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A common question we come across when working with first time buyers is the difference between an undivided and a divided co-ownership. In Quebec, when real estate professionals refer to a “condo,” it almost always implies a divided co-ownership.
There are several critical differences between divided and a undivided co-ownerships, and any investor should be aware of what they are getting into well before signing an offer to purchase.
1. An undivided co-ownership has no private areas or land rights.
A typical condo (a divided co-ownership) has private areas (the rooms within an owner’s own unit) and common areas (the swimming pool, lounge, rooftop terrace and other amenities shared by all owners in the building). On the other hand, an undivided co-ownership has no real delineation between private and common space. Instead, buying an undivided co-ownership means buying a share of a property as a whole. The building has a single tax account and one mortgage which is split between however many shareholders may be sharing the property. Exclusive access to the dwellings and parking spaces is agreed upon by the shareholders and stipulated in the ownership agreement between parties.
2. Undivided co-ownerships imply lower property and school taxes, but higher insurance costs and risk of financial loss.
To some investors, undivided co-ownerships are attractive because their property taxes are substantially lower. However, most buyers tend to prefer the financial security of a divided co-ownership. In a divided condo, property taxes are put aside each month so that collective money will be available for repairs and building maintenance. Management and preservation of the building is done as a shared task between all the co-owners of the building and the co-ownership syndicate (the condo corporation).
In an undivided co-ownership, shareholders are responsible not only for their own mortgage payments but for the loans of the other shareholders as well (since there is only one mortgage). They are also jointly responsible for repairs, and insurance. Should something go wrong with one unit, it could potentially be expensive for all shareholders and not just the home-owner that lives within in.
3. Undivided co-ownerships are harder to finance.
Undivided co-ownerships require a larger downpayment (20%) and are only financed by 2 banks: “The National Bank” and “Caisse Populaire.” The lender will already be involved when you make an offer to purchase, so you won’t be able to shop around and choose the best rate the way you can for a divided co-ownership.
4. Renting out an undivided co-ownership is tricky.
When it comes to an undivided co-ownership building, Quebec law stipulates that you can’t reclaim your unit back from a tenant once you rent it out, regardless of how many months notice they are given, or whether you intend on living in the unit yourselves. For this reason, many ownership agreements for undivided condos will clearly forbid shareholders from leasing their units. Furthermore, while a mortgage is still being paid, the financial institution will also forbid you from leasing your unit.
In which cases is an undivided co-ownership actually better?
If you plan occupying the building yourself, have enough liquid cash for a 20% down, and prioritize low taxes over low risk, an undivided co-ownership may be well suited to you. Furthermore, un-divided buildings are often found for a lower asking price than divided units of the same calibre and dimensions.
Regardless of which option you opt for, be sure to read the co-ownership agreements carefully before putting in an offer. Besides the general laws of co-ownerships, each building will have its own ownership rules that shareholders will have to adhere to.