Nobody likes paying high maintenance fees, and everybody likes a “deal” on the purchase price of a condo!

But how many people acknowledge that quite often, one is based on the other?

How much do you figure a parking space is worth to you, each month?

There’s some math involved, and perhaps it only makes the difference of a few dollars, but let’s take a look at the numbers…

Let’s assume that a parking space in a downtown Toronto condo is worth $30,000.  Some are more, some are less, but let’s just assume we’re looking at a $529,000 condo without parking, that would cost $559,000 with parking.

Assuming a 5-year-fixed rate, 25-year amortization, at 3.09%, it would cost approximately $143.36 per month to carry that $30,000.  If the parking space cost $35,000, it would cost $167.26 to carry that cost.

So what does the average parking space rent for in downtown? $150?  Maybe as low as $100 or as high as $200?

If you do the math, you see that there isn’t a huge difference between the cost to rent a parking space, and the cost associated with actually owning a condo with parking.

I find that the cost isn’t a monetary one, but rather a psychological one for the buyer.

Some buyers who don’t even have a car say, “I still want to own a condo with parking,” even if they’re losing money each month carrying $143.36 in mortgage cost for a space that only rents out for $120, and is likely vacant 1-2 months per year as they scramble to find a lessee.

Other buyers who have a car might not care in the slightest if the parking space is owned or leased, so long as they have a place to park their cute little Prius each and every night.

The cost can either be up-front, or each month, but in the end, the buyer is likely paying around the same.

This brings me to the subject of maintenance fees, and how high-fees can actually lower the price of a unit beyond what is otherwise reasonable.

As a refresher, here are the “tiers” of maintenance fees, if you will:

Less than $0.50 per square foot – this, in my opinion, is unsustainable.  These $0.41 fees only exist on paper for pre-construction, in brand-new buildings where the fees are going to increase, or in perhaps in 1% of cases – in unique, boutique buildings with no amenities, and a budget made by God himself.

$0.50 – $0.60 per square foot – this is a very reasonable range!  Newer buildings might offer $0.52/sqft fees, and of course if they have concierge, gym, and other amenities, and one of heat/hydro is included, that’s fantastic value.

$0.60 – $0.70 per square foot – this is probably the ‘average’ range for downtown condos.

$0.70 – $0.80 per square foot – this is starting to get expensive.  There are a lot of fantastic downtown condos that happen to have fees around $0.76 per square foot, and while it’s not yet “expensive,” it’s starting to creep up there.  If heat and hydro are separate, then you’d better have some killer amenities to make up for it!

$0.80 – $0.90 per square foot – this is “expensive.”  There’s simply no other way to put it.

$0.90 and up – this is “insane.”  There’s just no other way to put this, either.

So what about a building where fees are $1.00 per square foot?  What do we make of this?

Well, $1.00 per square foot is absolutely, positively insane, and I feel for the owners in those buildings.

I’m going to go out on a limb here and say that I would never, under any circumstances, sell to a client in a building that has fees like this.

However, I’m talking about your more ‘typical’ condos, and not the so-called ‘luxury’ condos like Trump and Four Seasons where fees are astronomical, but you’re paying for drycleaning, dog-walking, an in-house restaurant, cigar-lounges, and whatever other BS that would only be valued by Saudi Princes that own condos so they can visit once every other year.  I’m not talking about your typical $400K condos in building X, Y, or Z.

So let’s look at a current example, and I apologize in advance if you happen to live at 50 Lombard Street, and I’m not trying to pick on you and your building, but I’m always asked about this building and the maintenance fees, so I think it’s a good working example for this blog post.  If you’re reading this in the year 2014, and you Googled “50 Lombard Street” and found this blog post, well, what can I tell ya?  Your decision was (hopefully) well-thought-out, and ultimately my opinion is not fact.  I hope you’re happy in your new condo, and wish you all the best.

The last unit that sold at 50 Lombard Street was approximately 1,236 square feet, and had monthly maintenance fees of $1,225.87 per month.

Do the math, and you’ll see that we’re just shy of a buck-a-square;$0.99 per square foot.

Now what do you think the average price per square foot is in downtown Toronto?

Is it $500 per square foot?  Or are we well past that now?

Is it $550 per square foot?  Probably, although I’ve seen “averages” listed around $650 in newsletters and in the media.  These numbers, in my opinion, are inflated by “luxury” projects like Trump, where units (apparently) sell for $1,900 per square foot.  So for the purpose of this example, let’s assume the average is about $575 per square foot.

The 1,236 square foot unit above, based on the average, would sell for approximately $710,700.

But as you might have assumed, it did not.

In fact, it did not come even close.

Perhaps the “average” isn’t a fair metric for a building like this, which may be a bit older, and may not be a sexy as something on Portland or Stewart.

So let’s assume that this building was a $500-per-square building.  That would but this 1,236 square foot unit around $618,000.

But alas, it did not sell for that.  It did not come even close.

$450 per square would be $556,200, but that’s still a dream.

$400 per square would be $494,400, but that’s wishful thinking.

No, this unit sold for a paltry $405,000, or roughly $328 per square foot.

When was the last time you heard about a condo selling for $328 per square foot?  Those were pre-construction prices back in 2005!

So what’s the conclusion I’m looking to draw here?

Well, I’m interested to know just how much those high maintenance fees affect the sale price, and ultimately if it makes more sense to:

a) Pay a higher price for the condo, and have lower fees
b) Pay a low-low price for the unit, and have astronomical fees

So let’s assume that this 1,236 square foot condo with $1225.87 monthly fees instead had fees of “only” $865.20.

Now I know that $865.20 still sounds like a very high number to you, but keep in mind – this is based on square footage!  Every condo in the city (well not every condo, since buildings like 287 Richmond have $400 fees for each unit, regardless of size…) bases its monthly maintenance fees on square footage, so this is the norm.

$865.20 is based on $0.70 per square foot, which as per above is sort of “getting pricey” but not quite expensive.

So if this 1,236 square foot unit had $0.70 per square foot maintenance fees, how much would you expect to pay?

The fact that it sold for $405,000 in the first place is outrageous.  Where else would you see such a low price per square foot?

So I ask again – how much would you expect to pay for this 1,236 square foot unit if it had maintenance fees of $865.20 ($0.70/sqft)?

How about $499,000?  Is that reasonable?  Actually, I think that’s fantastic!  That’s still only $404/sqft!

How about $549,000?  That’s still great value!  $549,000 for a 1,236 square foot unit in downtown Toronto?  Count me IN!  That’s still only $444/sqft, and you might argue that you could go higher.

In fact, if this unit had maintenance fees of, say, $741.60, or only $0.60 per square foot, what’s to stop us from using a $500/sqft price estimate?  That would put this unit at $618,000.

But why don’t we get crazy here and throw both together – the low $0.60 per square foot maintenance fees, AND the $444/sqft price.

So that leaves me with this question: where do you see more value?

a) A 1,236 square foot unit for $549,000, with monthly fees of $741.60
b) A 1,236 square foot unit for $405,000, with monthly fees of $1,225.87

You’d probably choose the second one, right?  If you’re following the math, you would.

But in practice, nobody would choose the second one, even if it makes financial sense.

Option (a) has monthly fees that are $484.27 lower than option (a).  That’s $5,811.24 per year, meaning you could live there for 25 years before the purchase price of (a) vs (b) is offset.

And if we used the more reasonable numbers (like monthly fees of $865.20), you’d be living there for 33 years before calling it even.

But as much financial sense as option (b) makes, there’s not a buyer out there that would want a condo with fees of $1,225.87 per month.  Even if it’s a great “deal,” it’s almost unsellable to me.

None of my buyers would ever look at this unit, even at $405,000.

I might explain, “If you can handle the extra $484.27 per month in fees, it’s going to save you $144,000!  You could stay there for five years, spend an additional $29,056 in monthly fees, and save $144,000 on the purchase price!”

But the mind of a buyer just wouldn’t allow it.  It still comes down to, “I don’t want to pay $1,225.87 per month, every month, plus hydro.”

And the savvy buyers will ask, “As good as this sounds, and as great as this $144,000 ‘savings’ would be, how hard is it going to be to sell in five years?”

Well-said, Mr. Buyer.  Well said…