Contingency fund | Transparency should shake up condo prices

When she bought her condo, engineer Jeanne Desbiens managed to reduce the price by $100,000 after learning that the building had no contingency fund despite the obvious need for major work. Currently, buyers do not always have access to this type of information, which is crucial to making an adequate offer. But things will change with the entry into force of important provisions of Bill 16, which will shake up the condo market in Quebec.

The smiles of co-owners who have been lucky for years to pay very little money into their building’s contingency fund may disappear in the coming months. The value of their investment could melt away and the extraordinary hefty contributions will undoubtedly be numerous.

Bill 16 will force all condo buildings to have an expert report establishing the sums necessary in the contingency fund to cover the costs of all necessary work over a 25-year period. Common charges, the famous “condo fees”, will have to be adjusted accordingly.

Another new feature is that all this information must be transmitted to those who wish to submit a purchase offer. Today, the sharing of figures – when they exist – is voluntary. We can therefore assume that they remain secret when they disadvantage sellers.

The size of the contingency fund should, however, be at the heart of any transaction since it directly influences the value of the condo. “It must be part of the equation, of the negotiation,” argues Jeanne Desbiens, lecturer at ETS and founder of Toolbox, a company that creates reports for co-ownership associations including a maintenance log and financial scenarios.

Nearly 40% of some 40,000 co-ownership buildings do not have sufficient contingency funds for major repairs, according to the Regroupement des gestions et copropriétaires du Québec (RGCQ).

The co-ownership charges are used almost entirely to cover operating costs, also notes Jeanne Desbiens. Thus, the majority of its clients do not have a contingency fund, “otherwise it is insufficient, or even insignificant”.

Unfortunately, there is no rule to roughly determine the ideal proportion of co-ownership charges that should be directed to the contingency fund, because there are too many variables such as the general condition of the premises, the year of construction , the diversity of services (swimming pool, terrace, elevator, landscaping, snow removal) and the number of accommodations. The only thing we know with certainty is that the widespread idea that 5 to 10% is enough is simply false, says Jeanne Desbiens.

The end of inequities

Over time, this neglect to sufficiently capitalize the fund causes great inequity, particularly when co-owners who have long benefited from the common spaces sell without having paid their fair share of the wear and tear.

But the recess ends with the entry into force of Law 16 scheduled for this year.

Buildings that do not have a management plan “will be downgraded in the market,” predicts Yves Joli-Cœur, lawyer specializing in real estate law, president of the RGCQ and founder of the condolegal site. com. In other words, their value will decrease due to the uncertainty they represent for future buyers. Who wants to move into their home and then find themselves with a surprise bill of $25,000 for roof repairs and a 100% increase in co-ownership charges?

Let’s take the example of a building where 10 owners must share a bill for 2 million even though there is only 1 million in the account. Everyone must therefore contribute $100,000. A potential buyer could ask for a price reduction of $150,000, the expert believes. “He could take a risk premium, because he does not know if the other co-owners are solvent. »

This is the type of situation that could multiply. “We are talking about a park [de condos] in distress in Quebec,” laments M^e Pretty Heart. In his opinion, “we don’t understand the iceberg in front of us”. Logically, capitalization deficits, once calculated and openly revealed, will be taken into account by real estate brokers and buyers, which will not be without consequences on prices.

The average age of condos in Quebec, around 30 years according to the RGCQ, is a key element of the problem. “It’s a lot in the sense that 20 years is the lifespan of a roof, certain types of windows and certain coverings. These are all very expensive jobs,” Jeanne Desbiens, who has already worked for a construction contractor as an estimator, points out to me.

Thanks to her cumulative experience, the 36-year-old engineer knows that assessing the maintenance costs of a building over 25 years is not a simple exercise. You have to know about construction, engineering, finance.

Even though she is an engineer, Jeanne Desbiens criticizes the reports of her colleagues and competitors which are sometimes difficult to read and whose “scenarios are unrealistic” since the “estimates are insufficient”, which places the co-owners in an uncomfortable position. She suggests that unions carefully choose the company that will carry out their asset management plan after obtaining three bids.

This is an additional responsibility on the shoulders of union administrators who may have a lot of work to do this year. But when we look at what is happening in France, where buildings that have been neglected for too long are being demolished, we quickly understand that the financial efforts for maintenance are not in vain.

Advice from Jeanne Desbiens, engineer and founder of Toolbox

1. Co-ownership associations should not wait for Law 16 to come into force to obtain their asset management plan which includes the study of the contingency fund. Costs are then likely to increase since demand will be strong.
2. Once you have obtained the plan, vote as quickly as possible for a financial plan to replenish the contingency fund. Ideally before the moving festival on the 1st^is July. Otherwise, co-owners who sell will leave without paying anything, even though they have taken advantage of the common areas. It’s not fair.
3. Do not leave the contingency fund in a checking account with 0% interest. “I have clients whose retirement fund is not in a high-interest account. This is my first advice. The money has to make money. Every dollar earned in interest does not come out of the owners’ pockets. »
4. The unions already have an interest in being transparent regarding the deficit of the provident fund, even if this is not yet obligatory. They thus reduce the risks of ending up with a new co-owner who does not have the means to pay an extraordinary contribution to redo the brick. With today’s high prices and interest rates, many are buying to the maximum of their financial capacity. Hiding places benefits no one except real estate brokers.
5. If you plan to buy a condo, ask to see the list of imminent work and the amount contained in the contingency fund. Use this information to make your offer. If the information is not provided up front, look elsewhere or get your own deficit assessment, a service such as Toolbox offers. Consider having common areas inspected, not just private areas.

The Quebec condo market

• 382,755: number of condos distributed in more than 40,000 buildings
• 80% of co-ownerships are located in the Montreal region
• Nearly 70% of co-owners live in their home, the others rent it
• A little over 30 years: average age of condominiums
• Between $2500 and $4500 per year: average co-ownership charges
• Nearly 40% of co-ownerships do not have sufficient contingency funds for major repairs

Sources: Association of managers and co-owners of Quebec (RGCQ) and Yves Joli-Cœur

Read about the provident fund

Read about Bill 16

Read about Bill 31