I don’t want to come back to Fantasy Football for analogies in every Monday blog post, however, if the shoe fits…

For those of you who play on Yahoo, you’re familiar with the “Chance To Win” feature atop the app, which feeds off a predictive algorithm and tells you what percentage chance you have to win your matchup that day.

Obviously, before you’ve even played, or a half-hour into the 1:00pm games, this “chance” is far-fetched.

But when you’re sitting there at 6:45pm with a 92% “chance to win,” according to Yahoo, you’d like to feel confident.

But then, Garrett Minshew throws not one, but two touchdowns to D.J. Chark, and your opponent has both.  The dreaded “double-stack” is, in itself, doubled.  Couple that with two defensive touchdowns from your opponent’s team defence, and a slew of other timely yardage hauls and touchdowns, and your 92% “chance to win” turns into a 14% “chance to win” just like that.

So, what good was the 92% chance to win, to begin with?

Odds, percentages, algorithmic predictions; how much do you trust them when it matters?

I had a buyer agent tell me last week that she was “Ninety-nine percent certain” that she was bringing an offer on a listing of mine, and I relayed that to my seller-client.  He said, “That sounds good, but I won’t hold my breath.”

How can you not hold your breath with a 99% chance, right?

Well, six days later and there’s no offer in hand.  To be fair, this buyer agent didn’t say when she would bring the offer, but just that there was a 99% chance she would bring one.

Did she over-state her chances?  Or did we just end up the victim of that 1%?

I bring these stories to light because last week, one of the agents on my team was given a percentage “chance to win” that was higher than that 99% noted in the case above.  My colleague had shown a listing, and a problem with the condominium’s finances was brought to light.  But in offering a potential solution, the listing agent estimated a chance of success at, yes, you guessed it – 100%.

But before we delve into that delectable dish of BS, a brief refresher, or two, is needed…

Were you reading Toronto Realty Blog in 2014?  Do you remember the infamous post I wrote about the Printing Factory Lofts?

Well, in the past six years, I’ve probably made mention of this a couple dozen times.  But the long and short of it is: there was a massive lawsuit in the building over deficiencies that had to be fixed, and because the building needed to make the repairs long before the lawsuit could be settled, the condominium corporation took out a huge loan – with a balloon payment.  This action caused the mortgage insurers – CMHC, Canada Guaranty, and Genworth to collectively refuse mortgage insurance on loans.  This meant that only buyers with a 20% down payment could purchase in the building.

I wrote about this on my blog, and the shit hit the fan.  Apparently, bad news is not allowed on the Internet, and the residents went berzerk.

So today, I’m going to talk about a similar situation, only I’ll refer to this one as “a west-end condo townhouse complex.”

As mentioned, one of the agents on my team had shown a condo in the west end that seemed really well-priced!  Too well-priced, in fact, to not have an offer date that would signal the desired sale price was in excess of the list price.

The listing agent, to her credit, brought the building’s financial issues to light before my colleague had asked.  “Disclose, disclose, disclose,” as the saying goes.

She sent him a copy of the condominium’s Status Certificate, and within those documents lay an issue that I thank God I’m not involved with, nor are my clients.

In my honest opinion, this renders this particular condo, and any within this complex, as borderline unsellable.

While there are buyers out there for a product like this, it would only be opportunists.  And in my experience, most would-be sellers are inherently naive and in denial, as we learned with the folks at Printing Factory Lofts back in 2014.

We routinely pay lawyers to review Status Certificates and report back to us, but the truth is, I don’t believe for a moment that most of them read 300+ pages when they can just spend time on the 6-page summary.  Most of what you want to know is in there, anyways.

As for this particular condominium corporation, the inherent financial issues are spelled out on the third page of that 6-page summary, as follows:

The Corporation has no knowledge of any circumstances that may result in an increase in the common expenses for the unit(s) except:

The Corporation requires additional funds for water penetration repairs (further set out in the
Statement of Claim referenced in paragraph 19 below) and necessary capital repair projects that will be carried out over the next three years.

The anticipated repair projects include:

2019
Roofing, Door, Railing & Siding work on Blocks 500 & 600 – Completed April 2020
Front Entry Stair Remediation – In progress
Lower Level Handrails – In progress

2020
Building Envelope Remediation – Commenced
Door and Siding Replacement – Commenced
Isolated Roofing Repairs – Blocks 100-400 & 700 – Commenced

2021
Lower Terraces/Balconies Repairs

Based on a conservative estimate for these projects, the Corporation has been approved for a three-year construction loan of up to $7,300,000. The loan will be drawn upon, as required, to pay for the repair projects. At the end of the three-year loan term, the Corporation will need to pay back all funds borrowed, which will be no greater than $7,300,000 but may possibly be less. In advance of the principal repayment at the end of the loan term, the Corporation will levy a special assessment. In the interim, the Corporation will need to pay interest on any funds borrowed. The projected interest payments is included in the monthly maintenance fees.

As set out in paragraph 19 below, the Corporation has commenced a claim in the Ontario Superior Court of Justice against a roofing contractor and project consultant as a result of the defendants’ negligence and breach of contract arising from a roof membrane and door replacement project. The repair costs incurred to date, and further costs that may be incurred in the future, as a result of the defendants’ conduct, as well as the engineering and legal costs associated with the lawsuit, may result in an increase in common expenses.

Corporation is not aware of any leaks that occurred to date as a result of the Kitec piping, any Kitec piping that is part of a unit is the responsibility of the unit owner. The replacement of any Kitec piping, and the repair of any damage arising from the piping, could result in costs to unit owners, either directly from the cost to replace the piping (which is borne by the unit owner) and/or unit damage resulting from water escape, and or indirectly through common expenses in the case of replacement of or damage to the common elements or other expenses. The recipient of this Status Certificate is advised to make his/her own investigation into whether Kitec piping is present in the unit.

In another section, we find the following with regard to the reserve fund:

The balance of the reserve fund at the beginning of the current fiscal year was $1,017,515.13 (unaudited). In accordance with the budget of the Corporation for the current fiscal year, the annual contribution to be made to the reserve fund in the current fiscal year is $321,996.00 and the anticipated expenditures to be made from the reserve fund in the current fiscal year amount to be $3,192,412.00. The reserve fund will not be adequate in the current fiscal year for the expected costs of major repair and replacement of the common elements and assets of the Corporation. A portion of the construction loan (referenced above in paragraph 12) will be drawn to ensure that there are sufficient funds for major repair and replacements of the common elements and assets of the Corporation.

Yikes!

That was a lot to take in, I know.

But for those of you who did not read the above, please go back and do so.  I know it’s easy to skip, and large, block paragraphs are unsexy, but this is one of the worst issues I have ever seen in a condominium corporation of this size.

The first section that bears attention:

The Corporation has no knowledge of any circumstances that may result in an increase in the common expenses for the unit(s) except:

In case you’re wondering why in the world they would write this, then follow it up with a note about massive repairs that necessitate an even larger loan, it’s because this is always included in the status certificate.  It’s always written exactly like this.  Why, I don’t know.  And I feel it’s almost salt in the wound when you basically say, “There’s nothing to worry about at all, kids,” and then add, “Except for that scary monster over there.”

But the bullet points that follow:

1) There was $1,017,515.13 in the reserve fund to start the year, and after $321,996.00 was contributed, $3,192,412.00 will be drawn.

2) There are major issues in the building that will cost $7,300,000 to fix.

3) The loan is payable in one installment of $7,300,000 in three years.

4) There is interest on the loan.

5) The interest is payable each month.

6) The interest will be added to, or, included in, the monthly maintenance fees.

7) A special assessment will be levied to pay for the $7,300,000, in three years.

8) A lawsuit has been filed which could recover some, all, or more than the $7,300,000 it will take for the necessary repairs.

9) The corporation isn’t aware of any issues with respect to Kitec plumbing.

10) The corporation is, it would seem, not requiring bulk replacement of Kitec plumbing, as most every condo in Toronto has.

11) The corporation is making the replacement of Kitec plumbing the responsibility of each unit owner.

12) The corporation, in this status certificate, is not specifying whether any Kitec plumbing exists, or not.

–

Phew!

Okay, so, as I said to my wife on our honeymoon, “Now, let’s be honest with each other…”

How many of you would consider buying in this complex?

Zero.  Right.  That’s what I thought.

And the irony is: we may all have different views on which of the twelve points above are most concerning.

When the listing agent talked to my colleague, she essentially said, “We are 100% confident that we will win the lawsuit, and so nobody will be on the hook for any of that special assessment.”

Oh, wait, how much is the special assessment?

$50,000 per unit.

So here we have a condominium complex which has obtained a $7,300,000 loan to repair roofing issues, and that $7,300,000 will be repaid in three years by having each unit-owner chip in $50,000.

Every month, for the next three years, the maintenance fees will include an additional portion to cover the interest on the $7,300,000.  I’m going to assume that the construction loan is 8% interest, so that’s $584,000 per year, or $48,666.67 per month, and with about 150’ish units in the complex, that’s an additional $324.44.

Oh, that’s it?

Now whether this money is included in the monthly fees, or will be in addition to, is vague.

See this note:

In the interim, the Corporation will need to pay interest on any funds borrowed. The projected interest payments is included in the monthly maintenance fees.

If it’s included in the fees, then it won’t take long for the reserve fund to be depleted.

If it’s added to the fees, today, or down the line, it makes these units that much less attractive to a buyer.

Now back to that $50,000 special assessment, shall we?

If there’s one thing I’ve learned over the years about property sellers, it’s that very few of them like paying for things on the way out the door.  To ask a seller to pay the $50,000 special assessment is to expect a pie thrown back in your face.

But what choice does the seller have?

This complex, in my opinion, is almost unsellable.

These units are already trading at a massive discount, but with a $50,000 special assessment to be paid inside of three years, and potentially massive increases in maintenance fees to cover the monthly interest costs, I don’t know who’s buying in here.

The agent who said she is “100% confident” in the lawsuit is doing her job.

But if the seller and agent are really 100% confident, then they’ll have no problem holding back $50,000 of the sale proceeds in trust for up to ten years to cover any special assessment paid in that time, and reserve the right to receive a refund of that amount if and when a lawsuit is settled.

Hard stop.

For any buyer looking in this complex, unless the seller is going to take $100,000 less for the condo, you have GOT to have that clause in your offer.

Now, what about the Kitec?

Geez, Louise!

As if this can’t get any worse, right?

Just about every condo in the downtown core with Kitec plumbing has already replaced it, and yet this condo won’t say if there is or isn’t Kitec, but then mentions there’s no plan to replace it, if there is.

My favourite part:

The recipient of this Status Certificate is advised to make his/her own investigation into whether Kitec piping is present in the unit.

Translation: “Bro, you see what we’re already dealing with over here?  Check yourself before you wreck yourself.”

If I’m representing a buyer in today’s market, I see this status certificate, and I move on.

There are just too many properties for sale out there to ever consider this as an option.

There’s a buyer out there, somewhere, who wants to target this complex, looking for an absurd deal, in order to take on the risk.  And that buyer could also day-trade penny stocks on a margin account, and he or she may or may not be successful.

It’s quite easy for an onlooker to talk a big game about the opportunity here, but I don’t know a soul who would consider this.  Real estate is more than an investment; you have to live in it.  Leaky roofs, Kitec plumbing, lawsuits, construction loans – who wants this hanging over their head?  It’s bad enough there’s already, apparently, only part of a roof over their head anyways…