Wednesday, June 30, 2010

Divided Versus Undivided Co-Ownership, What's the Difference?

I'm working with a new client ready to buy his first property.  He said he was looking for a condo, but I've come to realize that buyers throw that term around without knowing what it means.
In Quebec, there are two kinds of shared ownership properties: undivided co-ownerships and divided co-ownerships. People tend to use the word condo to mean both but they are distinct and there are things a buyer should understand about each before purchasing.
When buying into an undivided co-ownership property, you are, in fact, buying a share in a property as a whole. In a triplex, that typically means that you are buying about 33 per cent of the roof, foundation, walls and yard. You are given exclusive use of a portion of the property but you are essentially a shareholder in the whole.  The property has one tax account, divided among the owners according to their share of the property. One of the big advantages to this kind of ownership is that property and school taxes are substantially lower.
Undivided co-ownerships have their own particularities. 
As a rule of thumb, asking prices for undivided properties are lower than those for divided properties of similar size and with similar features. That's because buyers are obliged to provide a larger down payment when buying into an undivided property, 20 per cent down, versus the usual minimum 5 per cent.
Only two lenders will mortgage them: The National Bank and the Caisse Populaire. You can't choose, the lender will already be in place when you make an offer to purchase.
The third thing about undivided properties is that you have no automatic right to occupy the premises. Whaaaa?  It's true. If you lease your "apartment" in an undivided co-ownership building, Quebec law says that you cannot then reclaim it unless the tenant agrees to go.  It is equally true that if a rental building is turned into a undivided co-ownership property, the tenants cannot be turfed out, regardless of how many months notice they are given, or how much money you offer them as an inducement to leave.
For this reason, many undivided properties have clauses in their co-ownership agreements that forbid owners from leasing their properties.
Life is much more straightforward with a divided co-ownership property. Properly, this is what people mean when they talk about condos.  You own your unit, its walls, floors and ceilings. Your tax bill will be higher, because it will more closely reflect the market value of your individual unit. This kind of ownership is relatively new in Quebec. It only became possible to divide a property after the Quebec Civil Code was revised by the National Assembly in 1969.
Unlike an undivided, the down payment can be as low as 5 per cent and you can seek a mortgage with any lender you like.
Which is the better option? There is no easy answer. For some people, substantially lower tax bills trump all other considerations.  For others, there is a clean, simple logic to owning a unit, versus a share in a property.
The main thing is to consider what you're buying into. Read the co-ownership agreement. It will be so very booooooooooooring, but you'd be a fool not. A good agent will read it too, and advise you on potential problems. Are dogs allowed or not? Are carpets mandatory, or can you have hardwood floors? Are window boxes okay? Who has use of the yard or the basement? How much is each owner required to contribute to the reserve fund. All will be spelled out in a well-written co-ownership agreement.
Also read the minutes to the last two or three annual meetings of the co-owners. These will give you an idea of the issues and possible conflicts in the building. Examine the financial statements so that you know what big bills may be coming due and how much money is in the reserve fund.

31 comments:

  1. I live in a "now" divided co-ownership in NDG and from my experience taxes might be slightly higher but insurance cost is less in a divided condo, plus you also have more options (only a few insurance companies take care of undivided). You need to look at all the facts.

    ReplyDelete
    Replies
    1. Which insurance companies offer undivided coverage?

      Delete
    2. You would have to do your own research on that question. There are many, unlike mortgage lenders.

      Delete
  2. Hi Laura,

    Thanks very much for your comments. It is true that there are many variables when deciding between divided and undivided co-ownership. You have to look at all them. It is amazing how many buyers are unaware of the basic difference between the two.
    Thanks for stopping by!

    Mary

    ReplyDelete
  3. Hi Mary,

    I own a duplex in NDG and my tenant is leaving (of his own accord). Do you know if there are any restrictions on me selling the former rental unit in an UNdivided co-ownership? If it is possible, are there any particular obligations that must fulfilled?

    ReplyDelete
    Replies
    1. Hi Hammer

      The first thing you'll have to consult a notary and have a deed of indivision drawn up. Second, the notary will prepare a declaration of co-ownership laying out the rules of the building. There is a standard template document that can be used and adjusted as the owners see fit. Will give it some more thought and get back to you. Oh yes, and a new certificate of location.

      Delete
  4. Hi Mary,
    Could you explain the third category- the building? Apparently the semi-commercial building that I own on the plateau is neither undivided nor obviously, divided. I have only had it explained in French and cannot wrap my head around the complexity.
    I would be extremely grateful!
    Thanks!

    ReplyDelete
  5. This comment has been removed by a blog administrator.

    ReplyDelete
  6. Hi Mary,

    how much less is the taxes in an undivided property?

    Kind regards,
    Sabrina

    ReplyDelete
  7. Hi Mary,
    I recently inherited a duplex with two of my sisters - we each own 1/3 of the property. The upper unit is empty and one of my sisters lives in the lower unit. There is also a small basement bachelor which is presently rented.

    Do you know whether it is possible for us as co-owners ourselves to sell the upper unit as either a divided or as an undivided co-ownership? I'm very confused as to what is or isn't possible now in Montreal.

    Thanks so much for your time.

    Ber Lazarus

    ReplyDelete
    Replies
    1. Hi Ber,
      Yes, absolutely you can sell the upper but there are a few steps you need to go through. Start by talking to a notary. He or she will be able to get the ball rolling. Depending on where you live,there might be a moratorium on the conversion of multi-unit buildings into condominiums. If that is the case, you can still convert into an undivided co-ownership.
      This can take a few months.
      A notary will be able to help you with the legal process, including drawing up a declarattion of indivision and co-ownership agreement.
      You will also need to get a new certificate of location for the property, detailing the dimensions of each of the units.
      Hey Ber, do you need a really good, very helpful real estate agent? Call me!

      Best,
      mary

      Delete
    2. Hi Ber,
      Yes, absolutely you can sell the upper but there are a few steps you need to go through. Start by talking to a notary. He or she will be able to get the ball rolling. Depending on where you live,there might be a moratorium on the conversion of multi-unit buildings into condominiums. If that is the case, you can still convert into an undivided co-ownership.
      This can take a few months.
      A notary will be able to help you with the legal process, including drawing up a declarattion of indivision and co-ownership agreement.
      You will also need to get a new certificate of location for the property, detailing the dimensions of each of the units.
      Hey Ber, do you need a really good, very helpful real estate agent? Call me!

      Best,
      mary

      Delete
  8. Hi Mary,
    My husband and I own the upper of a divided co-ownership in NDG. There are items in the co-ownership agreement that haven't been in practice for over 15 years (it was written in 1984), but that we've mutually agreed upon with our downstairs neighbour for the five years we've been here. Now that we're trying to sell it, we're finding that buyers want certain clauses changed but our co-owner absolutely refuses to make any changes in writing, even though in practice it's been agreed upon. For instance, it does state that the upper should have wall-to-wall carpeting, but it didn't have any when we moved in, several owners before us never had it, and our neighbour doesn't require it, even though it's in the agreement. We've talked to her about updating it, but she won't hear it all. Three offers have fallen through now! It's been incredibly frustrating and I wish our agent had given us more of a heads up about this when we purchased. Any suggestions? Do we have any recourse in this situation?
    Thanks so much,
    Andrea

    ReplyDelete
  9. Hi Mary
    I am in process of buying undivided co ownership property .Please let me know what are the disadvantages and the advantages of buying an undivided co ownership property .
    Thank you so much ,
    Sahar taha
    s.sahar@bell.net

    ReplyDelete
  10. Hello,

    I own the lower portion of an undivided co-property. The owner of the upper is moving and has has been trying to sell his section. Since he has not had any offers he is now considering renting. According to our co-prop agreement he requires permission from the institution with which he has a mortgage and from me. I do not feel comfortable having someone who is a tenant rather than an owner living above me. Therefore I do not want to give him permission. According to him he says that he does have the right to rent out his apartment regardless of any reason I give. Is this true? Can he challenge this if I don't want to give him authorization?

    Thank you for any help

    ReplyDelete
  11. Hi Anonymous,

    I've answered in a new post here: http://tinyurl.com/cdearqr

    ReplyDelete
  12. Hi... got a quick question. We own an undivided unit with 2 others (a tri-plex), there is a structural deficiency caused by un-authorized work of one of the co-owners of the building, and we also want to sell. Said oo-owner has since gotten permits so that issue at least has been resolved. What are the ramifications of selling while there are structural defects, even if we have been told that the issue will be fixed? We have been told that this will not affect our selling price if we tell them that the issue is there and it will be fixed. We are not so sure. What are your thoughts?

    ReplyDelete
  13. Hi Anonymous! I preface my remarks by cautioning that I am not a lawyer. You might want to talk to one. Off the top of my head I think you need to get the guarantee from your co-owner in writing and witnessed by the third owner. It sounds like a matter that involves all of you, after all. If you declare the deficiency upfront in your vendor's declaration and even in the listing, you should be ok. That's doubly true if you can tell potential buyers what steps will be taken to correct the deficiency, what the timeline is and who will pay.

    Hope that is of help.


    m

    ReplyDelete
  14. Hello Ms. MAry
    I've visited an undivided condo, Since it would be my first time to buy a property, i need some advices from experts or experienced ones... is it safe to buy this property? Are there some risks involve whenever the other co-owner wont pay? What are the disadvantages of this? Hoping for your reply..
    thanks

    ReplyDelete
    Replies
    1. Hello, These are excellent questions. You should be asking them of your real estate agent. Do you have one? If not, why not? Call me to discuss.

      Delete
  15. Hello Mary,

    Is a co-owner in a divided condo obligated to disclose the pending foreclosure of his/her property to the other co-owners? I would have thought so, but my bankrupt neighbour is keeping mum.

    Thank you.

    ReplyDelete
  16. Hello Anonymous, that is an excellent question and probably one that should be asked of someone above my pay grade. On one had, financial matters are usually private and if you are not undivided owners with inter-crossed mortgages and mutual responsibility for one another's loans (used to be the case, not so much anymore) I would say yes. If your property is held in divided co-ownership and you have no right of first refusal to purchase other units in the building, I guess the case is less compelling. It would have been the neighborly thing for your neighbor to give you a heads up.

    ReplyDelete
  17. Hello Mary,

    I own an undivided co-propriety.On my mortgage agreement is stated that I can't rent my unit without prior consent from the Bank. One of the co-owners of the building is presently renting his unit without the bank's consent. I am considering to do the same thing. What are the possible consequences of renting without the bank's consent?

    ReplyDelete
  18. I own an upper undivided co-prop. When the agreement for our dwelling was drawn up the division of the property included only half the respective basement areas in the calculations of the share of the taxes. Is that standard practise? While the certificate states that we have 46% of the home we pay 48.5%. The lower has exclusive use of backyard, front yard is shared.

    ReplyDelete
  19. Hi Mary, great blog!

    I'm in the process of buying the rental triplex we currently live in with the other two floors tenants. We're turning it into a coprop and are wondering how do we go about allocating the percentages of each floor (les quotes-parts in French)? Is there standard formula for this? We're having a very hard time agreeing on the divisions. 1st floor has exclusive use of the backyard. (basement is only partially excavated, dirt floors). Does 37%, 33%, 30% sound reasonable?

    ReplyDelete
  20. Hello, thanks for the question about establishing the ownership percentages. Generally speaking, the division goes something like: ground-floor 35 per cent, second floor 32 per cent and top floor 33 percent.
    The second floor is smaller because it has the cage for the third floor staircase running through it. The top floor has not staircase eating up square footage. Also, it gets the roof rights, usually.
    It isn't something you work out, exactly. You'll need new certificates of location, one for the property as a whole and then individual ones showing each floor. Those are prepared by a land surveyor.
    The notary drawing up your co-ownership agreement will use the certificates of location to determine percentages and then enshrine them for all time in the deed of co-ownership.
    The basement is the variable. If it is usable (six feet or more, finished floor, dry) and only accessible to the ground floor, that is worth something, though how much, exactly is up to debate.
    If it is a dirt crawl space, it ain't worth much.
    The person on the second floor tends to get the short end of the stick. No roof rights, no garden rights, smaller ownership stake.
    Hope this is of help.

    mary

    ReplyDelete
  21. Hi Mary,

    I looked at an undivided property today. The seller mentioned that it's been agreed on/or the process is already started to convert the units to divided in the next few years - I am wondering what the cost of this will be? Thanks, Rachel

    ReplyDelete
  22. Hi Mary,

    I, too, am interested in knowing the approximate cost of dividing an undivided property. I would like to consider buying in NDG, but there are so many undivided properties. I'm wondering about approaching some of these with the idea of dividing, letting them know that I would share in the cost. Am I completely out to lunch?

    ReplyDelete
  23. Hello, It will likely cost somewhere in the range of $5000 or so. $1200 for a new declaration of co-ownership, another $2000 or so for a certificate of location (maybe more). The mortgage deeds would likely need to be broken and rewritten at about $1000 each. It should all be taken care of by the vendors, I would think. If you are looking at buying a property that is currently undivided, the first thing to do is to ask the owners (through the listing broker) whether the co-owners are open to dividing the property. Some people are some people aren't. The lower taxes can be a big benefit, in the case of undvided. The hassle and expense of dividing can be a put-off. Here's my question, Anonymous #2, are you working with an agent or are you stumbling around in the dark?
    Thanks for writing.

    ReplyDelete
  24. I have an undivided co-ownership question: Are exterior cement window ledges a shared expense? I am under the impression a cost to repair them is shared but my neighbor believes since they are under my windows that I have to incur the entire cost. Can you let me know?

    ReplyDelete
  25. I am thinking of buying a heritage apartment building and then converting it to undivided co-ownership properties. Aside from the questions in this column about doing the conversion (which are very helpful!) is there any I should be concerned about given that the building is a heritage building?

    ReplyDelete

Hi, in an effort to cut down on spam, I will now be moderating comments prior to publication. If you're a real person with a real comment or question, I'll get to you as soon as I can. Thanks!