Buying a condo? Check out the reserve fund

March 19, 2019 | By | Add a Comment
Reserve fund in the condo status certificate | Ingrid Bjel McGaughey | Toronto mortgage broker |

Thinking of buying a condo in Toronto? Here are the key points to know so you can understand the reserve fund.

First, what is a reserve fund?

A portion of every condo owner’s monthly maintenance fee goes into a reserve fund. That money is then set aside by the condo corporation to pay for things like a new roof, or repairs to common areas like the elevator. Expenses come up that are both planned and unplanned, and the condo corp must ensure enough money is in the reserve fund to cover all of them, while maintaining an adequate buffer for other short term or long term needs.

So, when you’re putting in an offer to purchase the condo…

One of the main conditions you should include is to see the “status certificate” for the condo. That document will include details about the reserve fund, so you and your lawyer can evaluate whether the condo is run properly. Your objective is to minimize risk so that you’re not caught having to pay for a big repair down the road, just because there wasn’t enough money set aside in the condo’s reserve fund.

What to look for in the reserve fund:

1. Amount of money in the reserve fund

Older condos should have a larger reserve fund than newer ones, because residents have been paying into the fund for more years. That makes sense, because older condos will likely need more repairs, and therefore need more funds. Check to ensure the directors have made a statement indicating they are satisfied with the amount of money in the reserve.

2. Inflation

Ensure the fund is increasing by a few percent every year, say 2-3%, as prices increase for any needed outlays.

3. Cash flow

The condo status certificate should include an engineering report on expected expenses and maintenance requirements, both for the short term and the long term. Check to see what the cash flow needs to be to pay for all these items.

4. Shortfalls

If there is a big difference between the recommended amount of the reserve fund, and what actually is in there, this is a red flag. As an owner of one of the units in the property, you will be on the hook for a your share of any shortfalls down the road. Is this a deal breaker? Maybe, maybe not. Ask your lawyer to calculate how much your share would be. If it’s reasonable, you may still be willing to pay that amount in exchange for a really great unit.

5. Special assessments

Another red flag to look for is any “special assessments”. These are unanticipated expenses that are looming or already underway. You will have to cover your share of these, and the amount may not be reflected in the current monthly condo fees.

Condo fees seem crazily low or high?

If the condo’s maintenance fees seem surprisingly low, this might mean the reserve fund isn’t being funded adequately. If it seems too good to be true, it probably is! And on the flip side, if the condo fees are weirdly high, this also points to a problem with the reserve fund. It’s likely that it wasn’t managed well in the past, and now they’re trying to catch up. Even mortgage lenders look at this, and they might not want to give you a mortgage for a property that has an unusually high condo fee.

Want to chat more about buying a condo?

If you want to learn more, check out the great resources offered by CMHC here. Or better yet, please get in touch. I’m happy to chat with you about your buying plans!

Photo credit [c] ridofranz for istockphoto dot com

Filed in: First Time Homebuyer, Mortgage Planning, Purchase | Tags: , ,

About the Author (Author Profile)

I'm a Toronto Mortgage Broker. My focus is on saving people time and money in financing and re-financing their homes. Am passionate about helping people make informed choices, giving back, and helping to improve financial literacy in Canada.

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