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Friday, April 20, 2012

Condo maintenance fees

My buddy Carmen hates condos.

And its very easy for me to agree with his reasons. Its the outrageous maintenance fees that some condos charge. (Over $600 is considered outrageous.)

The reality is that some condos are built poorly. Most condos have extra costs associated with security guards, lawn maintenance, clean hallways, garbage removal and fixing the structure of the building.

But its the fixing of the building structure that is the real issue with some of the newer buildings. In Canada we have the added problem of Canadian winters can be really harsh on the building's materials, but there are other common problems as well.

Common Causes of Higher Fees

#1. Electrical Upgrade

#2. Renovations of Foyer, Laundry

#3. New Elevators

#4. New Windows / Insulation

#5. Pool service and maintenance going up

#6. Administrative / Legal bills

#7. Common Area Electricity (elevators, hallway lights, etc) skyrocketing prices

#8. Property Taxes on the grounds go up

#9. Reserve fund for future repairs

#10. Insurance costs go up

Some condos even include cable TV and electricity within units, which can fluctuate.

What makes matters worse is that when fees go up they rarely go back down. Which begs the question, why would anyone want to buy a condo if some places charge such outrageous condo fees?

I think its completely unexpected. People buy into a new glass condo, expect everything to be wonderful, then the window seals break (a common problem with glass condos in Canada), the inert gas insulation leaks out and suddenly the heating and cooling costs for the entire building skyrocket.

All it takes is something unexpected to happen and WHAM, maintenance fees go up.

The advice then that should be given to condo buyers is buyer beware. Look at the maintenance fees the place is charging. How new is the elevators? Is the building structure glass or concrete?

FACT: The glass condos in downtown Toronto have the highest average maintenance fees in North America. Why? Leaking insulation and the repair costs. Toronto has been building glass condos like crazy, mostly in the downtown core because everyone wants a chic looking building, but totally ignoring the problem of Canadian winters.

According to city planner Greg Kuenzig the condos on Toronto's waterfront are "the future slums of Toronto", not just because of shoddy architecture, but because they were mostly purchased by overseas investors and then rented out.

And renters are much harsher on buildings because they simply don't care. And because the investors don't want to pay as much for maintenance the buildings suffer due to neglect and mistreatment. Combined with shoddy workmanship and Kuenzig says those condos will eventually be sold off at lower prices when the maintenance fees skyrocket and that will attract more lower income people, slowly turning the Toronto waterfront condos into a slum. It has happened before in other cities for the same reasons.

The end result is that there is a small number of condos out there which are built properly (have passed the test of time) and they're usually older buildings made of concrete. Lower maintenance fees and a concrete structure. It may not be as pretty to look at like a glass building, but at least you won't be overcharged for living in it.

In other news there is also a correction in condo market prices coming in the next 3 years. People looking to sell would be wise to sell now BEFORE the market becomes flooded with cheap condos.

There is also the chance that foreign investors in Toronto condos might all pull out when the market corrects itself. It happened in Miami recently. Investors caused a huge bubble in Miami's condo market, but then when property values plunged in 2008 all the investors sold off their properties in a rush and the prices plunged even further.

Sales in Miami have started to rebound and prices go up a little bit due to bargain hunters but many condo buyers and investors lost their proverbial shirts.

According to real estate research firm Urbanation 60% of recent condominium buyers in Toronto are investors who bought their units from developers before construction began... and then sold their condos once the construction was finished. They flipped it fast for a profit.

But if prices drop they won't be able to flip those properties for a profit. They will be taking losses or forced to hold onto the properties until the market recovers. Right now stagnant rent prices means if they hold on to their properties they will be taking a risk from that too because when property values drop so does the amount people are willing to pay for rent... and if the property is leveraged or mortgaged it will be shirt losing time.

The chances of correction is also increased by Canada's low interest rates.

"The longer we are in this super low interest-rate environment, the greater the potential for a big correction," says Andrew La Fleur, a condominium broker with RE/MAX LLC.

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