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Condo buyers should prepare for 'phantom' rent

cdr108

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Condo buyers should prepare for 'phantom' rent

http://www.theglobeandmail.com/servlet/story/RTGAM.20081120.reBelford1121/REStory/RealEstate/home

Registration backlog could mean months of payments
that don't count against your mortgage

From Friday's Globe and Mail

November 21, 2008 at 12:00 AM EST

When is a mortgage payment not a mortgage payment? Move into a newly completed condominium and you are likely to find out.

Reader Dennis Melnbardis raised the question in a recent e-mail. He ran into this vexing situation head on.

"[It] was a great mystery — and a huge unexpected cost. A few years ago when my father purchased a condo, he was charged what was described as 'rent,' which we ended up paying for four months while we waited for the condo building to be 'registered.' This apparently depended on the percentage of occupants who had actually moved into their units," he wrote.

"In my father's case, it was four months of payments … that did not actually count toward that mortgage and which my wife and I had to help out with because my father could not afford it. If a building is under construction for several years, why can't it already be 'registered' before completion?"

I asked lawyer Anne Hudson of Michael Peter Haddad Professional Corp. to explain the situation. Her firm regularly handles new condo purchases.

First, the idea of what is known as "phantom" rent only affects to the buyers of new condominiums, she says. Second, it is widespread, especially in the city of Toronto.

Under Ontario's Condominium Act, a developer can pass on to buyers the costs he must bear between the time a buyer moves in and when the project is registered and handed over to the newly organized condominium corporation.

Purchase deals cannot officially close until a project is registered. Until then, ownership lies with the developer, and the buyers are, in effect, tenants.

The developer still must make payments on the loan that financed construction, pay municipal property taxes, and cover the upkeep costs for common areas such as the pool and landscaped grounds.

The Condominium Act says that since people who have just moved in are not yet owners, they must pay enough in rent to ensure the developer is not out of pocket.

How widespread is phantom rent? Ms. Hudson says that she can think of only one condo in the past seven years where buyers did not face such payments. While in most projects the rental period is two to four months, she has seen situations in which that period stretched to eight months.

Now, down to the nitty gritty.

The Condominium Act allows a developer to charge tenants for three main expenses in the period between occupancy and condo registration: property taxes, a prorated share of common operating expenses and interest on the unpaid balance of the purchase price.

That interest rate is based on what the Bank of Canada says is the rate for one-year mortgages.

"In fact, many people may have negotiated mortgages lower than the suggested rate," Ms. Hudson says. That means their phantom rents may be higher than the regular monthly mortgage payments they will be paying once the project is registered.

Why are there phantom rents?

The bureaucracy is swamped with new condos, and the process of registering new suites is a lengthy one.

Before a condo can be registered, the developer must file what is known as a declaration with both the municipality and the provincial land registry office.

That is just the first step, however.

Once that declaration is registered, each unit within a condo must be properly described and recorded at the land registry. In the case of a condo with 300-plus suites, it is like registering an entire subdivision. It takes time.

Ms. Hudson says that, on average, the process takes about two years. Developers usually start the legal process the moment construction starts.

Problems arise when it takes less than two years to build the project. Yes, people get to move in, but they do not yet own their homes. The paperwork is not yet completed.

With more than 330 condo projects currently under way in the Greater Toronto Area, it is easy to understand the challenge faced by the bureaucracy, she says.

So, can anything be done to avoid an unpleasant surprise come move-in time?

Start by going through the documents with an experienced real estate lawyer during the 10-day rescission period — the time buyers get to change their minds after signing an offer to purchase, Ms. Hudson says. Then you can make counter offers to the developer or seek changes to the purchase agreement.

A larger down payment tendered in increments before closing will reduce the unpaid balance and the interest charged as part of phantom rent. An all-cash sale will do away with that element of phantom rent entirely.

"What I can also see happening is that developers may be more willing to offer incentives as the condo market cools," Ms. Hudson says. "A slowing in sales may also mean a slowdown in new projects and that, too, will help reduce the number of registrations that must be dealt with."
 
Phantom Rents

Near the end of the article;
"A larger down payment tendered in increments before closing will reduce the unpaid balance and the interest charged as part of phantom rent. An all-cash sale will do away with that element of phantom rent entirely."

A Prudent Buyer would not hand over hundreds of thousands of dollars without CLEAR and Marketable title to the unit they purchased. Warranties and title insurance need to be purchased. Taxes LTT need to be remitted.
All these issues are at the closing registration.

These terms are clearly detailed in the Agreement you signed when you buy. You have 10 days to fully review the "bundle" with a lawyer of you choice Prior to proceeding.
 
It's funny how the person in the article describes how their father "could not afford to pay for this so-called phantom rent"....If he couldn't afford the tentative occupancy fees (which should be less than the actual mortgage)...then how was he going to afford his mortgage payments???
 
It's funny how the person in the article describes how their father "could not afford to pay for this so-called phantom rent"....If he couldn't afford the tentative occupancy fees (which should be less than the actual mortgage)...then how was he going to afford his mortgage payments???


Maybe he wasn't going to have a mortgage.
He could have already sold another property and had the money on hand to pay the full price. since he's probably a senior citizen on fixed income the 'phantom rent' is more than the anticipated maintenance fees and property taxes one would expect.
 
The fuss is unwarranted, b/c:

A. It's all disclosed in the agreements beforehand
B. The buyer shouldn't be able to live there for free if he doesn't own the unit

The fact that it doesn't reduce his mortgage balance is just silly. The phantom rent is an long estalished calculation and does not favor the developer in my opinion. With the steep yield curve I would think that a 1 year mortgage would best a typical 5 year mortgage any day. The only arguable unfairness to it is a lower floor buyer gets forced to move in many months before registration and must live with dust, noise, and an unfinished building. Again, all disclosed in the agreements.

I think the article is pointless. They should be printing more stories about how hard it is for buyers to qualify for mortgage today period.
 
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Maybe he wasn't going to have a mortgage.
He could have already sold another property and had the money on hand to pay the full price. since he's probably a senior citizen on fixed income the 'phantom rent' is more than the anticipated maintenance fees and property taxes one would expect.

Think about what you just said for a minute....if he had the money from another property, then why couldn't he afford the rent for a few months??? Doesn't make sense...
 
If he couldn't afford the tentative occupancy fees (which should be less than the actual mortgage)

Occupancy fees are often much higher then the mortgage you've secured for yourself. There is no way to know how long you'll have to pay someone elses mortgage either.

The fact that it doesn't reduce his mortgage balance is just silly.

Yes, it is. Tha fact that you have to pay for an undisclosed amount of time is also silly.

The phantom rent is an long estalished calculation and does not favor the developer in my opinion.

It certainly doesn't benefit the purchaser in any way.
 
Occupancy fees are a percentage of your total common expenses + property taxes + interest on the balance of your purchase. In a normal situation ie.when a buyer is purchasing with 25% or less, then your mortgage + your maintenance fees will always be higher, or at least about the same amount. In rare cases where the purchaser has put down a "substantial" amount of downpayment, then yes it may be possible that the occupancy fees would be higher...but in most cases no.
 
it is unfortunate that 'Reader Dennis Melnbardis' was unaware of such thing as occupancy fees which comes with new condos, and of course one can not depend on your trusty agents who's trying to sell you a unit in the sales office to offer you this info voluntarily

moral of the story ?? Educate yourself before buying a condo and signing on the dotted line :)
 
it is unfortunate that 'Reader Dennis Melnbardis' was unaware of such thing as occupancy fees which comes with new condos, and of course one can not depend on your trusty agents who's trying to sell you a unit in the sales office to offer you this info voluntarily

moral of the story ?? Educate yourself before buying a condo and signing on the dotted line :)

I agree...just to add: a good lawyer should/would have disclosed this information to the buyer as well.
 
In a normal situation ie.when a buyer is purchasing with 25% or less,

This is a relatively recent "norm". Mortgages used to requre 25% down.
I put in much more then 25% and had to pay an outrageous "phantom mortgage". Since the builder can promise registration prior to occupancy, in a bait and switch sort of way...there is no way to know how much or how long a buyer has to pay a "phantom mortgage".
 
This is a relatively recent "norm". Mortgages used to requre 25% down.
I put in much more then 25% and had to pay an outrageous "phantom mortgage". Since the builder can promise registration prior to occupancy, in a bait and switch sort of way...there is no way to know how much or how long a buyer has to pay a "phantom mortgage".

The builder would have had to go through your lawyer to get you to give them the cheques for the occupancy fees....like I said before, your lawyer should have dutifully disclosed to you what you are going to be paying during occupancy and for what reasons. It is not a blank cheque, but I agree with you on one point and that is that you don't really know how long it is going to take before the building gets registered. Normal turnaround is about 2 to 12 months.
 
This is a relatively recent "norm". Mortgages used to requre 25% down.
I put in much more then 25% and had to pay an outrageous "phantom mortgage". Since the builder can promise registration prior to occupancy, in a bait and switch sort of way...there is no way to know how much or how long a buyer has to pay a "phantom mortgage".

Did you get credit for your downpayment against the phantom mortgage amount? If you did then what do you think is unfair about having to pay occupancy rent for living in a suite that you don't own? Again, the rate is set by statute, not arbitrarily assessed by the developer.

I personally don't understand the concept of buying a condo without seeing it completed with my own two eyes myself. I find this thinking completely alien. Would you buy a car without at least a test drive or a photo? Why take a chance on the view, layout, structural features, noise, etc?

I don't get it.
 
Did you get credit for your downpayment against the phantom mortgage amount?

No, not at all....and why would you? A phantom mortgage has nothing to do with your mortgage.

Again, the rate is set by statute, not arbitrarily assessed by the developer.

Again, the occupancy period is undefined, you could be paying 3 times your mortgage for over a year....and you think this is fair?

I personally don't understand the concept of buying a condo without seeing it completed with my own two eyes myself.

I saw it prior to buying it.


I don't get it.

Clearly, you make a lot of assumptions as well.
 
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