Wednesday, March 28, 2007

The Trouble with Condos



I've never been a big fan of condo ownership. There's something about it that conflicts with the pride-full "man's home is his castle" thing. (I apologize for the gender-bias in this statement)

I have a friend who bought a two-bed, one-bath unit around 3.5 years ago. It had been a previous rental unit and had been sitting on the market for a while as it didn't show well. Of course, this was before the crazy market times of 2004/05. It's 1050SF and two levels. He paid $107K in 2002. His purchase was one of the true own for less than you rent situations.

Fast forward to this year. His assessment came in at $224K. He's invested about $15K into making his home his castle. He's very creative and has done a fantastic job of painting, installing new floors and turning a rather drab unit into a bright, arts and crafts-style home.

In the span of his ownership, his monthly assessment has increased from $178/month to $278/month. The reasoning behind the increase: new fences and decks for all units. Two months ago, the strata sent notices to all residents that they planned to go ahead with a building remediation. This building is not a leaky condo. It was built in the mid-70s.

The reason for the remediation? There are two buildings directly across the street. They have units selling in them for high $280Ks to low $300K. The building my friend lives in has never had a unit sell for over $235K. The building is centrally located on a busy street. The strata believes that re-mediating the outside from stucco to sturdy-board and updating the common spaces will increase the value of each unit upwards of $50K each and bring them in line with their neighbours. The per unit charge will be approximately $30K. There are, of course , other condos within a two block radius that are selling for less than this one; my friend feels the strata is ignoring this fact.

My friend is heart broken. He loves his home, though hasn't planned to stay there forever. He has a financial investment in it, but his emotional investment is greater. He recognizes that he has done very well financially in his 'investment' and is grateful that the market has cooperated. He is very aware of current market trends and is skeptical of the promised gains in his unit if the strata goes ahead with its planned work.

Should he sell? Two other units have been put up for sale since the announcement. Both have asking prices between $219K and $230K. My friend feels his should get more because he's confident that it will show better, but things aren't moving too quickly in the condo market right now.

His realtor has been by to discuss and seems to think he'll be fine, but has cautioned him that in order to move his unit he may have to eat the $30K remediation charge. If he's lucky, he'll find someone who loves his unit so much they agree to pay half the charge and give him full price. She stated that there is very little likelihood of a bidding war and that he should price his place at $229K, $5K above assessment. He's looked around and isn't happy with what he's seen in similar price ranges and isn't keen to go back to renting either.

He's afraid that if he doesn't sell soon, he'll be stuck with the extra $30K debt, which will be about $300/month to his mortgage, and a declining asset value as the condo market flattens and dips. He's not happy with the strata corporation and feels they haven't done due diligence with their work on this project; he has lingering anger regarding the high monthly assessment and the lack of transparency regarding its justification. If they go ahead with this work, combining that charge with the increase in his monthly assessment, his payments will have almost doubled in a short span of 4 years.

He's spoken to neighbours, but many do not feel the same and are happy to remortgage their property to do the work. It's a big strata and he doesn't feel confident that his efforts to change people's minds will go over well. He'd rather not rock that boat.

I'll leave this open to every one's input. My friend will be reading this, though is unlikely to respond to comments. He's just wanting to 'poll' public opinion foremost. Any advice will be taken with a large helping of salt. He's hoping that some insights will help him to see things in a different light.

12 comments:

Anonymous said...

excellent post. loved your description of the situation, thoug I would not like to be in this position!
I guess this is like rock and hard place choice.

Roger said...

hhv,

Condos offer several advantages but have one major drawback: you are not the master of your own destiny.

I feel that your friend is in an uncomfortable spot but he will benefit from having outsiders comment on his situation because we are not looking at the situation through an emotional filter. Many of the posters to this blog look at things in a logical way and will offer him a different perspective.

Let me throw in my nickels worth:

He paid $107K in 2002. He's invested about $15K into making his home his castle.

So he has 122K invested, not counting the mortgage interest and condo fees he has paid (but he didn't pay rent)

Two other units have been put up for sale since the announcement. Both have asking prices between $219K and $230K. She stated that there is very little likelihood of a bidding war and that he should price his place at $229K

If he sold for 222K he would make 100K - 11K realtor fee= 89K. The mortgage interest and condo fees would be about equal to the rent he would have paid. So financially he will do very well on a four year investment (89K return on 122k over five years). I realize that there is an emotional side to this but in five years from now he will still have the profit and the bad memory will have faded away.

The strata believes that re-mediating the outside from stucco to sturdy-board and updating the common spaces will increase the value of each unit upwards of $50K each and bring them in line with their neighbours. The per unit charge will be approximately $30K.

I think the strata council is right. Buyers are wary of buildings that have not had some kind of remediation or common area renovation. My friend hung tough in this situation and watched his property on View St. increase in value. People nowadays want things all done for them when they move in (especially seniors) and do not want the noise of remediation. Your friend will be recoup his investment if he is patient; the realestate correction will hurt higher priced homes first.

He's afraid that if he doesn't sell soon, he'll be stuck with the extra $30K debt, which will be about $300/month to his mortgage

His estimate is way off. Current mortgage rates are about $600 per 100K of mortgage. He should pay about $180 more on a 5.2% 25 year mortgage.

a declining asset value as the condo market flattens and dips.

Your friend is in a price range that will realize future appreciation. In any correction the high end properties drop first and have the biggest drop. Moderately priced properties, like this one are affordable and will appeal to seniors when they downsize and/or move to Victoria.

He's not happy with the strata corporation and feels they haven't done due diligence with their work on this project; he has lingering anger regarding the high monthly assessment and the lack of transparency regarding its justification.

This is the part of condo ownership that is hard to accept for many. In any democracy the majority rule. It becomes more difficult to accept as the democratic decision, you don't agree with, moves down the ladder from federal to provincial to civic to strata because it is getting closer to you personally. I can understand and sympathize with your friend but he should try and focus on the financial aspects or risk becoming an unhappy owner.

Another way of looking at this might be the following. The total capital investment is 107+15+30=152K for a pleasant, updated condo that is remediated and has a remodelled common area. He still has a bargain in today's market and even with a market correction will come away with a nice profit.

Anonymous said...

This reminds me of my younger brother's situation in Vancouver in the late 1990s. They had this amazing 3 floor condo in Kits that had stunning views of the Vancouver skyline and the Lions mountains from its top floor (I was just a bit jealous, living poor and paying off big student loans).

Then they started noticing a leak coming from the walls in their bathroom. Turns out the entire condo building had the whole "leaky condo" syndrome. The intitial per unit assesment of around $10k was followed by another $20k+ assesment a few months later. My brother and his wife panicked (understandably) and sold later that year. They lost about $25k on their investment (this was the era when few people wanted to touch condos). This place was their dream and it totally devestated them to lose it.

But 10 years later that condo is probably going for double what they paid for it. Maybe it was good to get out. Maybe another 10 years in a condo that stressed them out wouldn't have been worth it.

Hard to say what to do but sometimes its important to think in the longterm and ask yourself "is this decision going to give me something as good or better than what I've got?" Are you going to enjoy the things you can do with the money you might get from the sale as much as you enjoy your home...or are you just selling because you are p--sed off"

greg said...

Roger,

I would only caution that the condo owner doesn't really have any profit unless he sells, just an increasing debt. It looks good on paper, but in fact his mortgage and assessments are going up. If the owner is on a modest income, that is nothing to ignore.

While it sounds great if he comes out $50,000 ahead, even after the $30,000 assessment, let's not forget two things -

1) What about other supplementary assessments if the work doesn't get done on budget?

2) Some people associate remediated with "leaky" and will not buy a remediated unit. Not only that, some banks will not finance mortgages on "remediated" units. This happened to my sister when she sold a unit on Wark St in 2004 - Scotiabank refused to fund a mortgage on a "subject to financing" offer, because the stucco building was remediated.

I would advise the owner to think about selling, even if it costs him $15,000-$30,000 for the assessment. I would also advise language in any contract that protects against future assessments!

The sooner he locks in his gains, the better, IF the market is topping - rent is still cheaper than owning, and if high priced units do drop more than inexpensive ones, as you expect, the owner may find himself with a much nicer unit in a year or two...

Actually, all opinions here are only that, opinions, no qualifications for my advice, take it or leave it!

Aleks said...

I think he should sell. The way I read the original post, the remediation will cost $30K and increase the value by $50K, for a net gain of $20K. Even taking those numbers as fact rather than speculation, a $20K gain is not very much considering the risks involved. #1 being that he is definitely taking on $30K more debt, but would only realize the $50K gain when he sells, which he doesn't want to do.

But even more than that, all it would take is a 7% drop in the market for that supposed $20K net gain to be wiped out. A 7% decline is nothing considering the price appreciated over 100% in less than five years. I personally think a decline of 20% or more is likely, and I don't think condos are going to avoid the correction. They were part of the bubble, they'll be part of the crash.

The only justification for not selling now is if he intends to live there for a long time. If that's the case, then he needs to decide whether it's worth adding $30K in debt and the increased monthly fees. If that's the case, then he should just enjoy his home and quit worrying about the assessed value; all that matters is how much he still owes on his mortgage, the so-called increased equity is all so much phantom dust unless he decides to sell.

On the other hand, if he's getting tired of the assessment going up every year and dealing with a strata, then now's the time to sell. Lock in the gain, bank the profit and rent for a while. When the market drops back to a more sane level, use the proceeds as a down payment on a house.

Roger said...

Your friend has a choice to make.

1. He can sell and become a renter. But he won't be living in a place as nice as what he has now unless he wants to spend a lot on rent.

2. He can sell and buy something else using the equity he has built up and the profit. This means he will have to move up because there is little on the market at 250K. He needs to be very cautious because a lot of fixer uppers are overpriced and the market is due for a correction. It is one thing to sit where he is and lose some paper profit; quite another to buy something else and watch it drop to less than he paid for it.

3. He can continue to stay in his condo if he can emotionally get over the remediation costs and the increase in the condo fees and taxes. If he can't life is too short to be stressed out as some of the other posters have mentioned.

A suggestion that might help him out. He should go and look at some rental properties that are in the price range he thinks are reasonable. At the same time go to some open houses in the price range he might be interested in if he sold and bought again. If one of these choices seems great then he can move forward with selling his property. If not, he may decide to stay where he is and his shopping experience will make him more comfortable with staying in the condo.

If he does decide to sell he should interview several agents so that he goes on the market at a price that is realistic in the current market conditions.

Anonymous said...

Have him call an appraiser! The appraiser can provide him with a hypothical value as though the upgrading is completed. There are some highly respectable appraisal companies in this town that can do this for him, such as Baker & Osland, Coast Appraisals and D R Coel & Associates

Roger said...

hhv

There has been some great advice by all the posters.


When you close this thread it would be nice to hear about your friends decision.

HouseHuntVictoria said...

Roger,

The comments have been great.

My friend wants to add that selling and then renting would be a very difficult option emotionally. He'd be getting less and paying more than he is now; he'd even be paying more than he will have to if he stays in his current place and takes on more mortgage.

He spent most of January and February looking at stepping out of the condo and purchasing a house. He looked at a dozen or so places, did the math and found it too risky on his current income. So stepping up is out of the option.

So his options as he sees them are to stay and pay or sell and buy another at same price. He felt that he'd be moving in two years if none of this happened, and hoped to move into a non-strata property (house).

He's looked at several condos online, and walked through several with us--it's amazing what someone who lives in a condo can see in other units that we don't when we do walk throughs. He doesn't like what he sees at the same price.

As the first commenter suggested, this really is a rock and a hard place decision. Aleks suggestions about market fluctuations really hit home, and this is the beef that he has with the strata primarily as he thinks they are believing that the accelerated price gains are endless and that it really is as simple as just tossing money into upgrades.

He doesn't dispute that renovations add value, but his experience is that they don't add as much as you'd think. He's put in $6K worth of flooring--real hardwoods, not laminates; real tiling in kitchen and bath--he's also put in $4K worth of appliances and significant sweat equity in painting and re-tiling in the bathroom.

Yet his realtor is suggesting that he'll get less than the assessed value. That says something about the market state, and if they do the work this year, and he tries to sell two years from now, he may lose that $30K altogether.

It's a situation I don't envy at all. The amount he'd end up losing in the transaction costs (commission, fees taxes etc) drives him into a smaller condo in a different neighbourhood if he sells and buys again.

I really think this is a case of people not doing their homework and assuming that updating will automatically gain everyone 10% in value regardless of market conditions. Maybe this fits in with the herd mentality of the Victoria market is always a bright place. You know, where everyone is moving here constantly driving up prices and all that bs.

When my friend bought his place at $107K, the previous owners had bought four years earlier and paid $130K. Oh, how quickly people forget.

Anonymous said...

My husband was saying that if a prospective purchaser is interested in his condo and then the prospective purchaser finds out that there is a $30k remediation going to happen that they could quite possibly offer lower than assessed value for it and maybe even dramatically lower.

greg said...

For those who don't believe prices can fall, I have only four words:

Early '80s Vancouver condo!

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