Mortgage Blog

Review those Condo Docs!

June 16, 2016 | Posted by: Kelleway Mortgage Architects

In hot real estate markets when realtors anticipate multiple offers on listings, buyers are often advised to move quickly and make a 'no-subject' offer to achieve the winning bid.

Nevertheless, keep in mind that 'you' the buyer are responsible for making the decision to remove subjects and it is 'you' who are at risk of losing your deposit if the real estate transaction does not complete.

Some of the most important 'subject to' conditions relating to the property are:

1) Subject to Financing

2) Subject to Home Inspection

And, in the case of strata-title or condominium properties:

3) Subject to Review of Strata Documents

In the past six months, we’ve come across at least three mortgage applications where lenders accepted the buyers’ income and credit history but did not accept the condition or price of the property the buyers wanted to purchase.

To counter the above concerns, here are some suggestions to keep as few conditions as possible in your offer and also protect your best interests as a buyer.

Financing. Just because you have a pre-approval, does not mean the lender approves of the property you want to secure your mortgage financing. Therefore, to avoid losing your deposit, include in your contract a clause “subject to appraisal that is acceptable to the lender and default insurance company (e.g., CMHC, Genworth or Canada Guaranty)”, especially if you are seeking high-ratio financing with only a 5% to 10% down payment.

Home Inspection. The property may look great but what is a professional’s opinion? If possible, try to get a home inspection done before making an offer or have an inspection pre-booked for the day following the submission of your offer.

Review of Strata Documents. Usually, lenders like to review the last two years of strata or condominium corporation documents, including meeting minutes from the strata council, AGMs and Special General Meetings as well as other significant property reports.

Realtors often collect strata documents from the strata corporation where the property is listed and hand copies of these documents to their buyers. Even though realtors are licensed to review documents, for liability reasons they often leave that work to the buyers to do on their own and then ask the buyers to let them know if they have any concerns. And, if their buyers have concerns, the realtors advise them to seek independent legal counsel.

The clients may perceive the review of strata documents as an onerous task and just skim over numerous pages. It’s not uncommon for these documents to total 100, or 200, or more pages! Or, the clients may not know what to look for with regard to the property’s condition. Or, even if they find some concerns, they are not aware how those concerns will affect them and the value of their purchase.

As an outcome, the clients may sign off on their review of strata documents prematurely and then discover issues after they submit a “no-subjects offer” or waive their “review” subject clause.

There have now been a few cases that I, as the buyers’ mortgage broker, have had to be the bearer of bad news. All these buyers were “pre-approved” based on their income, credit history and down payment resources. Here are a few examples of why several lenders later rejected the clients’ mortgage applications based on the strata property itself.

Red Flag # 1 – The last two years of strata or condo documents did not mention any major repairs pending for the building. However, the default mortgage insurance company had it in their records that three years ago some major issues were discovered with regard to the roof and deck membranes. Subsequently, no further professional reports were sought and no repairs were authorised by the strata council or strata corporation. Therefore, since the default insurance company perceived a problem with the building that (to their knowledge) the strata corporation was not addressing, they would not offer mortgage default insurance to the lender for any high-ratio mortgage financing.

Red Flag #2 – Since December 14, 2011, the BC government requires that strata corporations obtain a depreciation report every 3 or 4 years. In short, that report must contain:

1) a physical inventory of the common property and assets,
2) a projected 30-year maintenance plan including repair and replacement costs for common areas
3) a financial forecasting section with at least three cash flow funding models

These reports help infer the strength of the contingency reserve fund. In my view, these funds come in three varieties with regard to how much strata owners can expect to pay in special assessments over the next few years..

My grading system of contingency reserve funds is:

'A' Full Reserve (i.e., the reserve amount is high enough to cover all projected repairs and replacements, no extra levies are expected from owners)

'B' Moderate Reserve (i.e. , CRF has sufficient funds to cover most of the small to medium repair and replacement scheduled for the building(s), largest repairs may require a levy on owners)

'C' Partial Reserve (i.e, CRF has moderate funds to cover small and some moderate repairs and replacement scheduled maintenance, medium and large repairs will require a levy on owners)

'D' Small Reserve (i.e, CRF is small or nonexistent and thus owners should expect to pay fees or levies for anything other than the smallest repairs)

Here’s an example of how the contingency fund can affect buyer financing. My clients were financially able to pay a $50,000 special assessment within the next few years. But, the lender did not have adequate confidence that the rest of the 90+ unit owners in the complex would be able to do so as well. Therefore, with an inadequate contingency reserve fund, the lender did not approve funding for my clients’ mortgage.

Red Flag #3 – In the rush of making a purchase, sometimes buyers are overly optimistic about the extent of repairs or replacements needed for the property. For example, when reviewing two-years of strata documents, my office noticed a reference to a preceding Engineering Report that had recommended repairs to the exterior of the building. We discovered that the default insurance companies had copies of the Engineering Report that was more than two years old. That report identified water penetration issues that, according to the insurance companies’ records, had never been fully fixed. As a result, funding was stalled.

In another instance, the strata council chose not to seek a professional engineering opinion before hiring trades to do the work. While the realtors and the strata corporation de-emphasized the extent of the exterior work needed to fix the problem, the lender and default insurance company were unwilling to approve funding due to lack of a professional report.

Red Flag #4– Something else to watch for in the strata or condo minutes is evidence of how smoothly the strata corporation operates. If run smoothly and effectively, there should be references to the strata council identifying problems, fixing problems, verifying the fixes and then moving on to other issues in a timely manner. If there is discontent, the strata minutes may reflect frequent deferment of discussions and postponement of action to address problems.

The result of such political stagnation and inaction may be that strata or condo owners will face even greater problems and more expensive fixes in the future.

If you have any questions about the above information, please do not hesitate to call me (Glen Kelleway) for help or explanation.


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Glen Kelleway, BSc, AMP, Senior Mortgage Planner & Owner

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