Deciding to buy your own home is an exciting milestone for many, and choosing a condo over a detached home definitely has its perks. The indoor amenities and services, not to mention the outdoor maintenance tasks you’ll never have to do are all wonderful features, perfect for busy singles, couples and seniors.
Although you’re spared a constant outlay of cash towards the upkeep and repair of a detached dwelling, first-time condo buyers sometimes overlook occupancy fees, development charges and closing costs. Without foresight of these expenses, the unwary purchaser could find themselves in a sinking financial boat.
So, besides your hard-earned down payment on the condo of your dreams, ensure you have knowledge of all the costs a condo will entail before deciding you’re ready to sign on the dotted line. Then, go back to the drawing board and ask yourself if you’re truly prepared for the financial impact of all condo fees on your budget.
What are occupancy fees?
They include three fees, identified as:
- maintenance fees
- property taxes
- interest on balance owed (typically 80 per cent, but can vary depending on your deposit structure)
The amount of occupancy fees is roughly equal to the interest on the amount outstanding on the purchase price. For example, a $500,000 condo with 25 per cent down means you must pay monthly occupancy fees roughly equal to interest payments on $375,000.
Put another way, typical condo fees can range anywhere from 60 to 70 cents per square foot, or $485 to $566 per month. The charge goes towards cost of repairs and upkeep of common spaces, amenities and hydro. As the building ages and repairs are required, expect fees to rise.
Condos under construction = development charges
Are you investing in a condo not yet built? Prepare yourself not only for a substantial outlay of closing costs (estimate an additional two to seven per cent of the condo’s purchase price), but also hefty development charges that include:
- general levies
- education levies,
- Section 37 levies
- Green Standard levies
Each City issues development charges to a builder when the developer receives their building permit. The developer pays these charges that fund infrastructure, such as roads, libraries, schools, hospitals, parks, transportation amenities, and more. These amenities aren’t free, any more than the pool, fitness room or services that go into establishing your occupancy fee. The difference, however, is that the development charge is a one-time deal.
The problem with development charges is that they are invoiced by the city upon closing, and if you’re in the situation where you’ve signed your contract on a pre-construction condo that won’t be built for two or more years down the road, who can say what those development charges will be?
Fortunately, one money-saving strategy is open to you: Negotiate for capped fees before you sign a purchase of sale agreement. This action will save you tens of thousands of dollars. If a developer is not willing to negotiate, you are advised not to buy.
Additionally, purchasers of units in larger projects might find themselves in an interim occupancy situation (aka phantom rent) for a full year or two—which means paying rent to stay in your unit until developers are ready to register the build. This occupancy fee is estimated between $10,000 and $12,000 before ownership title is obtained and mortgage payments can begin.
While projects are being constructed to minimize capital costs to stay competitive on selling prices, the projected outlook is that building systems will likely require maintenance, repair and replacement earlier than in the past. The heads-up is that condo fees, AFTER the first year of operation, are likely to escalate quickly.
Older condos = higher maintenance fees
You might be dodging the one-time development charge by opting to buy an older condo, but they often have higher fees. The building’s age plays a major financial role in determining the fees residents will pay.
The general rule is this: The older the building, the higher the maintenance fee. One reason is that utilities are normally included in older builds, as opposed to newer condos, in which you’ll pay utilities over and above your occupancy fees. New structures will have 20 to 25 years before an underground parking garage, for instance, needs to be replaced, compared to older buildings in which replacements or repairs may need to be done now, thus raising your fee.
Calculating property tax
One expert notes that calculating the correct amount owing for property tax can be problematical, leading to errors of over-payment or under-payment. This margin of error in calculating the property tax portion of the occupancy fee could cost unsuspecting condo purchasers thousands of extra dollars. Developers are urged, therefore, to calculate the tax in the same way their particular City does, and purchasers are advised to ensure their lawyers are alerted to this problem, when they scrutinize tax calculations used by developers for occupancy fees.
Should buyers be discouraged from buying into the condo market? The consensus is no. Historically, occupancy fees are “normal” and unavoidable. With foresight, however, potential buyers are wise to take the opportunity to learn how deeply they might have to reach into their financial pockets, so they can make informed decisions about whether to buy into the condo market now, or wait until they’re better prepared.