A special assessment or levy, as some prefer to call it, is a financial contribution which is voted on by the condominium board and payable by the condo unit owner to the condominium corporation in one lump sum or spread out over certain time (example: by monthly or quarterly installments). In most of the cases, the special assessment is levied on the top of the condo fees by currently elected board which presides over all the decision making, including maintenance of the registered property. To be on the condo board, you need to be an owner and elected member by other owners during annual general meeting. Many condo boards choose to hire a professional management company to run day-to-day operations including the financial aspect of the corporation. However, the management company does not make any major decisions including levying special assessments, rather it’s function is to make recommendations based on experience, financial situation, and current condition of the property.
So what should a first time buyer of a property registered as a condo corporation know and watch out for? Here are some of the facts that I have had the pleasure to come across during my career as a real estate agent. As there are so many different cases as many myths that surround the special assessments, common situation are:
- Poor financial situation by the corporation – every condo board is required to obtain a new yearly budget as well as a reserve fund study, which is basically a detailed and physical inspection of the property and all its facilities, by an in depended engineering firm hired by the condo board and which is supposed to be conducted every 5 years. I say usually every 5 years because I have seen some corps stretch it longer than that. The reserve fund study report includes; a financial and time table spreadsheet which in detail describes required maintenance and its cost, as well as future replacement of some of the properties mechanical and structural parts. So for example, if the reserve fund study recently finished calls for minimum balance of $600,000 in the reserve fund and the corporation has only $300,000, the board members may call for special assessment. You may ask why the condo board has less than it should. In many cases, there are unexpected maintenance, management, legal, or other costs that may be higher than budgeted for. Sometimes, the condo board is reluctant to increase the condo fees for a few years which would create a deficit. Other times, poor management or inexperience can play the role. Example of reserve fund future projection:
- Structural or envelope building issues due to poor construction. Unfortunately, many of the agents I have had a pleasure to work with including myself have come across condo buildings that had structural or building envelope issues just a few years after being built. Once the warranty is out, the condo corp is on its own and responsible for all the repairs. I have heard about these types of special assessment ranging from $5,000 to as high as $45,000. These special levies are usually higher in amount and are definitely to be avoided if possible.
- Replacement of the major components of the property. For example, need of a new roof, plumbing, windows, elevators, balconies or parking surface refurbishing. These are some of the larger expenses that many the condo corporations will eventually face. In the majority of cases, older buildings or condo complexes have to deal with these type of the repairs already.
So the question arises, how can one avoid special assessments in the future? The truth is that eventually you will most likely have to pay a special assessment whether you like it or not and there is nothing wrong with it as long as the amount is reasonable. You have to pay for maintenance on your house or a car, right? It is the big levies that you should try to avoid. There is definitely no formula for that, however, one can minimize the risk by:
1. Doing the proper research before the purchase
2. Avoiding certain types of properties
3. And working with experience real estate agent and inspector
4. Joining the board once you become an owner
Bottom line: beware of "great deals" out there, if a condo is cheap compared to other properties of similar size and location nearby, there usually is a reason behind it. I always tell my client, you are not just buying the unit but partial interest in the building. If you have any questions, feel free to call or text me at 780-220-4224.
Blog Author: Derek Hulewicz, REALTOR® at RE/MAX Select Edmonton phone: 780-220-4224