Why Passing on a Depreciation Report Could Cost Your Strata Owners Sales
Many strata owners and strata councils in British Columbia have sadly chosen to use the deferral option to avoid conducting a depreciation report / reserve fund study. They do not necessarily fully understand the risks and hidden costs that such an action invites.
Realize that reserve fund studies are vital tools in helping financiers and unit buyers make informed decisions. Without a reserve fund study, these parties have a blank sheet where they would normally get abundant information.
The unfortunate result could be longer listing periods and slumping resale values. Each of these factors hurt the strata corporation and the building at large.
Why Buyers Look for Reserve Fund Studies
Reserve fund studies, also known as depreciation reports, give an accurate “report card” on the strata building’s condition. A savvy unit buyer will request to see this document as a way of assessing how well-maintained all of the common elements are.
Without a regular depreciation report, buyers have to rely on hazy guess work to determine if there could be major problems in the future.
Furthermore, the lack of a proper reserve fund study usually translates to an inadequate reserve fund. Potential buyers see a much higher risk for unpredictable strata fees and cumbersome special assessments. They may begin to question the preparedness of your strata to look after its own building.
Mortgage Companies and Insurers Are Also Affected
Even if a potential buyer has no clue what a reserve fund study is, their lender probably will. A mortgage company may be more hesitant to finance a unit in a building in an undocumented state of repair.
The added level of possible risk means that the strata unit to be used as collateral has a potentially unpredictable future value. The lender may deny financing, or they may charge higher interest rates or demand mortgage insurance from borrowers.
Property insurers sometimes have a similar sentiment. They may see the decision to waive a regular depreciation report as an acceptance of risk. Their perception of your strata taking on extra risk could lead to higher premiums and even a denial of coverage in some extreme instances.
Perform a Study and Know Where You Stand
These problematic reactions place suspicion on your strata’s ability to manage itself. People may wonder how you could even know how adequate your reserve fund is.
A well-managed reserve fund is key to ensuring the longevity and reputation of your entire strata. Place buyers, unit owners, insurers and financiers at collective ease by having a reserve fund study conducted at appropriate intervals. You will be better prepared for the worst, and your building will have less probability of risk overall.
Take a look at our services page to learn more about how depreciation reports can keep your strata and your building in tip-top shape.