Thursday, 28 November 2013

Maintenance Fees: The Cold, Hard Truth!

Nothing gets a bee in the bonnet of a condo owner more than the topic of condo fees.  In fact, a good portion of the buyers and owners alike can be a little obsessed about how maintenance fees work (or don't work) in a given building.

Condos fees are also a big concern for the buyer as well, and who can blame them? Maintenance fees make a difference to the purchase price. Simply put, condos with high maintenance fees generally cost less than ones with lower fees in a comparable condo building with a unit of a similar size. That's a huge generalization, I know. So, let me add one caveat: Some condos do warrant the higher fees they charge and some of condos with smaller fees are not necessarily great investments.

Regardless, I can see why there is such a disdain for condo fees, though they are often misunderstood. Condos, like houses need repairs, need to be fixed and updated, and these things cost money. If you want your condo to run well, you need fees coming in. Also, you want to make sure you bring up these fees to have a healthy reserve fund. If money is required for a repair or an update, like replacing the smelly and stained carpet in the hallway, you'll need the funds to pay for it.

Still, I understand people's frustration. So, here are some tips when it comes to spotting the condos where fees may be unreasonably high or on the verge of going higher:

1. Brand New Condos. Don't be fooled by a developer telling you the estimated maintenance fees of a condo that is not even running yet. It's not the fee you will be paying a few years from now, once a condo is built and registered. When you are living in your unit or renting out to someone, the condo needs to build up a strong reserve fund. So, it raises the fees to do so. And fast. In many Toronto condos, fees can rise 20 -30%, even up to 50% in the first year of running and functioning like a condo.

2. Older Condos Have Higher Fees. I can be a big fan of larger condos, but they do have higher fees. In the olden days of condos, condos were built as a kind of Club Med where you can play tennis, eat caviar by the pool and have your concierge do your dry cleaning. It was like being in an all inclusive vacation deal at a five star hotel all the time. Well, pools are pricey to maintain and a top notch concierge needs to be paid. Plus, things break down in older condos. So, windows need to be replaced. Garages need to be repaired. Elevators break down. And in turn, maintenance fees go up. Newer condos, though tinier, have managed to bring down fees by offering less amenities. Keep in mind, though, that the older condos often include more in their maintenance fees like electricity and heating, and even cable. Newer condos, you pay for your own. And don't forget that that newer condo will become an older condo some day and require repairs.

3. Poor Management. Sometimes a condo is just run badly. Subsequently, money is not spent wisely or the management company doesn't do a good job. I have been seeing a few condo boards lately that fire one management company for on that does a better job.

4. Lousy Builders. There are some places that were just not built well. So, things start to break down a little sooner. The quality of workmanship has been rushed. Check the builder. Some have better reps than others.

5. Lawsuits. Generally if a condo is getting sued, that can mean pricey trouble. Because if the condo is getting sued, the condo owner are getting sued and will need to pay the legal bills. Any buyers should make sure they have their lawyer review the status certificate to see if anything serious is going on before they buy. Any lawsuits should be mentioned in the status certificate.

With all that said, I want to be very clear that a condo with high maintenance fees is not a bad idea all of the time. There are some condos that justify a higher condo fees. As I often mention, older condos are bigger in size and need more maintenance, but you do acquire more space. Some smaller sized condo buildings have higher fees since they are not spreading the cost of maintenance fees through as many condo owners as larger condos. Fees may be less per unit for larger condos, but I still feel the investment in a boutique, smaller condo is a better route to take, even though the fees are a little higher. Unique spaces often have more cachet than your typical condo space. So, beware of the pitfalls of condo fees, but understand that it's not the only parameter to determine the worth of a building.

Wednesday, 20 November 2013

The Value of Your House: An Art or Science?

A few weeks back, two clients of mine, a couple from Toronto, purchased a house in an emerging neighbourhood. The listing agent decided to hold back offers. That's no surprise to anyone familiar with the housing market in Toronto these days. He received four offers. Our offer was the one with which the sellers decided to work. In choosing the offer price, my clients and I focused on a property down the street about a block that sold in the summer at a very similar price. It was the best comparable. It was detached, the same size, and required a similar amount of work to fix it up. It had the same style of architecture and both had parking.

It was not the only property we reviewed. We also looked at other sold properties in the neighbourhood. We felt that the price we were offering was a fair and reasonable price with respect to how the market was working. Now, it's not as straight forward as it sounds. This is a more of an art than a science. Sometimes it is very difficult to find comparable properties to determine the price.  Not all properties in a given neighbourhood are similar. You have to have a kind of sense of the neighbourhood and its value to get an idea of the value of a given home.

The bank is another evaluator of your home. They don't evaluate all homes, just the ones that have been recently purchased and require their mortgage. If a home is bought for over $750,000, banks are even more likely to request an appraisal.  And this can really make life more difficult. With my clients that bought the house in an emerging neighbourhood, their bank required that an appraiser go through their purchased home to determine how much the appraiser thinks it's worth. The bank will only cover a mortgage on the appraised amount. So, let's say someone pays $1,000,000 for a house, but the bank appraiser believes its worth $900,000. In that case, you would have a shortfall of $100,000. The buyers would need to come up with the $100,000 before you even start paying a portion of your mortgage. If you don't have that $100,000, you don't get the financing.  Does it mean your house is only worth 900K? No! It means the bank uses a certain model for determining the value of a home that is not necessarily the same as market value, or what a house did sell for on the market.

When I have the chance, I always try to chat with the bank appraisers to get an idea of where they are coming from and how they do their jobs. What drives me crazy is how the appraisals vary widely. There are many appraisers who don't even live in Toronto and have no familiarity with a given neighbourhood. And that makes me nervous. The appraiser for my clients, came in at a lower amount of the value of the house because, in my opinion, he used properties much further north in a neighbourhood that does not have the same kinds of value as where my clients purchased. Plus, the homes did not have the historical detail of the one that was purchased by my clients. He tried to do more a square footage analysis, which may work for some condos, but in a neighbourhood where the houses vary widely, I didn't find this to be very effective or useful.  A 1960s bunker-like block of a building with no curb appeal does not compare to a brand new home or a 100 year old home with loads of character.

It wasn't that I felt the appraiser didn't know what he was doing. He was following all he had learned in appraisal school, which treated the appraising of a house more like a mathematical/scientific calculation. He seemed very competent, but his approach lacked all the nuances that I believe are required in an artful evaluation.

In the end, the shortfall was not an outrageous amount, but I had to admit I was a little surprised at the appraised value. The thing is, a different appraiser could have come in and evaluated the property at the price my clients paid for their house because he used different comparable. Maybe higher, maybe lower.

Now, I am biased here because I certainly felt that I was more knowledgeable about the area and felt I had a better grasp of the area's values. Still, my approach is an art and it's not exact. There's room for error there as well.

At the end of the day, no matter who is telling you what the value of your house is worth, be it a real estate salesperson or a bank appraiser, the real worth is how much a home actually sells for on the market. It is worth the amount someone is going to pay you to buy it. End of story.

Thursday, 14 November 2013

He Can't Be Blamed for Everything...

In the last week, I think about half of my Facebook feed has been about Rob Ford. His image cannot be avoided, and why would you avoid such real life drama? He really does put the "reality" back in reality TV. In a lot of ways, though, he has become a symbol of what is not working in this city. And though I do not carry a passport from Ford nation, I will admit that the many things that block Toronto from becoming an amazing city-of-the-future has a lot more to do with the government of the city, those of us who elected them, and how our city is currently run. It's not just the fault of one faulty mayor.

Recently, urban guru Richard Florida made a similar point about Rob Ford. He felt Toronto has outgrown its system of governance that no longer serves the complex, cosmopolitan city we've become.

What does he mean by that? Well, Toronto is still run like it is a mid-sized, typical North American city where there is a viable commercial centre downtown and most people drive home to low density residential neighbourhoods at night. And 30 or 40 years ago, that may have been the case. Nowadays, not even close. Toronto has transformed and grown.

 As Florida points out:
1. The Greater Toronto Area's economy is a big as Sweden's
2. The GTA is growing at a rate of 100,000 people per year or more.
3.  The GTA accounts for 20% of the Canadian GDP making it the sixth largest government in Canada, larger than most provinces.

So, this current Toronto is a powerful and populous place, but simply does not have the political clout to show it. The city has changed, but how it is governed has not. The city cannot launch large projects because the citizens are divided, the city has little political power for its size, and the elected officials are not focusing on what this city needs 20 years from now.

The voters of Rob Ford live largely outside the city in areas that often resent the downtown, who are more focused on lower taxes for the individual and less on the improvements in the community or the city at large. That's why Ford's "stop the gravy train" message resonates with them through all of the drama, whether the gravy has been stopped or not.

Ironically, Toronto has one of the lowest property taxes in larger North American cities.  And we have put very little money into much needed, large scale projects in transit and infrastructure. From Oshawa to Hamilton, there needs to be more integration of goverments so that we function as a whole, and not a bunch of fiefdoms. They need a stronger planning department with a little vision behind it. They need better communication and integration on all transit forms from the TTC to GO transit to all the transit in other areas in the GTA.The forward-focused cities are able to invest in ways that see how their cities are changing.

Quite frankly, the GTA needs to flex its muscle a little. If cities are going to be the way of the future, they need more power to make their own decisions and raise funds.  If you live in suburban Etobicoke, and you never come to the city, you are still going to suffer if this city doesn't improve. Alternatively, if you live in the city, you cannot ignore the lower density suburbs.

So, let's hope that all this mess around Rob Ford shines a light on what need to be done once the curtain closes on Rob Ford. Until then, enjoy the show.