We stumbled upon a great blog post by David Fleming from TorontoRealtyBlog.com that highlights the necessity for buyers to be aware of potential negative effects that arise from maintenance fees being priced too low
What’s Wrong With LOW Maintenance Fees?
Content by David Fleming via TorontoRealtyBlog.com
It might sound silly, but while maintenance fees that are too high should set off alarm bells, so too should fees that seem to low.
What good are low fees if they’re unrealistic, and will only serve to massively increase over time?
Today’s developers lead condo-buyers astray with their ridiculously low fee projections, and thus the onus is on the buyer to get a reality check…
What are the average condo fees in downtown Toronto?
That’s a question I get asked all the time, and it’s not easy to answer.
As you’re likely aware, the way we, in the industry, express, calculate, and compare maintenance fees is the cost per square foot, but even this comes with some other adjustments.
Some condos include, water, heat, and hydro in the monthly maintenance fees, and some do not.
If you’re looking at a new building, it’s about 99% likely that the monthly fees only include water.
If you’re looking at a building that’s, say, 3-8 years old, chances are, the fees include water and heat.
And for many older buildings (who’d have thought that we would ever consider 10 years to be “old”?), include water, heat, and hydro, and thus the condo doesn’t have any additional fees, other than property taxes.
Now, back to the question at hand: what are the average condo fees in downtown Toronto?
The simple answer is: about $0.68/sqft.
That comes with a lot of qualifiers, however.
That’s the average, not including utilities, and it’s a number that is made up, by me, based on experience and my “gut,” for what it’s worth.
I’ve written about this in the past, but here’s how I see maintenance fees:
$0.50 – $0.60/sqft – Very cheap, and well below average.
$0.60 – $0.70/sqft – In the “average” range.
$0.70 – $0.80/sqft – Starting to get expensive.
$0.80/sqft and up – Expensive, and going to affect resale value.
You’ll notice that I didn’t include fees under $0.50/sqft, and that’s what I want to talk about today.
About five or six years ago, I had a conversation with the president of a property management company about maintenance fees, and he said something that’s always stuck with me: “It’s impossible to run a building under fifty cents a a square foot. Absolutely, positively, impossible.”
Keep in mind, we’re not talking about niche, boutique, or specialty buildings here. We’re talking about your typical, average downtown Toronto condo.
So what then, do we make of developers who advertise in their pre-construction pricing sheets that maintenance fees will be $0.39/sqft?
Well, they’re lying. Plain and simple.
Or to be fair, they’re not lying – because that’s what fees will be for pre-construction occupancy fee calculations, and for the first year of operations of the building. But if you asked the developer, or the salesperson standing next to the “80% SOLD” sign in the sales office, “Will fees really be $0.39/sqft when I’m living there?” I’m sure they’re not going to spit out, “Oh, no, they’re likely going to increase about 50% in the first two years because we’ve set them artificially low to try and get morons like you to buy.”
Nah. I don’t think you’ll get that kind of honesty…
As with everything else in the pre-construction game, the low-low fees are nothing but another gimmick to help idiots make terrible investments.
I’m not in the mood for naming names, but a package came across my desk the other day for a King West condo (why do developers send me this crap when they likely know I’m the biggest anti-pre-construction advocate in the city???) where the fees were estimated at $0.38/sqft.
Note the word “estimate.”
We’re at the point now where developers can lie about the reality of maintenance fees, by setting them ridiculously low, only to have them increase rapidly in the first couple years, but also where developers can full-out lie about fees by putting the word “estimate” on their marketing material, and in their contracts!
When you see “Estimated maintenance fees: $0.38/sqft,” there’s nothing to stop the developer from simply changing that to $0.55/sqft before interim occupancy. Just as there’s nothing to stop the developer from changing just about anything else with the building, which is the point I’ve been trying to make for the past six years…
A blog reader of mine sent me an article last week from the Globe & Mail, which you can read HERE if you like. It was a strange piece that I didn’t quite understand; it seemed to try to glorify a buyer for saying “NO” to taking on mortgage debt, only to point out that house prices have risen, and will continue to rise, along with mortgage rates, meaning that his saying “NO” has, and will only serve, to cost him the chance at a house. Anyways…
The section of the article that my blog reader drew my attention to was this:
According to Frank, his condo fees have risen 5 per cent, 7 per cent, 13.5 per cent, 9.5 per cent and 6 per cent a year over the past five years, respectively. “Since I’ve been in my condo, the yearly increases in fees are way beyond inflation.”
Exactly what I’m talking about.
There’s an excellent chance that this condo was either brand new, right out of pre-construction, or 25+ years old, and in need of major work.
So let’s play around with those numbers above, for a moment, and pretend that this was some pre-construction condo where a developer set fees at a silly $0.42/sqft. Assume the condo is 700 square feet, and fees are $294.00.
First of all – if this ain’t your first rodeo, and you’ve read my blog before, or have the most basic understanding of real estate, you’ll look at that $294 figure and say, “That’s utterly insane.” For the record, you’re right.
So if the fees increased according to the schedule above, they’d be $308.70 in year 2, $330.31 in year 3, $374.90 in year 4, $410.52 in year 5, and $435.15 in year 6.
And once fees arrive at that final figure, they’re $0.62/sqft, which is actually still quite reasonable!
But the point is that after five years, the fees would have gone from $294 to $435.15, which is an increase of 48%.
And the only reason fees can increase 48% over five years is……wait for it…….if the developer set the fees artificially low to further his/her agenda of selling units!
Okay, okay – there could be other reasons as well.
The condo could be in need of major repairs, there could be pricey litigation, or maybe some glass fell from a balcony, hit an old man, and he actually decided to sue….unlike the guy outside Shangri-La last week, but that too is a topic for another day!
The peson quoted in the article said, “The yearly increases in fees are way beyond inflation,” and that’s true. But shouldfees only increase in line with inflation? Good question.
Some people would argue that a condominium should keep fees at a level that is sufficient to, a) pay for expenditures, b) add the necessary amount to the reserve fund, c) provide a buffer between a & b in case of shortfalls.
But then we’d be forgetting that expenditures don’t always track inflation!
Does the price of natural gas only increase at the price of inflation?
Do the salaries of some unionized personnel only increase at the price of inflation?
Inflation is an average of the increase in price of all goods and services, but the goods and services necessary to run a condominium simply can’t be deemed “average.”
It’s naive to think that condo fees won’t increase at a rate greater than inflation, but it’s even more naive to think that the fees set by the developer are realistic.
I’ve seen new condominiums where fees have jumped 50% inside of three years, and it has nothing to do with inflation. It also has nothing to do with management, or mismanagement. It just comes back to that one point that a property management president once told me, “You can’t run a building for less than fifty cents a square.”
So for the love of God – if you see fees that look too good to be true, then please recognize that they are…To read the full article as it appeared on TorontoRealtyBlog.com click here.