How do you know if a condominium is in good financial condition?

The financial well being of the condominium corporation is an important consideration. Buying on into a condominium corporation that is insufficiently funded to operate and maintain common elements is a risky proposition.

Low condo fees may make one condo more appealing than the others, but it may also be a sign that the condo corporation is not-prepared to fund major repairs and renewal projects. As a result, the condition of the property can deteriorate or you may be faced with substantial charges from the condo to cover repair costs as they occur. Fortunately there are way to determine the financial status of the condominium, based on the documentation that the condo corporation is obliged to keep, such as annual operating budgets and end-of-year financial statements. An important part of the operating budget is the reserve or contingency fund.

The Reserve Fund

The purpose of a reserve fund is to provide financing for major repairs and renewal projects over the life of a condominium building. The fund essentially ensures that the common elements will be maintained in good shape for the life of the project.
The amount required to be in the reserve fund depends upon the condition and life expectancy of all common elements in the building and the estimated costs to replace them over the life of the project.
The amount each unit owner is required to contribute to the reserve fund, usually via monthly condo fees, is determined by estimating what would have to be set aside on a monthly basis to cover the long-term costs.Reserve funds studies are updated from time to time, depending on provincial regulations or at the discretion of the condominium corporation. The studies are conducted by professionals capable of assessing the condition of the common elements of the building, estimating remaining life spans and the related repair and/or replacements costs. Based on their observations, these professionals estimate a monthly or annual contribution necessary to fund the long-term renewal of the common elements.

After receiving the study, the Board of Directors can propose a plan for the sustainability of the fund, including monthly contribution from owners as part of the condo fees.Moving into a new home where the reserve fund is under funded and major repairs are required will mean a significant increase in the condo fees or the special assessment to the unit owners by the condominium corporation.

Special assessment charges can be high depending on the type of work required. Ensure you obtain and review the disclosure statement or the status certificate to determine the current estate of the reserve fund.

Source: CMHC.

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