Sometimes a deal looks too good to be true but you’re curious anyway. That is how we felt when we spotted this 3 bedroom 2 bathroom Port Moody townhome for under $200,000. In this area, small condos are hard to find for under $300,000 so to find a townhome with so much space for such a low price seemed like a deal that was too good to be true. But the pictures looked really nice so we went to check it out.
It was a for sale by owner property so we thought there might be an opportunity to put a creative deal together. But we also expected the property to be in pretty rough shape.
When we arrived we were pleasantly surprised at the well kept nature of the complex and the lovely grounds, and we were even more impressed with the interior of the unit. It had been redone and it looked amazing. We just couldn’t believe it was going to sell for under $200,000 so we started asking lots and lots of questions. We asked questions we knew the answers to, because sometimes that can lead to other questions. We asked questions we really didn’t care about the answers to because you never know when you might learn something interesting. And bit by bit a story began to form … and the story was not a good one.
The strata council (strata is the same as condo in BC) had been horribly run over the past decade. Full of people with no business experience or expertise in how a large strata should run, some really bad decisions had been made. The worst two decisions were allowing the former property management company to continue to oversee renovations and improvements of the property even after they had demonstrated a lack of capability to do so. Then, when they finally fired that company and hired a new one, the council voted to increase strata fees by $100 each month instead of placing a single levy on each unit for the money needed to complete the renovation.
The result was a new window here and there throughout the 100+ units. There was a partially redone fence on one unit, and a totally redone deck and fence on another.
In other words, the renovations were years away from completion and no one unit was fully renovated. The costs were skyrocketing and nobody was trying to (or able to) resolve the growing issue.
As a result, this property, that seemed cheap on the surface was actually very likely to be a money pit. Strata fees had already doubled in 2 years, and there was no end in site to those increases. Neighbouring town homes that were very comparable were selling for $100,000 more but had half the strata fees and the strata didn’t have any major issues.
And this isn’t our only example of how a condo investment can go wrong. Dave had a coaching call with a woman in New Jersey a few months ago that couldn’t sell her condo because of issues with the condo council. And many of the people we know that buy condos for investments find themselves being outvoted at meetings when it comes time to decide if units can be rented out or not … leaving them with their hands tied when it comes time to put new tenants in their property.
The big problem with condos is that there is a BIG RISK you can’t control– and that is how the property is managed.
Sure, there are advantages. When things are going well and you have a good tenant in place, you won’t have to do a thing. Most major issues are handled by the condo corporation (or strata council). But the big issue for us is that, unless you’re willing to take on the part time job of sitting on the council for each and every property you own a condo in … and that often means getting voted into that position so you can’t be guaranteed a spot just because you want it … you really can’t control what happens in your building. And it is very possible with poor property management and a mediocre group running the property that you could find all of your positive cash flow being eaten away by increasing monthly fees and levies to fix big problems along the way.
Now – am I saying never buy a condo? Not exactly. But in many cases I think you’ll do better to find an investment that you have a higher degree of control over.
If you’re looking at investing in a condo here are a few questions to ask:
- What’s included in the monthly fees?
- What are buildings in the area with comparable amenities charging for monthly fees? If there is a big difference find out why.
- Have there been (or are they planning to do) any special assessments on the building (this could be for rainscreening, any structural issues, etc.)?
- Ask if there is a large contingency fund within the Strata Budget (if it’s small, find out why!)?
Who is on the council currently? Get their backgrounds.
Read the minutes from past meetings very carefully to get a good sense of any issues the property may have and how it is being run. Even then, unless you’re going to become an active participant in the strata council you can’t be sure it will continue to run smoothly but at least you will have a good understanding of how it has been run and of the issues that could arise.
Ultimately, it comes down to knowing the risks you can control and the risks you can’t control. And if there is a risk you can’t control then you have to make sure you are being adequately compensated for the risk you are taking. In other words – when your risk goes up so too should your reward.
Published on April 1st, 2010
(Picture is not of the townhomes we spoke of in this article.)
