Condominium Loans and Special Assessments With Jim Wallace
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Rafal Dyrda: Welcome to the Condo Web Show. My name is Rafal Dyrda and on today's episode we'll be speaking with Jim Wallace from Condominium Financial Inc. on the topic of Condominium loans as an option to special assessment, so owners don't have to pay tens and thousands of dollars out of their own pocket right on the spot. So stay tuned.
Welcome to the show, Jim. Thank you for coming.
JM: Thank you for having me.
RD : I've known you for many years, seven maybe now.
JM: Seven, right, by now. Yep.
RD: So I know you pretty well, but why don't you introduce yourself to our audience?
JM: Okay. My name is Jim Wallace, and I own Condominium Financial Inc. And what I do is I help condo boards and the property managers and the owners through the loan process, so that they can get ... As an option, so they can get the money to help fix their buildings, because the starting point is that the building needs to be fixed, the common property. And without any money, you can't start the repairs.
RD: Okay, fantastic. Well, thank you, Jim.
JM: You're welcome. Brief intro.
RD: Brief intro, yeah. Nice, straight to the point. So tell me, what got you interested, or what got you in this industry, and why did you become a loan facilitator.
JM: Well, in reality it was pure luck, whether good or bad. It depends on which side of the fence you're on, but for me it was good. What happened, short story about it was I was in the financial services industry, and I had a friend that I was working who was helping a young couple from Saskatchewan to get a home. Now, we went through the process, got them through the down payments so they had enough. They could start the whole process on that to buy their own home. This was a younger couple. But when they were doing this, this was back in 2007 when the market for homes was going like this.
So what happened was, which is pretty common, is that they had to buy a condo. Now I don't know the full background, but I do know from my friend is that he got them into the home. They were happy and then within two months of buying their condo, they got a $20,000 special assessment. Now I don't know any of the background, whether they were able to read the red flags or if they had the documents looked at. I don't know any of that.
But what this did was ... My friend was a little upset about this, because he did everything right to get them into the home, and then this special assessment came out of left field. Long story short is that they couldn't come up with the money because they didn't have it. They'd already used it for their down payment, although they had no way of getting more, because they were at the max for their credit. So in the end what they had to do was they had to sell it, and move back to Saskatchewan.
JM: So my friend was, like I said, a little upset about this. So I started looking into it because he asked me, "Well, what's going wrong?"
And I said, "Okay, well, I'll look into it." And then I kept looking into it and realized that there was some endemic problems in the condo industry in relation to the assessments and the repairs that generate these assessments. So I kept looking, saying, "Okay, how can we fix this? What can we do?" And in the end what I realized was that they could in fact borrow money, the condos, but nobody was helping them to do so. Some managers theoretically knew that they could in fact borrow, because they've heard about it, but they didn't know how to go about it. So if they don't know it, and the boards ask them, "Well, can you do it?" and they don't know how to do it, the manager says, "Well, I just don't think it can be done, so you better just special assess."
And that's what started me down this path was that couple getting that assessment so quickly. And the ramifications, which were they had to sell and move out.
JM: A lot of the guys, a lot of the owners have that same problem. But that might be a long answer, but that is what generated the start of the business and how to go about it, and here we are seven years later. Well, I started actually looking into it in 2008, 2009. I spent a year doing research, trying to figure out how to go about this, and incorporated in 2009 and did the first loan for a condo in 2010.
RD: That's pretty awesome. I think that's a fantastic story because you actually started in this industry, or dealing with loans for owners, out of necessity, out of the need to help others, which is a fantastic story.
RD: Many people in this industry really are looking for the money aspect, for the gain, but they're not fully invested in helping people. They just want to make a quick buck. It's a very interesting story because we had a friend, my wife and I, she bought a condo in Edmonton. Oh, that was back in the day, maybe two thousand and ... When was that? Anyway, long story short, she bought a condo. About a month or two later, there was a foundation crack, and she had to pay $35,000 in special assessments.
JM: Ouch. Yep.
RD: Thank goodness, she was able to cover the payment. However, it wasn't disclosed in any of the documents, in any of the minutes. She took a lawyer to sue the previous owner that sold her the condo that they haven't informed her of a special assessment coming. And you know what, she didn't win. She had to cover the costs. And even though the board didn't have the proper paperwork, the proper information in meeting minutes.
So it's really unfortunate. So I'm happy that you're actually in this industry, trying to help people that want to keep their home, however, they can't cough up 20, 30, 40, even 50 thousand dollars in special assessments.
RD: So thank you for doing that. So you've been doing this for about seven years now, correct?
JM: Yep. Started, like I said ... In 2010 was the first loan and had been steadily getting busier since then. Yep.
RD:Yeah. And you know what, with the properties in this day and age, even with the newer builds ... Some of those builds, the quality of them isn't the greatest.
RD: And people get special assessed after moving in a year or two later, which is really unfortunate. And yeah, it's just the way of the condo world.
JM: Yeah, it is the way at the moment, which is basically why I have a business, because somebody needs to help them. And that's part of the reason is I'm helping solve a problem. There is an issue out there. These owners needs some help. Not every owner needs the help, but every owner will get the option. But overall it is going to be an endemic problem, and it's only getting worse as the buildings age, because as the ... Older the buildings are, the more likely it's going to have a special assessment.
RD: Yep. Yep. Yeah, it's unfortunate. Even of the newer properties, you never know.
RD: So from the sounds of this, it's not only the monetary benefit that we're seeing of this, but I feel that being able to help others really drives you in this role, in this industry, in this business.
JM: Yeah, I am helping people because everybody lives in a home somewhere. I'm not going to try and say I'm a saint, but the business is based on helping these people and these owners through a tough situation, a problem that they have that is basically money. They've got to come up with the money somehow, because the building has to be fixed. That's the starting point. And that's why I have a business, is to help them through that, but it is a good business and I do get paid for my services because I'm providing a service to these owners. It just happens to be going through the condo to get to them.
Not every owner has to take the loan, depending on the situation, but they will get a choice more often than not on how to pay the assessment. And the loan is just an option to pay it.
RD: Yeah, obviously they have that option, right. It's not like if you can't pay ...
RD: Sell and off you go, which many people lose their homes that way.
JM: And that was the defacto situation prior to the loans being available. There was, okay, here's your assessment. You've got 90 days to pay 120 whatever it is, but that's the only way. And there are a lot of owners that had to sell and move out at a loss because they didn't have the full amount. Some of them just got foreclosed on. It takes a while, but the condo will get its money, but it was a problem for a lot of owners. Now, it wasn't a big percentage, but overall if you still have four or five percent of owners that can't come up with this money, in the end it's going to cause a lot of distress.
RD: Yeah, yeah. It kind of puts a weight on everybody's shoulder.
RD: Because everybody ... You have to get the work completed, and you need the funds for it, one way or another.
RD: I know it's seven years that you've been helping condos and owners. How many condos have you ... Or condo boards and owners have you helped so far?
JM: Well, I took a quick look just to follow up on that for my own information. In the last three years just in Edmonton, I've helped 23 condos that have completed the process, and at the moment there are 16 others that are in various stages of the process.
JM: Which means at the very beginning, just getting some basic information, getting proposals, to the far end of the scale where they're drawing money, and some of them are almost finished. They'll probably be finished before winter hits, and then they'll be completed, and then their building will be much better. But that's what's happened in the last three years. It's really picked up in the last few years because of general knowledge, more people needing it, more people knowing it, which is really helpful. The more property managers know of it and know or see the information that I can provide to them on how it works, the more condos or more clients that they suddenly realize, "You know, this might apply to this condo." And even if it's just one out of every property manager, you add that up and away it goes.
THE MOST CHALLENGING CONDOMINIUM LOAN
RD: Yeah, yeah. So fortunately, our condo didn't go through a special assessment. We have a healthy reserve fund, but not many do. And I bet you've dealt with those as well, so if you could tell me of the most challenging loan you ever processed, you ever went through so far?
JM: Well, I won't put a name, but there's one that started the process, got some proposals, and then it got, I guess, off track because the board tried to do most of the providing the information to the owners. A lot of other stuff, they tried to do on their own. And then they picked a number, or a potential assessment based on information they got from contractors. And that got a lot of pushback from the owners, because the board wasn't prepared with the correct information as to why they needed to do "X" amount of repairs, which was at the time $1.4 million. So it got delayed, so basically almost a whole year. So they came into the next spring and decided to go at it again. At that point they now decided ... Well, they reduced the assessment, or the repairs, because now they took some advice from me and contacted one of my referrals that I gave them.
The issue that the board had was that they got to a point, and they said, "Well, we need to do the roadway," or the asphalt, or we need to do the windows. So they got quotes on doing that, but in reality ... So the contract said, "Okay, you asked for this. Here's your quote." But what they didn't ask was, "Do we have to do it this way? Can we do a repair in a different manner?" Or another one was, "Do we need to replace all the windows?"
As it turns out, they didn't. Their assessment came down because they asked for help from other professionals, but it delayed the process, so it was a little more difficult. And then they restarted the loan process, but now had to go to another lender that was now potentially a better fit for them, because their amount of money went down to $800,000 from the $1.4 million.
RD: Oh, that's a huge chunk.
JM: It's a huge chunk. Because they were looking at saying ... Again, doing what they had to do. So this started down the process. That lender was exceedingly busy. They thought that the process should go faster, when they were basically starting back at square one. So it just got ... The expectations from the board side from my point of view was incorrect and/or unrealistic. So it became much more difficult than it needed to be.
RD: Okay, so from the sounds of it you got into the whole process a little bit late in this case.
JM:No, not quite late.
RD :Not quite late.
JM: I mean, I was working with them before that.
RD: Okay, before that.
JM: So they had the information, and then they looked at what do we need.
RD: Okay, okay.
JM: And they thought they needed $1.4 million based on the quotes and estimates that they got, but again, they didn't ask, "Do we need to do the repair in this manner? Do we need to do all the windows?" et cetera.
JM: So it just delayed everything and became a little worse in the long run.
JM: They eventually got there, though, but it was difficult.
RD: Yeah, like any of them is.
WHEN SHOULD THE CONDOMINIUM BOARD START LOOKING AT LOANS
RD: So at what stage should a board or an owner come and approach a loan consultant or facilitator like yourself?
JM:The best time would be at the very beginning when they are looking at what repairs do we need to do. A lot of times these boards will think, "Well, we'll do this," and then they're only going to do a certain amount of repairs, because they want to keep the special assessment lower. But the loan option gives them a lot more flexibility to do more at any given time. But the real key is to get that information at the very beginning, so that we can see what the overall dollar value's going to be, what this would mean on a monthly payment for the loan, and a dozen other factors that go into it.
But the earlier they're involved on what they have to repair ... Sorry, the earlier that I'm involved at the beginning, so that we can figure out what they need to repair ... They will make that decision, but a lot of times what they will repair will actually increase once they know of the loan option, because they don't have to say, "Okay, well we're only assessing for 'X' amount, because we want to keep the assessment at $10,000." But in reality, a year from now, two years from now they're going to have to go through the same process and come up with another 10 grand a year from now or two, and on and on.
So that's the best time. You can get the help even when you're in to the point where you've actually issued a special assessment, because at that point even if you're collected it, you can still get the loan happening, and/or owners can still choose to get in the loan.
RD: I see.
JM: It's a touch more difficult, but it can be done, and has been done. But once you get where you're halfway through the repair, it's probably too late.
RD: I see.
JM: But if they've just made the actual assessment and are starting to collect it or haven't collected it, somewhere in there, no problem. They can still go through the loan process.
RD: Okay, but best case scenario, the sooner the better.
RD: At the beginning of the process, call Jim From Condominium Financial Inc. and he'll basically walk you through the process, so it's a seamless ... Well, maybe not a seamless, but you're going to try to make it as simple as possible.
JM: Yep. Sooner, sooner
JM:Yes. The sooner the better is correct. And that way, what I have seen is that boards will get so far down the process and they will get out of sequence, potentially, of what the loan process needs to do. So they're trying to get something done when the reality is they don't have enough information to get that done.
Won't get into details, but there is kind of a sequence on how this goes, so that you maximize the ability and the information for the owners to accept. You maximize the probability that the loan will get past or get through the process, so that they can access it.
HOW TO FIND A CONDOMINIUM LOAN FACILITATOR?
RD: Okay, fantastic. So let's say somebody needs a loan consultant or facilitator, how would they go about finding a person such as yourself?
JM: Well, there's a website. The vast majority of the loans that I do are word of mouth referral. No different than anything else in reality. Board members who've gone through it, they pass my name and number onto another friend or somebody they know who is doing it ... A coworker.
A lot of it comes through the condo professionals. Property managers is a big one. Engineers, lawyers, accountants, they all refer clients when they realize a client has a problem, because they know that it can be done. And that's the biggest plus that happens now, is that other professionals know what the issue is. They know that the loans can be done, they've seen it done, and they say, "Well, let's talk to this guy. He'll give you some information." And away you go.
RD: Okay, well, fantastic. It's great that you're working off referrals, because that means that you're actually doing your job right. People like working with you, and they keep on bringing you clients.
RD: So you're able to help others, which is fantastic. Not many businesses can say that.
WHAT TO LOOK and what questions to ask BEFORE HIRING A CONDO LOAN CONSULTANT?
RD: So before somebody hires a loan consultant, what should they be looking for? What questions should they be asking?
JM: There's a lot of detail to that question, so we'll try and get it in as simple an answer as I can. There is the basic questions that they will ask, which is what's the interest rate. That comes into play. It's a big question, or big factor in what they will do, but it's not the only factor. Amortization comes into play.
The real question that they are going to have to ask is what repairs do we want to do, how are we going to pay for it? And then once we have an idea of the dollar amount, from there it's a lot easier to figure out what will be the options for a condo. You can have an amortization anywhere from five years to 20, but some condos can pay it off in five, and ten or 15 is just too long. Other condos need 15 or 20, because if you try and do it in five, they've got a monthly payment that's $600 a month. That doesn't help anyone.
JM: So you've got to balance all those things along with how does the loan work from the lenders point of view? How do you draw the money? What happens when you need to change the loan in some way potentially, whether that's more money or a longer amortization because other things have occurred? There's a lot of times where the flexibility really comes into play when you have enough loan available. And this is pretty constant, is that a lot of condos suddenly realize ... They don't realize it ahead of time, but it happens that once they start doing the actual repair, the amount and cost of the repair increases, pretty significantly in some cases.
So having the loan there makes it a little more available on how to pay for that extra repair. Because a lot of times these buildings, once you start tearing off siding or doing something to the concrete, and the parquets, nobody knows what the cost is. But the basic questions that the owners or the board members are going to have to ask is what result do we want to do or have? What do we need to get done? How much money is it going to cost? And then once you have that, the rest goes a little easier. But the boards are going to have to make some decisions, and those decisions affect what is the potential lender that they will choose.
Example of when someone would benefit sooner from a loan for their special assessment
RD: Okay. Okay, that's some good info. Can you give me an example of a time when somebody would benefit from your services way more in advance than they actually approached you? You can give us a couple examples, but something that they would really save them. Do you have any examples like that?
JM: There's been a lot of condos that have contacted after they've either done the assessment or already started the repairs. I guess the two examples come in to play, one is that one condo actually assessed for $1.8 million because at the very beginning of the process that's what the engineer gave them as a budget in their report. Now, the reality was that by the time it came back from the tender after they did the scope and specs, the lowest tender was $2.4 million.
JM: So it was already short $600,000 at the very beginning. In the end when I started talking with them, they were looking at a short fall all complete of about a million dollars.
JM: And they didn't do anything wrong, but they assessed at the very beginning even before they got to the scope and specs and getting the tenders back. So the loan at that point paid for that million dollars, and then owners also had a chance to decide what do we want to do with the third instalment of our original $1.8. So most owners ... A lot of owners had already paid the whole thing, other guys took the loan for that portion. But the bottom line was that at the very beginning they assessed for "X" amount when they didn't actually know if "X" amount was going to be what they needed.
Another one was a much smaller one, was that the board had gotten some budget items. They got information on what they wanted to repair, and then they'd already started on the loan process, but they'd already engaged a contractor for one of the major items. But they didn't have a clear budget number. What happened really was that what they thought was going to be "X" amount was about $100,000 or more, or just a little above extra. So now they had to come back and they had to scrape ... What can we do? What can we put off because we've got to spend this extra hundred. In the end what happened was that overall their budget was short between that big one, which was $100,000 plus and some other stuff, they had go back to the lender and ask for another $200,000 on top of their original five.
Now, this again, is not a huge issue, because it was able to be done after the loan was in place, but at the very beginning, if they'd gotten a little bit more information and/or some help from a referral source ... What they actually did was take one of those referral sources and actually got a project manager, but if they had that at the very beginning, then they would've known that they would've been about $700,000 from the start, instead of $500,000 and having to go back for two.
What the board should do before approaching a CONDO loan consultant
RD: Okay. So from the sounds of it, boards need to really prep before starting any repairs or any maintenance. So is there anything that a board can do or prepare before they approach you? Is there any information that they compile, look at? What's the process here?
JM: A lot of the time or almost all of the time they have a general idea of what they want to repair. They may not know the exact amount yet, but the most important things that they have to do is figure out what are they going to repair. Now once they start talking with me that list may increase, because it's very because they know they've got other stuff to do and/or a lot of components are connected. Like if you're doing windows, you want to do the cladding at the same time, because thermally ... And you'll get a much better result. You also have a much better resistance to water penetration et cetera. So there's a lot of stuff like that.
But overall the most important thing they have to decide is what do we want to repair. And then once they have that idea, then the rest flows from that. Whenever I talk with boards, I always tell them a few things, but one of them is ... I say, "First decision you're going to have to make is what are we going to repair. And second is that are we going to do this repair even if we don't get a loan?" And if the answer to those are yes, then that gives you the approximate amount of the special assessment, which equals to loan, and then everything flows from that. But without the board having an idea of what they want to repair, they can't really do a whole lot of anything else. Now that doesn't mean that they have to know every single thing at the beginning, but generally if they're going to come talking to me, they know of what the main things are that they're going to repair, and they generally have a good idea of the approximate price.
the process for getting a condominium loan
RD: Okay, so from the sounds of it you do have a process that you follow with every client.
JM:Yes, I do.
RD: Can you go a little bit in detail of what you do?
JM: Yeah, it runs sort of in three stages.
JM: The first stage is not the most difficult, but it has the most information. It's got the most things that have to be done, and that first stage is starting with the board saying, "Okay, what are you going to repair?" as always. How much is that going to cost? What is that going to mean for an assessment? And then that gets into, "Okay, well now that we have that number, now we need all these documents to start the loan process." I prepare all the loan applications with the lenders so that they know what's going to potentially happen ... The lenders do so they can see what the situation is with each condo. So that has to happen.
Then once you have that, then we get the proposals back. I compile some more information, and now that we have the proposals, what is this going to look like for the board, for the condo itself, but what is this going to mean to each owner? Show them what the payments are going to be, show them what they're going to have to do on a potential vote of the owners to allow the corporation to borrow. Is there anything else that has to be done such as when you're changing siding? The most common is from cedar to some other product, because cedar is so expensive now and takes a lot of maintenance over the years as well. So they're going to have to have a vote of the owners to change it from cedar to whatever they choose. So that has to happen as well.
All of this stuff occurs to where the board has these potential multiple options on a lender, and then at that point they have to choose one and go forward to the stage two, which is actually get approval. The proposals are pre-qualification in reality. But they choose one, now they go to stage two, get the approval. Takes a few weeks for the lender to actually approve them, a bit more information.
And then stage three is, well, they've signed the approval and now the actual legal loan documents are being prepared by the lawyers, and then they'll be brought to the board for signing et cetera.
So there's a ... Stage one has most of the work, but it's also got most of the decisions that have to be made. The board is going to see a lot more information than the owners will, because the board has to make decisions on certain stuff. Once they do, now you have the decisions made, now you have the information that you take to owners for the next step, because you're going to have to have an info meeting so the owners can see what's going to happen, what's going on, what the assessment is, what's being repaired, and everything from there.
RD: Okay. So I've a couple questions from there for you, based on that.
RD: Because initially when I bought a condo, for one I didn't know what special assessments are or anything like that. I was like, agreeing like everybody else.
Can every condominium get a loan?
RD: And boards probably don't know this either, but can every condo corporation get a loan or are there limits?
JM: Every corporation can apply for a loan, it doesn't matter whether the vast majority are residential, but even commercial condos can still apply for a loan, because they're still a condo under the act.
JM: There are limits. Easy example is if you went to buy a unit or a home and your home was worth $300,000, you could not go to the bank and say I want a $400,000 mortgage, because the bank looks at it and just says, well, your home's only worth $300,000. So we're going to give you a mortgage of 280 or whatever the number is. But they're not going above that. That same theory works with the condos as well. The amount is going to vary depending on lenders, but what generally happens is that the amount of the components that is common property that the corporation is responsible for repairing and maintaining can be anywhere from 30% to 50% of what the actual value of the home is, because we're talking hallways and roofs and windows et cetera. So it all adds up. But you don't usually need to do all of it at one time, unless you're doing the envelope, which is really a big one.
So it's not that there's a hard number that you can't do. It was always dependent on every condo. Every condo will be different. Just like you, me, and ten other people, we go for a mortgage, we're all going to get a slightly different mortgage rate based on the risk profile of us.
The same works with a condo. Some condos are well-run or better run, let's say. So their risk profile's a little less, so that means that maybe they'll get a slightly better rate. Or that they can borrow more money because they're running pretty well. Other condos, the same thing. So it will vary on that, but generally we're looking ...
If you break it down, the dollar value is based on the size of the condo. So a 20-unit condo is only going to need $200,000, but a 100-unit condo going through the same repair is going to need a million. It's just five times as big.
RD: Of course.
JM: So that, really what factors in is that the dollar value is going to vary depending on the size, but in reality you're looking at somewhere around 20%, maybe a bit more of what the potential assessment is going to be that you can borrow.
But when you start talking with most of these units, very rarely are they $100,000 or less. I mean, some of the really older condos or smaller ones, maybe, but generally you're looking at $150,000 to $200,000 for a lot of them. Even some of them, basic town homes, are running a little over 200 at this point or thereabout. So you're looking ... You can get 40 to 50,000 per unit on a condo loan, with no problem.
Information meetings FOR owners
RD: Okay, and going back to your previous answer, you mentioned info meetings for owners.
RD: Is that something you can attend?
RD: So owners have questions, they can ask you, and you can basically explain the whole process?
JM: Yes, that's part of the service, because at that point you have to explain to the owners what the loan is. They're going to get pretty much the same information the board is, but it's going to be a lot more streamlined because now the choices have been made. But the owners at that point are going to have to make some decisions because again, it goes all the way back to the fact the building, the components, and the common property need to be repaired. So that doesn't change. The loan is just an option for some of these owners to take if they want to come up with that money for the assessment. But they also have to know how the loan's working, how it's going to potentially affect them, the fact that it can be transferred. A lot of the pluses that go along with the loan for an owner, there's not a whole lot of negatives, but they also have to understand what is this going to mean for me as an owner.
JM: But it is part of the service.
RD: Okay, so it's not like the whole condo corporation is ... All the owners have to take the loan if they are able to pay for a special assessment out of pocket, they can, those can't can go with the loan.
How do you pay back a condominium loan?
JM: Right. There's actually three ways or options to pay for the loan. One is, and this is frequent, the board sees all the information, they understand what's going on, and they say, "Okay, you know what? We can pay for this loan out of our current condo fees, or for an extra 20 bucks a month we can pay for this half a million dollars." So I call that the "All in" option. The board sees the information, takes the information to the owners and says, "This is what we want to do." So if we vote for the loan, then we're going to pay for it from the condo fees, whether it was a small increase or not. And they'll say, "This is what we're going to do. So that means if we vote for it, this is what's going to happen, but nobody has to pay the seven or eight thousand dollars each." There's no individual choice in that one, it's all or nothing.
JM: The second option is an individual choice. I call it the "Opt in or opt out." So now, and this usually happens when the amount of the assessment is bigger, generally when you start talking 20,000 or more, it's more important that owners have an individual choice. So they have the assessment, and they can either opt in for the loan for that amount and make their monthly payment, or they can opt out of the loan by actually paying the assessment. So if they have 20,000 or 30,000, however they want to acquire it, they just pay it, and they're no longer in the loan. So in that way you can have some owners in the loan, some owners out.
RD: I see.
JM: Third option is a blend of the both. There's a lot of condos where they can pay for some of the assessment from their condo fees, and they do that. And that leaves a remaining amount that the owners have to opt in or opt out. So the first part is an all in for ... Could be half the assessment, could be a quarter of the assessment, whatever the number is. And then the remaining amount owners have to opt in or opt out.
JM: There's various ways to do it, but the one thing about that is if there's an opt-in or opt-out, owners can vote for the corporation to take the loan, but it doesn't mean that they have to participate. They can vote so other owners in the condo can access it, but even as that owner will say, "But I'm going to pay the assessment, so no problem."
RD: Okay, okay. So people do have options. It's not that they're locked in and they have to go through the whole process.
JM: They only do that if the board takes that option to the owners.
Disadvantages of not hiring a professional loan consultant
RD: Okay, I see.. So I've a question, because as most boards, every board, as soon as they have to spend a penny, they step back and say, "We don't need help. We don't need this. We could go to a bank and get our own loan." So what are the disadvantages of somebody trying to go to a bank to get a loan even if it's possible, instead of coming to you and getting your expertise and help.
JM: Well, it's not that they can't try, but the real problem is that there is that there isn't every bank does this. This lending to condos is a very niche market. There's only a certain number of lenders that actually know how to do it and are willing to do it. Now there are a couple banks that do do it, but you can't just go to the corner bank and say, "I need a two million dollar loan for our condo." The guys just don't know how to do it. Even in the banks themselves, there's only a few people that even know how the process will work and/or how to go about doing it. But also from their point of view all they are going to show or do is from that one lender and from their side. They'll say, "This is what I need," or "This is what I want." Do this, do this, do this, but they're not in the business of really helping the condo through the process.
If they get all the stuff and they've check-marked everything that's on their list, then they can keep going. But as soon as something stops, it stops the whole process. But it also means that the condo is only going to lender as opposed to Condominium Financial or myself, or my consultants in other cities. They can access multiple lenders. So that's part of it.
But the other part of it is that when I started this, it wasn't simply about what is the rate. As we've been discussing, there is a lot of information in here. There's a lot of stuff that the boards don't know, because each time a board gets to this point, almost certainly it's the first time they've ever even looked at it. So they don't know how the process works. They don't know what steps have to be done. They have any of that information.
And when I set up the company, it was based on knowing that the key part of it was the education and information for the owners, so that they could in fact get the process through without falling behind or having something come out of left field that they hadn't seen before stopping the process.
And I know it's been done. Condos can actually go through the whole process if they want to, but what was generally the result is that a lot of times it doesn't get to the end because it falls apart because they don't know what to do at a certain point or they're not getting the help through the point. In reality, what will happen in that sort of go it alone scenario is that the board themselves think, "Okay, well, we'll do this." They think they're saving money if they try and do it on their own. It's the way it goes. It very rarely works that way.
JM: It rarely works out that way, but they see in some ways ... They look at it and say, "Well, we don't need to pay somebody to help us. We can do in on our own." But the board themselves never really do it on their own. They turn around and say, "Okay," to the property manager, "Go get us a loan." So now the property manager has all this extra work that they have to go and do, and they're property managers. They're very good at their jobs, but they're not loan facilitators, they're not engineers, they're not accountants et cetera, et cetera. But they know where to turn to get the professional help.
JM: So what happens is that they're trying to do it on their own, which means that all of this extra work, they have to do, which means they're working extra hours. Or one of their other clients suffers a little because they'd have less time for some other client. And even if they do all of that and they get it to the end, what generally happens is that they've done this to try and save what they think is money that the corporation has to pay, but what really happens is that they get to the end, some owners will pay the assessment, some owners will take the loan, but the owners that are taking the loan, they're getting the loan for free because the board, or more likely the property manager, has done all the work.
So now what happens? That's the end ... The result is that some of these owners will get it for free. But again, at the very beginning boards don't know this, and they don't think it all the way through because they've never gone through it before.
RD: Wow. I hope they don't have to go through that process, and to most of them that is the first time, right, because special assessments. It only happens during emergencies when your reserve fund isn't healthy enough and all that.
How IS JIM DIFFERENT FROM OTHER LOAN CONSULTANTS AND FACILITATORS?
RD: It's great that they have an option and there's somebody to help them guide them. So tell me, Jim, how do you do things differently from other loan facilitators?
JM: Well mostly it's because nobody else is actually doing what I do. When is started the company, nobody was doing this. And even now, seven years later, I've got a guy consulting in Calgary, doing it down there as well. But nobody is really doing what I do. Like I said, you can potentially talk directly to a lender, but they're not going to go through the whole process the way I do it.
The situation is that once these boards get to the point where they actually need the money, the better result more often than not is if they get the help to get them through the process. Like I said, some of these boards can in fact, if they really push it, do it on their own. But most of them, a lot of them don't get all the way to the end.
When I set up the company, it was designed so that what I do here in Edmonton can be done in other cities. So it all it takes is other people to follow the process, so that it can be done in multiple cities without having to ... For me to go to Regina or me to go to Vancouver. Somebody will do it at the end. That's, I guess, the difference.
RD: Okay. So I guess it's a process that can be applied across Canada, correct?
JM: Yes, it can.
RD: What about the States? Are you familiar with the States as well?
JM: Yes. It can be done there. I've even looked at that, so it can be done. Again, each state is different, just like each provinces act as different, but it can be done. All it takes is people because the general situation is that the problem that a condo here in Edmonton has is no different than in Calgary or Vancouver or Toronto or New York.
JM:. To get to a situation where they need the money because they got to do repairs. But why they need to repair is not a really long answer, but it's part of the problem, I guess.
RD: Right. Also the repairs come unexpected and it's something that's unusual to plan for, so sometimes they are basically in an emergency and they do need help. And instead of the boards trying to do things on their own, it's advisable. And so I think it's a better option, even it costs, whatever the costs are. It's a better option to get the help and just get things going right away.
RD: Because I know boards that have been sitting on repairs for months, even years, and it came to a point where now they really have to special assess their owners and it's never a fun thing. Many people don't have the money to basically pay for these, so they have to either sell and then move out or rent, or move in with ... Like our friend, which was fortunate that she was able to cover the 30, 35 thousand dollars, otherwise she had to sell and move back with her parents.
Why some condominiums don't have enough money in their reserve fund for repairs?
RD: It's better to jump onboard and then hire a professional and guide you through it. That's like when you hire a property manager or account manager. That professional is helping you run and manage your condo corporation.
JM:Yep. And while we're on that subject, it's not so much that boards have been doing something wrong. What I have noticed and what I noticed when I first started doing the research and it's consistent through the years, is that there's generally three problems that occur that generate these assessments. And not one of them really falls at the foot of the current board. Now, there are a lot of boards that are trying to do the band-aids, trying to get problems solved with a cheaper solution at the moment, which will work for a year or two, but eventually the roof is leaking. It's not going to get any better unless you replace the roof, or the same with windows and cladding et cetera. But the basic problem that I noticed at the very beginning was that the law that required ... Here in Alberta, the law that required condos to actually start and maintain a reserve fund wasn't law until 2002.
So what happened is that condos that had been ten, 20, even 30 years old by that point hadn't put a dollar away to fix their common property. So once the law came in, now they were so far behind. So those ones went through the assessments even before the law was required, and that's sort of what generated the law as part of it. But what happens is that even if you're 20 years old by the time that law came into effect, you were so far behind because the major components of the common property that really generate the special assessments are about six items. Those are the roof, windows and doors; cladding, whether that's stucco, siding, cedar, any of the claddings; asphalt, whether that's parquet, parking lots or roadways, concrete parquet ... Certainly the underground ones really drive it up. These are the big ones that really drive, again, these assessments. So to try and save up over ... And what happens is a lot of them last about the same lifetime. They run anywhere from 25 to 30 years, maybe a little less for the roof. But they all tend to have the same lifetime.
So what happens is that when you get to 25, 30 years, now you've got to replace three or four of these all at once.
JM: So those guys that were 20 years old when the law came in, only have max about ten years before they suddenly got to come up with all this money. And you just can't make up in ten years for 20 years where you haven't put a dollar away. It doesn't work.
So that's what happened with those guys. And this had a corollary effect with some of the rental residential buildings. They were just as old, but during the boom especially, but even before or after, a lot of the owners that owned these buildings knew that they have to replace the cladding, the windows, and the roof et cetera. But they didn't want to spend the dollars to do so. So they condo-ized the rental building, sold it off, because it was just as old as a regular condo that was still 30 years old. The building for the rental was 30 years old, but they sell it ... The owners don't realize the deficit that is involved in the components because they didn't know. So they buy the building, and then within a few years they got to replace all this stuff. But they're brand new as a condo, so they've only had a few years. But they got 30 years of component deficit that they bought into. So suddenly they got to go through with the assessment right away.
Engineering problems with newly developed condominiums and lack of reserve funds
The third big problem is the new builds. Well, we know it here in Alberta, huge boom in 2006, 2007 et cetera. And even since then there's still been a lot of buildings going up.
RD: Even with the most recent ones going up, right.
JM: Yeah, yeah. So what has happened is that I talked with an engineer on this, and I thought they were being built poorly. In a lot of ways some of them were, but the real problem is that they weren't being detailed correctly where balconies met the building, or where windows met it et cetera, to stop the water penetration. But between that and a lot of poor construction is that these owners bought these new buildings and then they didn't realize that they were going to fail really early. And there's no way to know that when you buy it because you think it's brand new, it should be okay.
RD: Of course.
JM: The problem is that the big problem ... The big issues that occur with this, which is usually water penetration in the cladding and/or balconies, and sometimes a lot of that roof, but even underground parquets, is that it takes five, six, seven, eight years before it's really noticeable. Because now people start realizing their balcony is pretty spongy when they step on it, it's moving a little. Or they start seeing stucco bulging out under windows, and then they start looking at it, and they have somebody come in, figure, "Well, I'll just fix that." And they realize it's a bigger problem. So they call an engineer in, and of course the result is that there's water penetration throughout the envelope. So you've got to start over. You've got to rip it all off, redo it.
So these guys have anywhere from five to ten years where they're brand new, but they haven't had a long enough time to save up the millions of dollars by the time for components that should have lasted 30 years. They're paying for a 30 year component inside a five to ten. So they're basically paying for a brand new one earlier, so they just don't have enough time. So they get to that point and it has to be a special assessment. They're brand new, they have not had enough money saved up because they just are so new.
Those three items are really what generate a ton of the special assessments in the industry right now.
RD: Yeah. And it's really interesting and kind of sad at the same time. I have clients in the States and many of those condos, they don't even have a reserve fund.
RD: So whenever it comes to ... And some owners don't even want to save for a reserve fund.
RD: Like if it comes it we're going to pay it from pocket, and what I'm noticing is a lot of these condos are getting special assessed, and it's becoming a big issue in the States.
RD:In Canada, I know certain provinces ... I don't know if it's every province needs a reserve fund or?
JM: Yes, it is now.
RD: Okay. Yeah, but it is ...
JM: Alberta was the last one to actually put it into the law.
RD: Which I think it's a fantastic law.
RD: Right. Save for the dark days, the dark times. But yeah, in the States people are losing their homes. They're moving out. They basically, "Here are my keys. Go to the bank. I can't." It's really unfortunate. That's a different topic.
So Jim, you know what, I think we're going to take a short little break and after the break we're going to come back and we're going to go over some questions from our audience. So stay tuned.
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Thank you for joining us on the episode, and now onto the Q&A with our guest.
RD: Welcome back to the Condo Web Show. Today we're here with Jim Wallace from Condominium Financial Inc. And right now we're going to over our questions from the audience. So the first question that we have is,
Do special assessments still have to be done if the condo gets a loan?
JM:And the short answer is, "Yes." And the reason is that once a board levies that special assessment, it's considered a contribution owing from the unit under the condominium property act. So it's no different than a condo fee. The unit owes "X" amount, it just happens to be that "X" amount is a one-time special assessment for $30,000, and not just your regular $300 a month condo fee.
But the reason is has to be done is the lenders need that because it's part of their security. Once that assessment is levied, the unit owes it. So if the unit doesn't pay the loan, they will ... Again, they'll choose whether to go on the loan or not, but if they're on the loan and they don't make that loan payment, then the condo board itself can start the legal proceedings to collect from that unit. Now that could start with a caveat, but could go all the way to collections and foreclosure if they continue not to pay it. But it's protected from the board's point of view in the exact same way that condo fees are protected, because if an owner stops paying the condo fees, board put the caveat, does the collection, and on and on it goes. Because again, the act doesn't distinguish between whether it's an assessment, whether it's a loan, whether it's a condo fee. If it's a contribution, this is the way it's protected. But again, the lenders need it that way so that if something goes wrong at the very end, then they can collect that money.
What do you do in ... A way that I tell boards and owners is you're taking that $30,000 one-time special assessment and you're turning into a monthly special assessment of $200. And that's how the loan works.
RD: I see, okay. Next question is,
How can the loan be repaid?
So we already talked about this previously a bit earlier, but why don't you go over it again?
JM:Yeah, there's three basic ways. Depending on the information at the very beginning, the owners will get a choice from the board that says we can do it this way and it's an all or nothing, which means that the board has said because of the value or the assessment per unit, we can actually pay for this from the condo fees or even with a little bit of an increase. But the bottom line is that they put the vote to the owners as ... We vote "Yes," the condo pays for the loan. There's no individual choice.
Second option is an individual choice. Generally this happens when the assessments are much larger per unit, $20,000 or more. So at that point the owner might just want to pay the assessment for their own means. So what happens in this one is I call it the "Opt-in or opt-out." The owners are given the choice and says, "Okay, you owe $30,000. You either pay the $30,000 in a lump sum or you participate in the loan to get that $30,000, and then the corporation will go get that money through the loan and do the repairs on your behalf."
The third option is a blend of the two. A lot of times these condos can pay for part of the assessment from their condo fees that they're already paying. So let's just say it's one third. So that one third is now an all or nothing, because every owner's paying condo fees, so every owner's going to get a benefit on that one third. That leaves the two thirds left over. So out of that $30,000 assessment, 10 grand is paid by the condo fee. Now the owners have to pay the other 20. How do we do it? Well now you have your opt-in, opt-out, your individual choice. You can pay the 20 grand, or you can get into the loan and the condo will take 20 grand on the loan.
JM:Those are the only three ways, or I guess the fourth way is there's no loan. Everybody pays the assessment.
RD:Okay. The next question
What benefits are there to owners who participate in the loan?
JM :There is a number of them, and they will vary depending on the situation for an owner, but each owner will decide. And when they have the opt-in or opt-out, they're going to decide whether I want to ... So the benefits generally come down to if they decide to participate in the loan, the owners do not have to go through the financial hoops trying to find the money on their own. If the corporation is qualified for a loan, the owner automatically is. They just have to say to the board, "Okay, when do I start? What's my payment?" And away they go. And they just have to make a choice to actually enter the loan. But what this means is they don't have to go find that money on their own. And I've ran into this with every board that I talk to. Board members know of or have been told by owners, "If you go through with this assessment, I can't get the money because I've already gone to my bank and they won't lend me an extra 30,000."
So what happens here is that once you have the loan option, owners will be able to get that money. The banks are under no obligation to lend more money to people. You might not have enough equity in your unit, your total debt/service ratio might be too high. Host of reasons that the bank could turn you down. They do not have to lend you more money. So for some owners that's one end of the scale. Now these owners, they can handle an extra 100, 200 dollars a month, no problem, but what they can't do is get the bank to give them 30 grand all at once.
The other end of the scale is owners that have paid off their unit. It's free and clear. They could right now write a check for 30 grand if they wanted to. If they want to, go ahead, no problem. The bulk of the owners in the center can problem come up with the money one way or another. Most of them will probably put it back on their mortgage, but they can come up with the money. But they go through all the information that's been presented, all the pluses, all the stuff. Even some of the slight negatives. And they decide what is in my best interest. What do I want to do?
The loan itself is not just for the end of the scale for those that have to take it. It's a choice for every owner. But for the owners that are looking to do it, the benefits they get is that they don't have to refinance their mortgage. Depends on what happens. Sometimes if they refinance it, they're not going to be paying a higher rate. So now they have to pay the higher rate on the whole mortgage, and not just the extra amount that they've got to borrow.
The other big benefit is that the loan is transferred automatically to the next owner of the unit. So you're sharing the cost of that assessment going forward. Can't do anything about the past. The fact is that here's the assessment, here's the repair. So if an owner gets into the loan and they live in that unit for four years, then they pay the loan for four years. When they sell and move out, the new owner takes over, but take over the loan payment and they take over the condo fee because they now own the unit.
So that owner now pays for however many years that he's there. So he might be there for three, he might be for seven, if that's what it is, that's what he pays. And you do this and you share it for as long as the amortization of the loan. So it's a little more fair in that way in that you're only paying for your portion of the loan while you live there.
So that's one of the things that gets in there. A lot of owners ... Also another benefit is that they will take the loan because they think that they can pay for it, but maybe I just don't want to add that much to my mortgage right now. So they take it as a short term solution, because at the end of five years when the first term comes up, they'll have a chance to pay off the loan at that point. So a lot of them use it as a way to make payments for five years and then see what their situation is five years from now. If it's a lot better, they'll just pay off the loan. If it's not, they just continue on the loan, no problems. But they're not forced into making that decision right now unless they want to.
JM: And the thing is that there's not going to be much difference in the monthly payment whether they're on the loan or whether they added to their mortgage. The mortgage probably would be a little cheaper, but it's not going to be a 100 or $200 a month cheaper. I mean, we're talking just a few dollars.
The other benefit is that the equity that they're going to have in their home is going to even out whether they pay the assessment or whether they take the loan. In the end what happens is that the value of the unit is going to be potentially a little more, but the equity they get out is going to equal out whether they sell with the loan or if they sell and they've already paid the assessment. When we're talking about like I said, there was an option for every owner, this means that for the board, they don't have to potentially put people into foreclosure, the guys at this end of the scale that can't come up with the money. They know that those guys can access the loan, and therefore they can get the money to pay the corporation on the loan so they can go do the repairs. But it solves that big issue for the boards, because they don't want to put people into foreclosure. In the old model where the assessment was the only way to pay the money, this is what happened. It didn't happen a lot, but it did happen.
So the other thing is that also means that the repairs are going to be done on time, because as soon as you have a lot of owners that can't come up with the money on the date and things fall behind, how do you sign a $2 million repair with a contractor if you've only collected a million and half dollars? Down the line it's going to be an issue.
But that's kind of a long answer, but overall there's a lot of benefits that owners will have to look it, and they will decide if those are enough, it that's what they want to do. What I have found in my experience is that when the option is there, when the owners have a choice to opt in or opt out, somewhere around two thirds of the owners will actually opt into the loan. There will always be owners that pay it, but again, the loan is not just for one end of the scale. It's a choice for every owner.
JM: And they all have their own reasons for paying, they all have their own reasons for participating in the loan.
RD: And that something that I didn't know that you can opt in or opt out. You didn't have to basically go all in in a way. You have the options, which is great.
RD: So next question that we have is
Who is your client and how does Condominium Financial Inc. get paid?
JM: My client is the condo corporation. I do not work for the lenders. I looked at it that way in when I set up the company, but in the end what I'm doing is I'm helping the owners, and I help the owners through the condo corporation. So that's the client, and that is who pays me. It's upfront. I tell the board at the beginning what the fee would be. It varies depending on each condo, of course. So I don't know what it will be, but what I'm doing is I'm charging an amount per unit that accesses the loan in any manner. So it's really the unit owners that are paying the fee. It's just flowing through because it'll be added to the loan. It's one of the soft costs that the loan can pay for along with legal, couple others. So that's who is going to pay me, that's how I'm going to get paid.
The biggest reason I did it this way was transparency. Now, I don't work for a single lender. I work for the condo corporation, so I can access multiple lenders. But what happens is that I could in fact still work for the multiple lenders, but I could have them pay me a referral fee or finder fees or whatever you want to call it, but what could happen is that I could charge double, and the condo would never see it. The transparency comes in when I tell the board what I'm going to charge and they know what it is upfront. If I had the lender's pay me, again I could charge whatever I wanted, but what would happen is that the lender would raise their interest by a little bit more to cover my fee, and the board would never see it. They would have no idea what it is. But I didn't think that was a right way to go.
RD: Yeah, no. It always comes out at the end, right.
RD: And last question that we have is
What are the reasons condos need to do a special assessment or get a loan?
JM:Well we had discussed this earlier. There are basically three reasons, again. One is that the condo is old enough that they hadn't put enough money away prior to the reserve fund being a law in 2002, so they were so far behind by the time they actually get to the point where they have to start repairing the major components. Because you don't usually need a special assessment if you're going to do something that's 20,000 or 30 or even 50,000. Most condos will have that in the reserve fund. I mean, again, it's based on size. But once you start getting into half a million or 800, or a million two, generally it's because the big dollar components have gotten to the end of their life and now you have to do the assessment. So that's one of the big ones.
The other is that, we discussed, is that a lot of these rental residential buildings got converted because the owners didn't want to pay that half a million or more to fix the building. So they condo-ized it, sold it off to the new condo owners who had no idea what they were inheriting, which was a million dollar liability that was coming due. So that was the one ...
And again, the third one is the new builds are built a little worse than they should be. Trying to be diplomatic.
JM: And even if they're build fairly well, if a lot of the details aren't right, they get a lot of water penetration, but they're fairly new. So once you have these claddings and these balconies failing in five to ten years when they should be lasting 30, they just didn't have enough time. Now there are occasions when something will occur that is an emergency, but generally those emergencies don't result in hundreds of thousands of dollars, but the ones that do or could have that happen is when you start talking sewer systems and water systems, whether that's the storm system or the sanitary sewer, or even the potable water in. They last a really long time, but once they do start to go, they usually just go boom, they crack, and now suddenly you've got backups or you don't have water, and now there's nothing you can do about it. You've got to fix it now. So something that assessment will be, "You owe the money in 30 days," because they've got a $100,000 or $200,000 underground repair that they have to do.
But that's the general gist of what happens, and again when it comes to these assessments, it's more often than not the big dollar items that trigger the assessments. Because they last the longest, but they're also the most expensive.
RD: So Jim, I think that's the end of our questions. I would really like to thank you for your time and educating us on another option where people don't have to go into major debt and lose their homes. You informed me that you'll be able to provide us with an info packet on condominium loans. So if you're interested, there's going to be a link below this video, so just click it, you'll be able to download it. And in the meantime if anybody has any further questions, how can they get in touch with you?
JM: The website has contact info that you can send questions and/or your info. The easiest way would be just the phone number, which is 780-952-7763, or straight to the work email, which is firstname.lastname@example.org.
RD: Okay, fantastic. And we'll include all that information below the video. We'd like to thank you all for watching and I'm looking forward to seeing you on the next episode. Take care.
JM:Thank you. Have a good day.
Find out what options are available and you have at your disposal before doing a Special Assessment. As we all know Special Assessments aren’t the most fun of things to bring to the table.