condo purchaser seek out state or provincial-level information after reading this guide.
Numerous terms and concepts all come into play at the same time and creating a direct A to Z guide explaining the condo world is impossible. A guide doing so would veer off on tangents, only to come back to the original concept being explained. For this reason, some concepts will sometimes be partially explained and then revisited later. This is done for ease of reading.
The Basics
The term “condominium” is nothing more than a form of legal ownership. It has nothing to do with how a structure is constructed, it’s height or the amount of people living in it.
The misconception comes from the entertainment industry’s portrayal of condos. In movies, we often seen imposing residential structures with swanky interior units overlooking a skyline. While such living arrangements are condos, other types of condos can also take the form of detached houses, townhouses or rowhouses, side-by-side or stacked residences, low-rise buildings, aggregations of the previously mentioned structure types.
Simply put, a condo is a “unit” within a larger arrangement of other residential units.
What am I actually buying?
When you purchase a condo, you’re purchasing a small piece of the pie in a larger residential entity. This is different than a traditional single family dwelling where you own the land and entire housing structure. A simplification of the concept is to think of it as purchasing and owning stock in a corporation. Your condo is a stock and the corporation is the larger encompassing condo building.
Once you’ve finalized a purchase, you own a unit as well as share ownership of the common areas and/or amenities of the building or entity.
Know your boundaries
As a unit owner, you are responsible for everything within the “boundaries” of your unit such as upgrades, repairs and maintenance.
How boundaries are setup vary depending on the rules and regulations of the condo corporation. In most cases, boundaries are defined by a legal shell that somewhat follows the physical layout of your condo.
For example, in my current condo, my boundary is defined by the drywall inside my unit and the beginning of glass (for windows). Everything in that shell is mine to deal with. If I upgrade to granite countertops, paint the walls or replace the carpet because of a wine stain, it’s my responsibility. If the building’s lobby is upgraded, a window begins to leak or the hallway lightbulbs need changing, it’s the condo corporation’s responsibility.
Knowing where the boundaries of a unit extend prior to purchasing a condo can sometimes be tricky. However, in every instance, you can find this information in the condo corporation’s rules and regulations (also called governing documents) which must be made available to you prior to signing purchase agreements.
Being explicitly clear where the boundaries are located before your purchase is extremely important as it affects your level of involvement in your unit’s maintenance. In my first condo, the boundaries didn’t include windows which meant I was responsible for cleaning them inside and outside. I was also responsible for clearing snow up to the start of the pathway. So much for worry-free living!
In rare instances, some boundaries include the land the dwelling sits on. This means the owner is responsible for every aspect of maintenance and repairs within that boundary. This can include lawn mowing, snow removal and even repairs to the roof and masonry!
Some condo corporations have rules and regulations that dictate activities you can’t do inside your boundaries. For example, they may ban commercial or industrial activity from taking place inside your residence. Rules and regulations that affect the inside of your unit are typically there to maintain quality of life standards. After all, you wouldn’t want someone operating a dance studio in the unit above would you?
There are also strict rules as to renovations that can affect the integrity of the overall condo building. For example, knocking down walls to create a loft look requires the condo corporation’s approval. Even though the walls are inside your boundary, your actions may have consequences on the community you live in.
Outside your boundaries
Areas that fall outside the legal boundary setup in your arrangement are called “common elements”. Think elevators, lobbies and hallways. Common elements in larger condo developments also include areas like recreational rooms, health and wellness facilities and pools.
Common elements are owned by all owners of the building and no one person can dictate their access except in cases of health and safety (ie mechanical and electrical rooms). Their use is regulated by the rules of the condo corporation and generally well-defined in the governing documents.
Of note, if your purchase also included a parking, bike rack or storage locker, it is also deemed a common element, albeit its use is reserved solely to you.
No such thing as a free lunch
If no one person owns the common elements then who is responsible for their maintenance and administration? Who pays for the repairs? The answer is simple: you.
When you buy a condo, you purchase a unit but you also legally commit to paying monthly condominium fees. Every owner in the building pays condo fees which go into a fund. This fund covers the maintenance, repairs and upkeep of the common elements. It is managed by your condo corporation and board of directors (other owners elected to that position).
Here are examples of expenses managed by condo corporations:
- Common elements upkeep;
- Exterior shell maintenance (ie roof, windows);
- Engineering services (ie inspection of plumbing, structure, electrical)
- Building management company fees;
- Heating and cooling costs;
- Security and insurance;
- Landscaping and/or snow removal.
Condo fees commonly follow a “per square foot” pricing structure. A condo corporation will estimate its expenses year-on-year and split it amongst the owners depending on how much square footage they own in the building. For example, if you own a 600 sq ft unit and the condo corporation collects 0.50 $/sq ft, you are going to pay $300 per month (600*0.5=300) on condo fees.
What about the surplus?
Unlike a commercial corporation, your condo corporation does not collect condo fees for a profit. Any surplus remaining at the end of the year is either put into a reserve fund, or used for common elements upgrades (ie building a fence around the property, switching to high-efficiency heating and cooling systems).
In many states and provinces, a condo corporation must have a reserve fund in place (their size depends on local laws). A condo’s reserve fund is like a family’s nest egg account in case of unexpected expenses… Except that a condo corporation expects unexpected expenses.
No crystal ball, but close
Because members of a condo corporation are owners like you, it may not be the case that they are qualified to conduct reserve fund predictions. How can a school teacher or a bakery owner accurately predict when large expenses like the central boiler will need to be replaced?
Luckily, unexpected expenses can be reasonably well predicted by building experts. A condo corporation will usually hire engineering and other certified professionals to provide expert advice on the health of the condominium structure. This expertise helps the condo corporation predict when major repairs or entire replacements will come around.
Some of these major repairs could one day be larger than the monthly condo fees. For example, replacing all the windows in a high-rise condo 10-15 years after it was built won’t be cheap. Such expenses should be anticipated by the hired experts and paid via the reserve fund built up over the years. This is why condo corporations always collect a surplus year-on-year.
Luckily large expenses requiring money from the reserve fund are predictable. As such, a well-managed condo corporation will collect a surplus every year to build up the fund.
Depending on the age of the building, the monthly condo fee will have to be adjusted over the years. Typically, new builds have smaller fees whereas aging developments will collect more. A well-managed condo development shouldn’t see large increases in condo fees but rather, gradual ones.
For the reasons mentioned above, it is very rare for a condo development to give back money it collected via monthly condo fees. Finally, don’t expect a refund, even if you sell your condo years down the road.
