Buying a unit has often been described as “buying thin air”. This is because on strata properties like units you are part of a collective of owners who are unit holders in the strata plan and you only own and influence from the paint on the walls in. Hence there are rules to how you live in the strata and to its membership, such as noise, pets, and hanging laundry out, types of building works etc …it also means paying quarterly fees to contribute to the normal strata levies and capital works programs of the Strata and the building it represents.
The trap can be additional levy raisings for chronic or new problems that need rectification. These special raising can be a killer. So, checking the strata is essential to buying well.
Due diligence on strata plans is essential. It pays to read the strata reports yourself (beforeyoubid.com.au is a good resource) and have your legal representative review this along with the contracts. Technically the strata report should accompany the contract.
Some Body Corporate items to look for:
1. Has there been disputes within the Body Corporate – tensions amongst parties, unit holders chronically creating issues or infringements.
2. How much is in the Administration fund
3. How much is in the Capital Works fund (Building maintenance and improvement)
4. When was the last meeting held – if it is years ago or nothing is available – be wary
5. What is the Standard of reports and record keeping – this tells a lot
6. Is a Capital Works plan in action? – this ensures the building is well maintained and there are funds to do any works required
7.Are all Certificates current – Fire, Building Insurance, Pool fences.
8. When was the building last valued for replacement value (so many buildings are well under insured)
What is the composition of the block ? – how many owner occupiers versus rental properties? When there is a high number of owners occupying the maintenance and general upkeep of the property tends to be better.
Look at the capital works program – Do they have one at all? (You would be surprised how many do not)
How many years are they into the capital works program? and is the program budget being executed in accordance to the planned works schedule. Have the works carried out been inline with the estimated costs or have they blown out. Preventative maintenance is far more beneficial in the long run.
The recent severe weather patterns and massive rains (often vertical and swirling) have caused havoc to even the best buildings with regards to water egress. Many properties have sustained massive leakage and water damage. Often where buildings are not well maintained this weather has caused body corporate to raise additional special levies to pay for the urgent works. Some of these raising can last for years.
One recent example where water damage caused millions of dollars of damage and remediation expense. This work was funded and carried out with a Macquarie bank facility for these scenarios, however, the strata then has a long term additional ‘special levy’ to service the loan for the next 5 years. This cost is spread proportionately amongst all unit holders but is a significant additional expense. Buying into this means your cost of ownership will be excessively higher than normal.
Alternatively, there may be no long-term concern, if a strata report shows comprehensive works that have been rectified and paid for – often the work is done and there is no longer any threat, issue or concern. New buildings in the first few years can be a concern where they are still finding the building problems and disputing with the Developer over these issues. If there are litigations pending this is a good reason for caution and pay extra attention to any liability.
Always check contract terms for additional levies and special conditions. Contracts are done in favour of the writer (the vendor) can be amended to have the vendor responsible for all raisings (adjusted into the price) or part responsible e.g., you only incur costs after the settlement. Life is a negotiation.
Delve into how many unit holders are in arrears with their rate payments and how many occasions collection agencies are used. This can indicate the unit holders cannot afford the upkeep and highlight the dysfunctionality of the Body Corporate or why they have no funds. The unit holders can and often do have to sell their units as they cannot afford the strata levies and must repay their commitments. This is becoming a continuing problem for the elderly occupants.
Another issue is where elderly occupants either currently reside in a block or they move into a block occupied by a lot of younger occupants. The issue is that the youthful body corporate can orchestrate the raising of funds for specific improvement or expenses that may not be aligned to yourself. Once again, a disparity can exit. Strata’s raise from all unit holders even if a swimming pool may only be used in a few months by a few people in the block, or certain public spaces are inaccessible to all but a few and they enjoy that exclusivity… yet everyone pays.
Balcony waterproofing is classic problem particularly if the building went into liquidation or distress during the construction phase. There always seem to be issues as trades do short cuts (not waterproofing under tiles, no sills on balconies or doors, flashings missing on roofs etc) and water penetration wins. A building that existed pat the builder warranty periods and has minimal upgrade or remediation problems are often safe bets. The problems have been revealed and typically sorted out.
Personally, I know within moments of approaching a building whether it is looking like a good proposition… initially – street appeal, external appearances, garden maintenance, construction and finish, painting and maintenance, bin areas, carpark areas, clutter versus uncluttered. This is what you will be buying into. Reviewing the strata reports will generally expose the lack of maintenance or insufficient levies being raised to cover the needed works.
Many reports show a continued block of remediation or improvements – this is also a bad sign. The body corporate is a corporation with the power to raise money, spend money and incur debt. The problem occurs when the controllers (those running the body corporate) block suggestions (No vote) and stop the improvements. Often this ‘penny pinching’ approach is short term as the quality of the overall block and living experience drops. This will cost more to rectify in the long run.
Large unit holders such as the developer of the block or owners of several units in the block, can like a company can get majority control of a body corporate and severely influence what occurs in a building. This can also be a take over approach by these parties to acquire more units as levies can be raised to force others out due to the excessive expenses. There have been several cases of this particularly in Tamarama in Sydney’s East.
Having a developer still occupying and holding property within a stratum can be a good thing. Why? Because they get an absolute headache from occupants and the body corporate if they don’t fix, remediate, or resolve issues… there lives can become unpleasant. So, they are motivated to get things sorted properly for the building they have constructed.
A contrary position is that poor strata reports can give you great leverage. Additional strata costs or special levies are usually to rectify a problem and resolve an issue (such as fire compliance etc) in the building. Understanding the levy, the amount and duration can provide great negotiation tools.
For example, a recent acquisition involved a property that had huge special levies that were twice the size of levies for surrounding buildings. The building had storm damage; insurance did not cover it (due to low maintenance) and they had to fix it. The ongoing special levies raising would last for another two years and amounted to a $20,000 per annum strata fee versus a normal $10,000. This meant the purchaser would buy the unit and then inherit every additional special levy on top of the normal levy. Cost of ownership had dramatically increased.
An Opportunity…. If this cost was to be an additional $20,000 per annum a lot of buyers would be put off and not consider the value of the property. However, going in eyes wide open can produce an opportunity – for example negotiating a discount from the asking price of $50K to $100K would more than covers this. Once the works are done, they will not need to do any similar work for a long time.
Be careful not to by a bunch of lemons when purchasing a strata property. This requires some solid due diligence with regards to the Strata report and its contents. Also doing a physical building report is also not a bad option. It is only the seller’s problem until you purchase the property… the it is your problem. Don’t buy a bunch of lemons.
For professional assistance when buying contact Gary Damp on 0425 232 115 or [email protected]
