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June 22, 2006

Condo Concepts - June 2006 Issue 61

Pros and cons of different types of condo purchase options - Part 1

Douglas Gray

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There is a wide range of ways that you can protect yourself through knowledge and due diligence research before you sign on the dotted line. In all cases, you want to have the assistance of a real estate lawyer to review all the documents and give you advice. It can frequently be a challenge for a layperson to interpret the implications of the fine print.

Part I will discuss the pros and cons of buying a re-sale condo and a conversion condo. My next column, Part II, will discuss the pros and cons of buying a new or pre-sale condo.

Buying a Re-Sale Condo
When you buy a previously owned condo, you need to ensure you obtain all the necessary documents and information. (The key documents will be discussed in Part V.) Depending on your province and your condo corporation, there could be additional documents. You want to make your offer to purchase subject to your lawyer obtaining all the relevant documents to review and being satisfied with them. Make sure you give yourself and your lawyer sufficient time to review and understand the documents—e.g., a week to ten days. There will be a lot to review, as there is a history to the condo. You also want to ensure you obtain a home inspection on the unit and the building to check on construction quality.

Talk to the people who own condos in the complex. Speak to a condo corporation director and the property management company about any problems and the governance of the condo corporation.

You want to ask detailed questions about the reserve/contingency fund, and what major expenses could be anticipated and when. You also want to review the annual report and read the last 24 months of condo corporation minutes to owners, to see if there are any matters of concern, e.g., leaking roofs, break-ins of cars and units, litigation pending, etc. If you are serious about buying a unit, it would be prudent to hire a competing condo property management company to the one used by your condo corporation, e.g., one of the larger and more experienced companies, to review the documentation and give you their candid feedback. They may have heard information that would either affirm it is a good location and complex, or one to stay away from. It would be inexpensive to obtain this third-party feedback – probably only $200 or so. That is money well spent. You want to see in the documents what the restrictions are on the total number of rental units that can be permitted in the complex.

Some of the advantages of buying a re-sales condo include:
•  No lengthy wait time before move-in.
•  You can see what you are buying.
•  There is a history to the complex in terms of operation and structure and any problems.
•  You can speak to people who live in the complex to see if the community is a good fit for your lifestyle, needs and wants.
•  Condo developments that are older could have larger-sized units.
•  There is no GST.
•  Deposits tend to be lower.

Some of the disadvantages include:
•  Major repairs could soon be required or planned for. If the reserve/contingency fund has insufficient funds, a special assessment could be charged to the owners to fund the repairs.
• Different construction standards could create problems with leaks, squeaks, noise or heat loss.
• Older condo complexes tend to require more maintenance and therefore costs.
• The New Home Warranty coverage would likely have expired.
• Limited choice in types of units or upgrade potential.
• May lack in the amenities that are important to you.

Buying a Conversion Condo
This format means that the building was originally used for some other purpose, but has been renovated for residential use. It could have been a rental apartment block before. Or if it is a loft-style of condo, it could have been converted from a former industrial or commercial building. You would normally be buying this type of condo from the developer if it has just been converted. Same cautions and suggestions outlined for re-sale and new condos apply.

Some of the advantages of a conversion condo include:
• Possible creative and unique designs and layout.
• Tend to be less expensive than a new completed unit due to less core construction costs.
• Tend to be located in downtown areas of a  city.

Some of the disadvantages include:
• As in a new-construction condo, the dates you have planned for occupancy could be delayed due to construction delays.

• If the core building is old, that could mean potential costly repair or maintenance costs in the future. Without an adequate contingency/reserve fund, that would mean that special assessments would be raised from condo owners.

• New Home Warranty coverage may not apply. For example, in a new construction the warranty company knows the quality of the construction and the builder. Dealing with a conversion of an older building has inherent risks for any New Home Warranty insurer. The developer could provide warranty coverage, but that is highly risky, as the developer could go under, or could have set up a corporation for the conversion that has no extra assets in it once the units have all been sold.

Douglas Gray, LL.B., formerly a practicing lawyer in Vancouver, B.C., is now a consultant, speaker, columnist, and author of 22 bestselling books, including the recently released Canadian bestseller, Making Money in Real Estate (The Canadian Guide to Profitable Investment in Residential Property), 2nd edition.

Excerpted with modification, from 101 Streetsmart Condo Buying Tips for Canadians, by Douglas Gray, to be published by John Wiley & Sons in May, 2006. Copyright  2006 by Douglas Gray. All rights reserved. Any reproduction of this material without the author’s advance written consent is prohibited. The author assumes no responsibility whatsoever for any information provided above, as the purpose of the column is for general information only, and not intended to provide professional advice.

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