How to pay for a major repairs and replacements

Deterioration is inevitable. The only question is how well prepared the condo will be, and how the owners chooses to deal with those expenses.

The ant and the grasshopper

In a field one summer’s day a grasshopper was hopping about, chirping and singing to its heart’s content. An ant passed by, bearing along with great toil an ear of corn he was taking to the nest.

 “Why not come and chat with me,” said the grasshopper, “instead of toiling and moiling in that way?”

“I am helping to lay up food for the winter,” said the ant, “and recommend you to do the same.”

“Why bother about winter?” said the grasshopper; “we have got plenty of food at present.” But the ant went on its way and continued its toil. When the winter came the grasshopper had no food, and found itself dying of hunger, while it saw the ants distributing every day corn and grain from the stores they had collected in the summer. Then the grasshopper knew:

“IT IS BEST TO PREPARE FOR THE DAYS OF NECESSITY.”

How to fund the reserves?
So we know that eventually the condo will need lots of money to pay for major repairs and to replace major components. So how can the board insure that they will have sufficient money to do so when it is required?

There are several ways.

Method One
From Day One a set amount of money is deposited in the Reserve Fund's interest bearing account. Over the years, compounding interest helps pay for future repairs. This is the cheapest, easiest and least painful way.

Method Two
The second way is to keep the monthly fees low and whenever the condo needs money, the board levies a special assessment. When you need $200,000 for a new roof, the board levies a $200,000 special assessment to pay for it. Need $50,000 to replace the boilers? No problem; levy a $50,000 special assessment.

Method Three
The condo needs $700,000 to repair the building envelope. The condo takes out a loan from a finance company and pays tens of thousands extra in long-term interest payments.

Method Four
Do nothing.

Let everything go. Patch the leaky hot water pipes, ignore water leaks through the building envelope and take no notice of the crumbling concrete in the underground parking garage.

The monthly fees can stay low for decades as the property slowly deteriorates.

Unfortunately, like winter, the reserve expenses can not be held off forever.

Most likely, the city will issue work orders and the condo will need to raise the monthly fees, have a large special assessment to raise quick cash and they will assume millions of dollars in loans.

Property values collapse and the owners who remain on title will be devastated. Many owners will not be able to pay and they will lose their homes.

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