Check the paperwork if you buy a condo
We recently went to look at a condo for sale. It is in a small development but apparently the developer still owns them. If we bought it we would be paying the monthly maintenance fees, but we would be the only ones. How does that work?
Dear Condo Buyer,
This is something that we may see more and more of in Bermuda if the condo market remains soft, and it is a great question. I will explain how it should work. However, it doesn’t always. Therefore, when buying into this scenario, documents need to be extremely carefully examined by your lawyer so that you are fully aware of the potential for unexpected expenses.
Any condominium units that come on to the market should be held by a properly arranged company. Usually at this point the developer is the owner of the freehold company (ie, ABC Condominium Company) which holds all the shares for all the units within the complex. Systems should have been set up, and are required to ensure that good governance is being practised for proper operation.
The company’s lawyers should have in place a standard leasehold document for each condominium unit (most condominiums are 999-year leasehold), which are signed when buyers take ownership and occupancy. In the meantime, the developer takes on the role of owner of any unsold units and should be paying maintenance fees into a fund which pays for things such as grounds maintenance, insurance, exterior painting, repairs and amenities. A level for those fees should have been established and divided by the number of units, sometimes varying if units are different sizes.
The developer should have someone appointed to manage these accounts — sometimes it is the lawyer, sometimes he will do it himself or a property manager is appointed to handle this on his behalf. In any event, disclosure of these accounts should be made available to serious purchasers.
Once a chosen unit has been conveyed to the buyer, occupancy is granted. However, it is common in Bermuda that the shares for that unit (and any other bought) will not be transferred until all the units have been sold.
How does this affect the owner?
It depends on the developer. Some encourage the new owners to form a “committee” (not a board of directors) who meet, discuss and suggest things that ensure the quality of the complex remains high. The committee can put pressure on the “condominium company” to make sure these matters are attended to. Once all the units have been sold, and the shares distributed, a new board of directors, made up of shareholders (owners) appointed by other shareholders, is established.
This board now has the authority to decide how the complex moves forward. It should be noted that in a soft market, as we have now, condominiums (particularly if it is a big complex) can take a long time to sell. A few years is not unusual.
The condominium company formed should have set up a budget for the association so that by the time the units are sold costs have been controlled not only from an expenditure perspective but also from a planning budget perspective sometimes known as a slush fund. This is for planned or unplanned future expenses. Otherwise, the buyers might be subject to an additional financial assessment on top of regular maintenance fees.
So in conclusion in terms of paperwork, if contemplating buying in this situation, you should be satisfied that:
• a condominium company has been set up;
• the leasehold document has been properly prepared;
• finances are being run properly (ie all maintenance fees are up-to-date);
• the maintenance is being run on a proper budget with a slush fund being accumulated. Otherwise, buyers should be prepared to make allowances in their own budgets for unexpected expenses.
Buying into a partially unsold condominium complex is not impractical (after all they were all partially unsold at one point). But I would say that buyers should ensure that their lawyer carefully examines all the documents on their behalf and you should be asking lots of questions.
Heather Chilvers is among Coldwell Banker Bermuda Realty’s leading sales representatives. She has been working in real estate for nearly 30 years. If you have a question for Heather, please contact her at firstname.lastname@example.org or 332-1793. All questions will be treated in confidence. Read this article on Facebook: Ask Heather Real Estate
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