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The-Mortgage-Gal

Buying a strata property? Read the fine print

Not all stratas are equal

I talked about buying strata properties in a previous column. After a few recent escapades with condo purchases, I think I’d like to talk about it again.

Strata properties can offer the convenience of shared maintenance costs, security, benefits like pools and workout rooms, and in some cases a more attractive price point. For people with busy schedules that don’t have the desire to spend time on yard work (or shoveling!) strata properties can be a great fit.

Strata properties are managed by strata councils. There are legal requirements with respect to meetings, finances and insurance, record keeping, maintenance and upkeep, as well as bylaws and rules. 

Not all strata properties are created equal.

People don’t realize the importance of taking the time to read through the strata documents when they are considering buying a strata property.

From a financing perspective there are several pieces that lenders look for.

Lenders and insurers (CMHC, Genworth, Canada Guaranty) will read through strata documents, particularly meeting minutes, financials, and depreciation reports. They are looking to see if the building(s) have been well maintained, and if there are adequate funds in the strata’s contingency reserve fund (CRF) to cover any upcoming projects or unexpected issues.

They will look to see if the strata has planned and budgeted for ongoing maintenance and updates to ensure the buildings stay in marketable condition.

Lenders look to see if there is a rental pool or if there are rental restrictions. They are looking to see if there are any age restrictions.

So how does this affect you as a potential buyer?

If buildings have not been properly maintained or have had significant structural issues, they are sometimes flagged by mortgage default insurers. This means that those insurers won’t cover new mortgages for people trying to build into the complexes until those issues have been rectified or remediated.

If the building has been flagged, it can mean that you are unable to find mortgage financing to purchase a unit in that building. 

This can also mean increased strata fees to cover big repairs. This may also lead to special assessments. Special assessments are used by stratas to raise significant funds relatively quickly to deal with major expenses.

Over the last year I’ve talked to clients that have had to deal with special assessments of $23,000 and $10,000 respectively. Neither of these clients were in the position to come up with the cash, so they are both on payment plans. In both situations this additional monthly payment has created financial distress.

Increased strata fees and special assessments can happen in any strata complex, but if you are looking at purchasing a unit in a complex that has ongoing issues or minimal funds in the contingency reserve fund you need to think about what that may look like down the road for your finances.

Having said that, just because a building has had issues in the past does not mean you should cross it off your list of potential purchases.

Do your homework. Check to see if the strata has dealt with any outstanding issues, and if they have documentation to confirm that.

We were recently able to obtain approval in a complex that the insurers had flagged. 

For over two years the building had been flagged due to maintenance issues. In this case any units that sold were sold to cash buyers as lenders wouldn’t touch the complex.

Major work was done and an engineer’s report was ordered to confirm the damage had been dealt with.

Both the lender and the insurer went through all of the documents and approved the financing because all issues had been dealt with and the strata has taken steps to rebuild their contingency fund and ensure necessary maintenance is planned for in the future.

The other issue that has been in the news recently is condo insurance. It seems like insurance premiums have gone up dramatically over the last year. My own home insurance policy just came up for renewal with an increase of almost thirty per cent. I’ve never made any claims.

For buildings that have had significant claims, the increased premiums have a significant on the strata’s financial position.

It will be interesting to see how lenders address this issue moving forward.

This felt a bit cautionary. The intent of this information is not to scare you off of purchasing a specific property, but rather to encourage you to do your homework and learn about the strata you are buying into.  Your realtor will be able to help you find answers to your questions, and it is important to have your lawyer or notary review the strata documents before you move forward with your purchase.

The spring market feels to be picking up. If you are looking to get into the housing market, a strata property might be the ideal fit!



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Mortgage closing challenges

Sometimes we run into bumps at closing time. Even when clients are organized and take care of everything they need to, last-minute issues may arise that make for a stressful few days.

One of the pieces that you need to take care of prior to your mortgage closing (finalizing) is buying home insurance. Sounds fairly simple, but this part of the process can cause headaches for you.

Earlier in the homebuying process, before you pull your subjects, you need to confirm that the home you are buying is insurable. Your insurance broker will ask you a series of questions about the property you are buying and provide a quote for insurance.

Fast forward to the week before your mortgage closes, when you go to actually purchase the insurance.

There are a few issues I’ve seen lately that you need to think about as you are buying a home and researching your insurance coverage.

I am hearing from more clients that the insurance companies are declining insurance (or limiting what it covers) for homes if the water tank is more than 10 years old.

Two summers ago clients of mine ran into a situation where they had to scramble at the last minute for insurance. They had done their homework upfront.  Three days before closing, a wildfire broke out near Peachland.

The company he had originally contacted wouldn’t provide insurance within 50 miles of an active fire.

After two frantic days of calls trying to find an insurance company that would offer a policy, the clients’ mortgage closed two days late.

Most recently, we ran into a situation where the clients purchased their insurance. The replacement value of the policy was about $75,000 less than the purchase price of the home.

This is quite standard, as the replacement cost does not include the value of the land.

Your lawyer has to confirm that you have adequate insurance in place. In this case, the lender told the lawyer that either the client had replacement coverage for the full value of the mortgage or they would not finalize the mortgage.

My poor clients were in a panic, afraid they would be homeless.

This was a fairly straightforward situation to fix – several calls back and forth with the lender and the insurance was signed off.  However, it was certainly a stressful few days for all involved.

Last, and certainly not least, is a noticeable increase in the cost of home insurance. If you bought a home with a longer closing, say two or three months down the road, you may want to have a little more of a buffer available for your home insurance.

I have heard from several clients that the cost of their insurance had increased when they went to finalize their policy. Mine is coming up for renewal and the increase is almost 30 per cent from last year.

It’s important to keep your mortgage professional looped in when you run into these challenges. Often we are able to help you navigate through, reduce (minimize?) your stress, and help keep things on track for closing on time.



Mortgage up for renewal?

An active spring mortgage market means that five years later there are many mortgages up for renewal.

The majority of clients initially sign a five-year mortgage term. That means that at the end of the five years, their mortgages come up for renewal. 

Statistics that I’ve seen from several different sources indicate that approximately two out of three Canadians break their mortgages early.

What I mean by break is that if at some point during the five years they move, sell their home, or refinance their original mortgage they have broken their mortgage.

If you have not made any changes to your mortgage, at the end of the five-year term your mortgage comes up for renewal.

Lenders handle renewals differently. Some start aggressively offering renewal options to their clients at least six months ahead of time. Others send renewal offers at the three-month mark. Some follow up repeatedly with phone calls; others wait for the client to reach out to them.

A significant number of lenders offer a 120-day rate guarantee for clients who are approaching their renewal date.

If your mortgage is coming up for renewal, it is important that you do your homework to make sure you are being offered a competitive rate.

A client who had just received a renewal offer in the mail from her financial institution called me last week to talk about the rate the bank was offering her. She felt it was much higher than what she was seeing advertised online.

I reviewed my rates. The same lender was offering new clients in the door a rate that was almost one per cent lower. 

My suggestion to her was to call the lender and see if they were able to offer a lower rate. Less than five minutes on the phone with the lender’s customer relations team and they had reduced the rate to match what was currently available for new clients.

In some cases, lenders are not offering competitive rates. If so, you are able to switch your mortgage to a new lender at the maturity date.

Many lenders review their clients’ financial situations before offering renewal rates. If there have been significant changes, they may offer a higher rate to account for (perceived) higher risk. As an example, if the client’s credit score has dropped considerably or if there is a great deal of new debt they may not be offered the lowest rates available.

In some cases, clients who do have multiple loans and credit cards outstanding may find that renewal is a good time to refinance and consolidate their consumer debt. A consolidation may help reduce their monthly expenses and will over time help bring their credit score back up.

If your mortgage is coming up for renewal and you are considering refinancing to help your monthly cash flow, there are a few things you need to consider. We talk about some of these considerations in a previous post. Link: https://www.okanaganmortgages.com/what-you-should-think-about-when-financing-your-home-2/ 

Whether your mortgage is coming up for renewal, you are initially purchasing your home, or you are restructuring down the road, it is important to spend some time looking into your options. 

We are happy to discuss current rates with you if your mortgage is coming up for renewal. In most cases, it makes sense to stay with your lender as they will most often match rates available with other lenders. In others, it makes sense to look at switching to a new lender if the rate you are being offered is not competitive.

Take a few minutes and do your homework. An informed decision can save you thousands of dollars in the long run! 





Avoid a collapsing deal

Over the last few months, several of our clients have walked away from the homes they were purchasing because of items that were uncovered by thorough home inspectors.

This can be frustrating for both the buyers and the sellers. 

By the time the home inspection is done, the buyers usually have their mortgage financing approved, which means they’ve been through a stressful time negotiating an offer then waiting to make sure they have everything they need lined up.

The sellers may have already written an offer on another home, which may have started a chain reaction of other purchases. 

Once the inspection has been completed and reviewed with the potential purchasers, if any significant issues are identified, the purchasers have to decide how to handle them.

Most purchase contracts now include a clause relating to the results of the home inspection. There is a price cap written in so that any minor issues are assumed to be dealt with by the purchasers. For example, any repairs under $2,000 would be assumed to be part of normal wear and tear or upkeep. 

Any repairs that need to be done that will cost more than the specified amount are generally discussed by the buyers and sellers through their respective realtors. Depending on market conditions at the time, these discussions can go several different ways.

  • Sometimes this results in a reduced purchase price.
  • Sometimes the sellers have priced the home accordingly and are firm with their price. 
  • Sometimes the cost of potential repairs or the scope of the damage means that the purchasers decide to collapse their offer.

This is one of the reasons that I always encourage clients to work with realtors. Having a representative negotiate through this process takes the emotion out of it and can sometimes help people come to an acceptable compromise.

Depending on the repairs that need to be done. A Purchase Plus Improvements mortgage might be a great option for purchasers.

As an example, maybe you find the home of your dreams, but the home inspection shows that you need to replace the roof within a year. You do your homework and find that a new roof is going to cost $8,000.

As the buyer, regardless of whether the price is adjusted, you decide you are going to move forward with the purchase. Many lenders will allow you to add the cost of the new roof into your mortgage.

Here is the short version of how this works:

Quotes for the roof replacement are submitted to the lender. On closing day, funds are transferred to the seller to complete the sale. The funds for the roof are held in trust by your lawyer or notary.

Once work has been completed on the new roof, those funds are then provided to you. Each lender handles this slightly differently. Some will release the money based on a paid invoice; others will require an inspection by an appraiser.

Generally, you need to be able to cover the cost of the repairs upfront. This can be done by using other savings, a credit card or line of credit temporarily, or finding a contractor willing to wait a few days for payment.

As the seller, there are a few ways that you can avoid this.

For example, if you are preparing to list your home, hiring a home inspector will reveal any potential issues ahead of time. This way you can take steps to deal with any issues before listing. 

By spending a few hundred dollars up front, you could potentially save yourself pain, aggravation, and money once you have an accepted offer on your home.

On the other hand, you might learn your house is very solid with no issues, which gives you confidence negotiating a higher selling price.

Another way to potentially avoid a collapsed sale is to take care of regular home maintenance over the years you have your home. 

Heading into the new year most of us make resolutions. Why not make yours around adopting a regular schedule for inspecting and maintaining your home?

I found a few great lists online and am implementing them myself. I’ve taken one of the lists and broken it into tasks I am going to tackle one at a time. I’m old-school, so I have written them into my planner and spread them out over the year.

If you are currently house hunting and want to keep your options open, a Purchase Plus Improvements mortgage can also be used for renovations and updates. For more detailed information, here is a link to a previous article I wrote about this type of mortgage: Creating Your Dream Home.



More The Mortgage Gal articles

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About the Author

Tracy Head and Laurie Baird help busy families find mortgage solutions. Together they have more than 45 years of experience in the mortgage industry.

With today’s increasingly complicated mortgage rules, Tracy and Laurie spend time getting to know the people they work with and help them to better understand the mortgage process. They support their clients before, during, and after their mortgage is in place.

Tracy and Laurie work closely with their clients, offering advice and options. With access to more than 40 different lenders, Tracy and Laurie are able to assist with residential, commercial, and reverse mortgages in order to match the needs of their clients with the right mortgage package.

They work closely with their clients to find the right fit, and are around to provide support for years down the road!

Contact them at 250-862-1806 or visit http://www.okanaganmortgages.com

Visit their blog at https://www.okanaganmortgages.com/blog

 



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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