Due Diligence is the process of taking the required steps for you to become properly informed about the situation surrounding the potential transaction. If you are a Real Estate expert, you probably don't need to ask as many questions then if you are not.
With all property there are basic forms of due diligence, such as title checks. In addition to standard title issues, buyers should also do the following
- Contact the police detachment in the area and ask if there is any knowing criminal history with the property, or open complaints.
- Contact the fire department and ask if there have been any fire calls to the property.
- Contact the local health board and ask if there are any open or past complaints from the address.
- Contact City Hall, and make sure there are no pending compliance orders (tree removal, etc)
- Contact City Hall and ensure you have the latest assessment, and the valuation model used for that assessment.
But what about Condo's. Certainly they are managed by boards, so you don't have run down or other issues right?
I find Condo's interesting for one main reason. They are multi million dollar corporations that are managed by people with little or no business training. So it is vital that you are not assumptive about a Condo's operating model. You need to ask the questions. We will break these questions up into three categories. The Corporation, Legal Issues,and Structural/Building Issues.
The Corporation is effectively the board. They are the ones responsible for managing the day to day maintenance and obligations of the condo. Every owner pays a monthly fee into a general fund that is used to manage general expenses. With that, there are rules and regulations that the occupants need to follow, in the form of by-laws.
1. Know and ask about the board. Current, and past.
Here you want to get the pulse of governance. Is this a dictatorship by one or two people who feel the board is their own pet project. Or is this a communal effort? Talk to a board member, and ask them about things like
a) how many vacancies are their on the board
This helps show the interest in the board, and may highlight control issues.
b) are their known significant political issues
This helps show if there are internal struggles, that may cause problems for significant capital expenses later on.
c) Ask for a copy of the last 2 or 3 years of board meetings.
These minutes will show all the issues tenants have brought up. It gives you an idea of the tenant profile, what issues are outstanding, and the way the board handled it.
2. Know the finances.
The finances are like windows to the soul of a corporation, and condos are no different.
a) Get last years budget and audit statement. Get this years budget.
You may not be a financial guru, but you should get a copy of the last years budget, and year end audit to see how close they are together. Also ask for this years budget. That shows what type of expenses are forthcoming.
b) Map out what the condo fees are for.
You should also map out exactly what the condo fees include. Heat, Water, shared facilities like pool/tennis court etc.
c) Know what the reserve fund is.
A Reserve fund is a pool of money that the condo corp will keep on hand in the event there is the need for immediate or emergency repairs. For example if it is a central shared heat, $12-$15k should be on hand to handle boiler central heat issues at any time. The reserve fund is important. If this is an older condo (20 years or more), then the risk of a major roof/structural issue increases significantly. If there is no reserve fund, then when such repairs are required, each tenant needs to cough up their share.
So if you buy a condo with no reserve fund, a few weeks after you move in, you may be slapped with a $15k shared reserved contribution for a new roof. This is why you need to know the health of the finances before you move in.
If there has been a call to contribute by the owners, this is called a pending or current cash call. Be careful as these are liabilities on the condo, that you may get bit with if you don't do your due diligence.
d) Know the management services.
Try to talk to the management company and get their feel for operations, the board, the property, and [pending issues. Third party contractors have an interested habit of being blunt when they are unhappy. You should also keep track of the expenses, knowing if the operating or management costs are due to increase, or if the contract is up for renegotiation.
This knowledge helps you anticipate costs, and shows stability in the organization.
e) If you are looking to rent out the Condo, know if there is a rental pool, and other rental issues such as vacancy rate, owner:renter ratio etc.
Fees, guidelines, regulations are all important so you know the issues for potentially renting.
Legal issues include current liabilities, anticipated liabilities, and compliance issues.
a) Is anyone suing the condo right now?
Has someone been injured on the property, is a management company suing to get their money they are owed, or is the condo suing a tenant for failure to pay, or breach of a by-law. Know where the corporation currently sits with law suits. That could have a significant financial impact down the road. You don't want the reserve fund for the roof to pay for a claim.
b) What type of insurance does the condo carry. Is it sufficient and how is it managed. Is there a claim process? Does it include water breaks?
The insurance is often skimped on by boards who are struggling to keep their books balanced. But without proper insurance your investment is at serious risk. the type level, and quality of insurance shows the attention the board keeps. In a condo situation, I have never seen 'too much" insurance. I all too often don't see enough.
c) Does the condo qualify for insured mortgages like Fannie/Freddie Mae, CMHC?
There are regulatory requirements for your home to qualify for a low down payment insured mortgage in Canada by CMHC, or in the US through the Mae organizations. You will need to make sure this condo fits the bill if you intend on using an insured mortgage provider. In addition it will effect your resale abilities.
d) Contact City hall, as pointed out above.
I need to repeat this as this is a regulatory issue. If this is multi phased, ask the zoning office if there are any issues or contentions with the zoning process for this project. In addition talk to the building inspectors office and ask what type of failures, remedies,or complaints have been lodged if any. It all paints a picture for you.
Let me reiterate. You must ALWAYS get an inspection on the home. Just because it is a condo does not mean you don't have to get it inspected. In fact the risk of collateral effects is higher, so an inspection is even more important. It will also reveal dodgy maintenance which shows the board may be corner cutting or incompetent. Two things you don't want in your investment.
ALWAYS GET AN INSPECTION.
a) What is the age of the building?
Straightforward but important. If this is multi phased what are the years of the different phase completions.
b) What are the significant maintenance or refirb projects that have been completed in the last 2 years.
These are things like anew sprinkler system, roof, resurfacing driveways, exterior windows etc
c) Are there any deferred projects, put off for lack of funds, or properly planned?
This is the one question that should really give you a sense of the overall maturity of the condo board. How well do they plan, strategize, and execute.
Things you should ask or look out for include the roof, exterior surfaces windows, siding), gardens, common facilities (heating, pool), communications, garage/parking lot.
d) use a standard check list for the actual unit, looking for all the usual suspects.
This is where your inspection is very important. Your inspector will highlight issues of contention for you with the unit, and can be used to tour common areas as well.
It might seem like a large task, but its not. Its just a few extra steps with the condo's to ensure that people who are able to make decisions about your investment, know what they are doing and have a track record for it. Condos are the last places to be assumptive it will be fine. Condo's can be very political and tense to live in when you are not happy with how things are being handled.
In addition your mortgage provider will also want most of this information, so doing the work upfront saves time, and shows a professional attitude on your part down the road.
So now that you have done your due diligence you can decide to make the offer. Always try to make it conditional on your inspection, on financing, on selling you home, and if possible on your retention of employment up to closing.
If you do have a specific real estate or condo legal question, and need to speak to a lawyer, click HERE. Lawyers are online, and can answer your question within minutes for as little as $15.
Copyright © 2009 Peter MacSweeney. All rights reserved. Reproduction in whole or in part without the express written consent of the author is forbidden. Contact the author through the comment form for all inquiries, including media.
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