Say No to Condos Less than 8 Units

FourplexDiligence

Podcast Episode 61:
New Homes And Subdivision.”

Purchasing a new property before it is built is far more complex than buying an existing one. There are even more possible issues when subdividing and condominiumization are involved. Subdivision takes a long time and has many complicating factors. I don’t generally recommend small condos (i.e., less than 8 units.)

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Say No to Condos Less than 8 Units:
New Homes And Subdivision

Our investor had an existing home with lots of equity. Her plan was to leverage that equity and purchase a side-by-side duplex. She would live in one half and rent out the other half with, hopefully, a legal suite in the basement.

Her realtor found a builder who specialised in duplexes, apparently had a good reputation and who seemed to be helpful. The builder already owned a lot on which a duplex would be built, but needed to subdivide that lot into two separate titles. That subdivision was apparently in process.

The contracts showed up in my office and were drafted to attempt to deal with the basement suite and holdbacks for finishing the suite after closing and deficiencies both seasonal and normal course. As always, the clauses that purported to give our investor comfort and security regarding the suite and deficiencies were unclear and inadequate. Those definitely had to be cleaned up.

Timing for completion and move in had to be firmed up because our investor had to sell her existing property. She wanted to move into the duplex before selling her existing home so she needed bridge financing. Why? Because all of her cash for the new duplexes was coming from her equity in her existing property.

As lawyer for our investor, I was also very concerned about the nature of the subdivision of the existing lot. Was the subdivision application to create a two-unit condominium corporation, which we completely disagree with, or two traditional lot, block and plan titles? And so the negotiations and discussions commenced.

Why don’t we like small condominiums? Following is my advice to another client in similar circumstances:

“As much as you might have been advised and are okay that this is a condo with one sewer line, there is so much more on which any buyer of a small condo should properly be advised. For instance, as discussed before, there is no such thing as an inactive condo corporation. In this situation what we really have is a condo corporation that is not paying attention to the Condominium Property Act and regulations.

There are no:

  • appropriate bylaws,
  • guarantees of insurability (Park Insurance won’t),
  • agreements about management,
  • agreements about common property including the party wall,
  • discussions about reserve funds and reserve fund studies, which have to be done if the property is going to be sold,

And that’s just a small portion of what needs to be looked at and advised upon on the condominium advice side.”

As the negotiations commenced, they were impacted by constant, inaccurate information from the builder’s realtor to our investor’s realtor, worsening her own inexperience as a brand-new, apprentice investor.

We could not get any comfort, no matter how much we tried, that the builder was creating two separate lot, block and plan titles as opposed to a two-unit condominium. Timing for closing kept getting postponed.

Late in the process our investor discovered that the lender would interim finance for the half duplex she was moving into but not for the rental half. It took a long time for the builder to confirm that he had applied for and had been issued permits to install a legal basement suite.

The expected subdivision was way behind predicted timing. The seller and seller’s realtor kept insisting that the subdivision was completed and would tell our investors realtor. The seller’s lawyer and our searches at land titles revealed the subdivision was not completed. Hugely frustrating for our investor who, like most normal people, believed what she was told. She would say to me, “Barry, they say the subdivision is completed, why would they say that if it isn’t done?” I agree, why would they? But the short answer to that question is, “if the subdivision is completed then just give us a copy of the new title!” They could never do that.

Finally, our investor had to book movers, take time off work, and move the process forward. Even with plenty of notice, on moving day, subdivision was not completed and there were yet more anxious, expensive negotiations about how to get our investor a key without actually closing. Very difficult to advise our investor to move in when we did not know about subdivision, final inspections, occupancy permits, or deficiencies.

Lessons Learned:

  1. Overall, a new home purchase is twice as difficult as an existing home purchase. Building permits, deficiencies, warranties, timing, and occupancy permits are all over and above the issues found when buying an already built property. Even harder when there are owner-occupier and investor issues all mixed in.
  2. If a transaction needs subdivision, this is a senior strategy (at the very least Master Investor) with its whole set of other questions. One of the biggest issues is that the subdivision process is lengthy. Even when all the surveying work has been done, all the permits have been obtained, and the subdivision application has been submitted to the Land Titles Office (3-4 months to achieve), Land Titles is currently quoting 12 business days to register the subdivision. That would be approximately 17-18 days including weekends, which is a huge timing issue. Neither Title Insurance nor Western Torrens Protocol, the usual methods of closing quickly, apply in subdivision situations. Therefore, in order to actually pay the builder, registration of the new lots must occur and that takes 17-18 days.
  3. Be extremely careful when someone suggests you buy a unit or units in a small condominium (less than eight units). Re-read section above.

 

 

Contact Barry McGuire now. Alberta real estate needs an Alberta lawyer.