Co-ownership of a home sounds good but may not be for first time homeowner

Co-ownerships can have much lower prices than condos, but they can be difficult for first-time homeowners to obtain, experts say.

 

In a city where the average condo sells for more than $700,000, coming across a spacious two-bedroom home for just over $400,000 can feel like finding a needle in a haystack.

 

In June, a North York co-ownership suite of nearly 1,000 square feet sold for just $402,000. The two-bedroom, one-bathroom corner unit has large windows, a parking spot and a balcony overlooking the quiet Banbury — Don Mills neighbourhood.

 

But co-ownership isn’t a simple solution for homebuyers seeking an affordable way into Toronto’s costly market. These buildings, which typically offer large units at relatively low price points, have different costs that could actually make it more difficult for first-time homebuyers to obtain.

 

Real estate experts say they’re better suited for seniors looking to downsize.

 

“You’ve got limited lenders, limited lawyers, high down payment (and) older buildings,” said Ian Busher, a broker and vice-president of sales at Fox Marin Associates.
Why co-ownerships can be difficult to finance

Real estate lawyer Bob Aaron, who has worked on several co-ownerships deals (and is a Toronto Star contributing columnist), explained that banks and other lenders generally consider co-ownerships to be riskier than other purchases, and they may be apprehensive to provide financing.

 

“It’s very difficult for a lender to foreclose or sell (a co-ownership suite) under power of sale, because the Mortgages Act doesn’t quite cover it,” Aaron said.

 

Unlike in a condo — where homeowners own an individual unit and have a shared interest in the common elements of the building — in a co-ownership, the owner acquires a small percentage interest in the title to the whole building and an occupancy agreement for their particular unit.

 

(Co-ownerships are similar to ownership co-operatives, but the two have different ownership structures, Aaron said; an ownership co-operative is usually owned by a corporation with residents owning shares of the corporation, while residents in co-ownerships get a registered deed to a small percentage of the ownership of the entire building). Co-ownerships are also not to be confused with rental co-operatives, where members don’t get ownership rights, which the federal government will be funding in coming years.)

 

With co-ownerships, if a borrower goes into default, lenders may have to file a lawsuit to recover the occupancy rights that owner has in an agreement with the co-ownership corporation that manages the building, which could be a much lengthier process than foreclosing or selling under power of sale.

 

Additionally, the few credit unions that do provide financing for co-ownerships (DUCA, Luminus Financial and Northern Birch are some) typically won’t finance more than 70 or 75 per cent of the purchase price. That means a buyer might have to pay 30 per cent down, rather than a more typical 10 per cent on a $400,000 mortgage — so $120,000 instead of $40,000.

 

“In my experience, a lot of people who buy in these buildings pay all cash,” Aaron said.

 

Aaron and Busher both said that’s why purchasers of these homes tend to be people who have sold their family home.

 

“This is ideal for them, where they would, from the sale of another property, have the payment immediately (and) be able to pay with cash and not even need to talk to a lender,” Busher said.

Why co-ownerships tend to have lower prices

In June, when the co-ownership suite at 160 The Donway West sold for $402,000, condos in the Banbury — Don Mills area sold for $711,558 on average, according to a Toronto Regional Real Estate Board report.

 

Aaron and Busher said co-ownerships’ lower prices are partially due to the financing challenges and the limited demand that results, but those aren’t the only reasons these homes are cheaper.

 

Developers stopped building co-ownerships around the 1970s, when condominiums started to go up, Busher explained, so they can feel like “time capsules” with outdated features, no amenities or in-unit laundry, and strict rules about making changes.

 

Aaron doesn’t believe it’s the age of co-ownerships that brings down their prices, but the lack of rules around maintenance and reserve funds, as well as some of the costs of building them.

 

For starters, co-owners may have to shoulder the costs of someone in the building who doesn’t pay their maintenance fees (which include property taxes and some utilities for the whole building), Aaron said.

 

“The building owners are going to have to pay the shortfall, either from their reserve fund or from their operating fund until the lender can sell the unit and make the building whole,” he said.

But co-ownerships aren’t legally required to have reserve funds, and if the board of directors wants to get re-elected, they have incentive to keep fees low, he added. In the long run, this could spell trouble for the residents if someone can’t make their payments or if the building needs repairs.

 

Unlike condos, which are required under the Condominium Act to have reserve fund studies that indicate needed repairs every three years, co-ownerships aren’t required by law to carry out these studies at all.

 

Additionally, co-ownerships are cheaper to build than condos, Aaron said, highlighting that condos legally need to have “very, very expensive” floor plans drawn up for every square foot of the building, whereas co-ownerships don’t.

 

Despite the potential risks, Aaron said the benefits to co-ownership are undeniable.

 

“The upside is that it’s half the price of an equivalent condo,” Aaron said. “You’re gonna feel that every single day when you pay your monthly expenses.”

 

 

 

This article was first reported by The Star