Rent To Own done ethically

Condos – good or bad?

Scale for blogA few weeks ago The Ottawa Citizen featured an article entitled “Becoming a major play: Once just a fraction of the market, condos are here to stay.” In the article, we learn that condos now represent a significant segment of overall sales and that they are gaining in popularity with both home owners and investors. In March of 2013, for example, 690 residential properties were sold in Ottawa and 224 of those were condos. Now the question is, should you consider buying a condo instead of a townhouse or a small single? In our Rent to Own business we have a number of clients who come to us thinking that a condo is their best choice. Condos may make sense for some people, but they do come with risk and we caution all of our clients, and investors, to carefully consider a few factors before making a decision.

Investor example

The biggest concern with condos are the monthly fees and the fact that you cannot control the increases. We own several condos in our private portfolios and in many cases there have been significant increases in the fees well beyond any of our generous projections. In one case, we had a professional company evaluate the strength of a particular condo corporation including the reserve fund. The report showed that this was a top performing complex with a high rating. One year after we bought the condo we were hit with a 42% increase in condo fees, followed by 9% and 5% increases respectively in the two years after that. We poured over the financial documents and we failed to see how the Condo Board could justify such increases. We called and mailed letters to appeal and each time we were met with the same answer: If you don’t like the increases, vote against them at the AGM. Most owners don’t even show up for the Annual General Meetings so the Motions typically get passed without issue. Our single vote didn’t stand a chance. The result was a significant hit to this property’s cash flow.

A home owner’s perspective

Let’s flip over to an example with a home owner. One of our clients had his heart set on a condo so we sat down with him and outlined some of the risks. After weighing our information he decided to proceed with the purchase. Two years later when his deal was done and we were signing the final documents, he admitted to us that he should have taken our advice to purchase a town home. The condo fees had gone up both years and each time the increases were larger than anticipated. He was now spending significantly more on condo fees than he had expected. His plan was to stay in the property another year or two to gain equity and then to sell in order to buy a town home.

This is not at all an argument against condos. They can be an ideal choice for people who want to live in the city core and who have sufficient cash flow to be able to absorb unexpected increases. They are also great for people who dislike yard and house maintenance. Our point is simply that they come with risks.

You might argue that houses require maintenance and that condo fees simply replace the money you would spend on repairs and maintenance anyway. Our counter to that is that you can control a lot of the expenditures on a house or townhouse. You can choose when to do the repairs, whom to hire and what materials to use. You can also be proactive to avoid larger bills. Yes, unexpected repairs occur in any type of property but at least with your own home you have much more control. In a condo, you represent a single vote and that’s fine if you happen to agree with the majority. It’s frustrating if you do not. Just ask a condo owner who has had to absorb a higher-than-expected condo fee increase or worse, a Special Assessment.

The bottom line is that you need to look carefully at the list of pros and cons for every potential real estate purchase and not gloss over the risk. If the property type meets all your needs and you’re comfortable with the risk, then buy away. Just beware of getting caught up in the hype and marketing pitches of a particular product.

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6 Comments

  1. Doris is bang on the mark here. Every situation should be carefully weighed. Apartments definitely carry more risk; new builds especially so. For the right buyer, they work, but only if the buyer has a solid understanding of what future outcomes can be.

    • Doris Belland says:

      Thanks Dawn. I always appreciate your comments. Can you elaborate on why you say that new builds are especially risky? I think this may be useful for our readers.

  2. Excellent post Doris, being an investor that focuses on the buy & hold in the residential multiplex sector, I have never given much thought to condos primarily for the reason you listed above as I’ve got many friends who have weathered the stresses of year-over-year rapid increases in condo fees. As an investor in the buy & hold space, this would pose too much risk to our cashflows with very little opportunity to recover those costs in rental increases.

    • Doris Belland says:

      Hi Brent. Thanks for your feedback. Excellent points. I am making money on most of my condos but they do present a lot of risk with respect to condo fees. If I were to start over, I would not buy as many condos. Multiplexes have their own risks but there is a much smaller downside regarding vacancy and none of the risk inherent in condo fees.

  3. Thanks Doris for this warning.
    I think many future property owners get caught up with the creative marketing messages of condo developers, without sitting down and looking at the pros and cons. We had a similar experience, where our condo fees went up without our control. Not only that, but they were expected to go up since there were unexpected large repairs to be made, and it was a brand new building – go figure!

    • Doris Belland says:

      And here I thought that a new condo might avoid some of the risk. Thank you for sharing your experience Irene. That’s very valuable information.

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