Time to take another look at the differences between divided co-ownership and undivided co-ownership. First-time buyers and buyers from outside Quebec tend to use the terms interchangeably. It's a good idea to be clear about what we mean when we talk about these two popular housing types.
Let's start with Divided Co-Ownership.
More commonly known as a condo. When you buy this, you own 100 per cent of your dwelling.
A condo has it's own distinct lot number. In Quebec, it's called a cadastral designation. Whatever the address, or whoever the owner, the cadastral number is the one used by notaries, banks, the city tax department and other official agencies to identify your property. It is found on the certificate of location, the survey plan that shows the footprint of your condo within your building. Other cadastral numbers might also be associated with your condo, for instance if you have a balcony, or share a corridor with your neighbours, or have a garage space or storage locker. Usually, these are common areas or common areas for which you have exclusive use.
A condo has its own tax bill. Your bill is mailed directly to you to pay. Generally speaking, the taxes are higher on a condo than they are on an undivided property of similar size and quality.
A buyer can usually put down a minimum down payment of five per cent on a condo. There can be exceptions. If the bank has concerns about your ability to pay a mortgage, they might ask you to put down a bigger down payment. If you are a foreign buyer, they will often ask for 35 per cent down.
Buying a condo you are free to deal with whichever lender you like.
Because you own your specific unit, you are free to rent it out, as long as rentals are permitted in the building. (This is a big one. We'll get into it more when discussing undivided condos.)
Now for Undivided Co-ownership
When you buy an undivided co-ownership you are buying a fraction of a whole building. In a triplex, that usually means about 33 per cent of the building, in a duplex, depending on whether you have the top or the bottom, or whether there is a basement or not, you're buying a 45-55 per cent share of the building as a whole. In a large apartment building, the fraction would be smaller.
Unlike a condo, your undivided property will not have its own lot number. There were will be one cadastral designation for the entire building. There is also only one certificate of location for the entire building but each owner gets a certificate with the plan of each fraction shown.
There's one tax bill for the entire building and the portion you pay is determined by the percentage of the building you own. Undivided properties generally have a lower taxable value than divided properties of similar size and condition. That means lower taxes for the owners.
Prices for undivided co-ownership properties tend to be substantially lower than for condos of the same size and quality. This is because the down payment on an undivided is a minimum of 20 per cent. The pool of buyers able to put together 20 per cent down is substantially smaller than the pool of condo buyers. That tends to have a moderating influence on prices.
Only two banks will finance the purchase of undivided properties, the Caisse Desjardins or the National Bank of Canada. If you are buying into an existing undivided property, you must use the bank already holding mortgages on the property. If you are thinking of converting your own duplex or triplex, you get to choose which of the two to use. Each bank works with specific notaries so you will either have to start by choosing the bank and then ask them to refer you to a notary, or, if you really like a particular notary, accept that you will have to work with the bank with which they are affiliated. Not all notaries do this kind of work.
Renting an undivided property presents a few risks. Quebec law is very clear. An owner who rents his or her undivided property has no automatic right to repossess from a tenant. So, if you are buying into a newly created undivided co-ownership and if there is a tenant already in place, you cannot force them to move. You can offer them an inducement but they do not have to go. This sounds crazy but it is true. Check property listing for older apartment buildings in Outremont, for example, and you will note that many of them are attractively priced but have tenants who are not going anywhere.
Likewise, if you are hoping to rent out your undivided property you might be opening a can of worms. First of all, your mortgage agreement will likely forbid you to rent (because banks don't want to be stuck with tenants, either). If you don't have a mortgage and you rent, you might still find yourself stuck with a tenant who won't leave. You could get around this if you offer short-term rentals, instead of a standard lease. Be careful though, many buildings are wary of short-term rentals and the headaches they can bring.
In undivided buildings, co-owners have a right of first refusal. That means that when the property is put up for sale, the other owners are given an opportunity to buy it first. Often, the co-owners are given a second opportunity to buy once a promise to purchase from an outside buyer is accepted. They then have a chance to match the offer on the table. Co-owners who renounce their right of first refusal must do so in writing and within a set time frame.
For all the complications and quirks of undivided co-ownership, it does have one big advantage. It is much easier to turn a duplex or triplex (or any other multi-unit building) into an undivided co-ownership than it is to turn it into condos.
All you need to do is ask a notary to prepare an indivision agreement. This agreement is a multi-page document that lays out who owns what, what the rules are, how decisions are made and other minutiae of owning. Next, a land surveyor must prepare a new certificate of location with a detailed plan of each floor or unit in the building. All of this can be accomplished in about two months and at relatively little cost.
Turning a similar duplex, triplex or apartment building into condos is a much lengthier process and much more costly.
Montreal has frozen condo conversions as a way of protecting the rental housing stock. (we can argue about how effective that has been.) If you want to convert a building where even one unit has been rented in the last 10 years, even if the unit is now empty, you must apply to borough for permission. Quebec's Rental Board will also want to know if any of the dwellings have been rented in the last 10 years. The owner must provide proof that all the tenants have been advised of the conversion plan. Once those steps are undertaken, the city and the province must give authorization. This can take six months to grind its slow way through the gears of bureaucracy.
A land surveyor must prepare a new certificate of location and must apply to the Minister of Natural Resources for cadastral designations (lot numbers) for each divided unit. Are you dizzy yet? Once all of that is done, a notary draw up a Declaration of Co-ownership.
The process is long, complicated and costly. There are deadlines that can't be missed. Usually, lawyers specializing in real estate transactions are involved because the paperwork, the procedures and the all-important deadlines are not easy to navigate.
As a final disincentive, in Montreal, some boroughs can and do impose what is known as a "park tax" when a building is converted into condos. This tax represents 10 per cent of the land value as stated on the property evaluation rolle. For a typical Verdun triplex, for example, that might mean $10,000 to $15,000. That tax is payable before the permit to convert the property is issued.
The good news is that it is easier and less costly for co-owners of an undivided property to convert to condo. It still takes time and will cost you money, but the park tax doesn't apply and the process is more streamlined.
Do you have other questions about buying, selling or converting a property to divided or undivided co-ownership? Drop me a line of give me a call. I'd be happy to help.
