Inspecting the strata books

As more apartments are constructed, many people will be moving into strata living arrangements for the first time. If you are purchasing a strata title property it's crucial that you buy into a good apartment and a well managed building.

Many people who buy into a building mistakenly make their purchasing decision exclusively on the merits of the apartment. Buying into a harmoniously run, financially sound development is one of the most under-rated aspects of apartment living. Many baby boomers are selling their spacious family homes to move into strata living for the first time. Adjusting to apartment living can be difficult enough without the added worry of a strata in crisis.

If the word crisis seems dramatic to describe what can go wrong in strata living, rest assured it is not. Regardless of whether you are a first home buyer, investor or a down sizing baby boomer, inspecting the strata books is more important than the oven in the apartment.

Given you are buying into a building where you will share amenities and expenses it is worth knowing of any issues that have arisen in the past.

Common issues to be aware of in strata usually consist of:

  • Noisy neighbours/ conflict between residents
  • Unpaid levies/insufficient money in the sinking fund
  • Concrete cancer (particularly in older buildings)
  • Defects in many of the newly built apartments
  • Special levies to fund capital expenditure

Noisy neighbours/conflict between residents

Neighbours are an underestimated aspect of buying a property be it a house or apartment. Before buying, knock on a few doors and meet the neighbours. They will soon tell you things the agent hasn't.

Unpaid levies/insufficient money in the sinking fund

A few non-payers in a building can quickly cause financial stress in a strata title situation, particularly in a smaller block. In a block of 4 units, if two owners are behind on their strata rates, 50% of the income is missing. The pressure quickly mounts.

If you stumble on a circumstance where the owner you are buying from is the person that is behind in paying the rates, rest assured you don't inherit that debt those funds will be reconciled at settlement of the sale. While these are all common go wrongs, you don't want to jump at shadows either. Most agents now disclose the strata/ building levies in their marketing.

When you find a property that has abnormally low strata rates, keep in mind that if they are collecting insufficient funds to run the building, ultimately the owners will need to pay a special levy of some kind. As a potential buyer inspecting the strata books, you are entitled to see the financials to gain a full and proper perspective of how it is being managed. If you don't understand financial reporting, employ someone who does to give you the vital information you need to know.

Concrete cancer

Many units built between the 1960s and 1980s experience concrete cancer. It is common for people to disregard a building inspection and/ or engineers report on a strata title property. The theory being the strata committee has to deal with such issues.

If you are buying into a building that is a high risk of concrete cancer, it's preferable to know this prior to purchasing. Conversely, if a building has had concrete cancer and dealt with it comprehensively, that augers well for the future of that property.

Defects in newly built apartments

The flip side to the construction boom in apartments is we will see a "defect boom". Defects are a reality of new constructions. You won't read about it in the brochure at the time of buying off the plan though. Know your rights prior to signing a contract. Depending on how the contract is written, the developer may have more freedom than you imagined.

In extreme cases, the developers have changed the floor plan and/or the standard of fittings on unsuspecting buyers. It is a case-by-case basis, but have a good real estate lawyer independent of the developer read the terms of the contract to you. If buying off the plan, be sure to find out whether the developer will have an influence on the strata committee.

In the past, some developers have controlled the strata committee until the builder's warranty insurance expires. If any defects are brought to the strata committee's attention, they waive the concern away until the developer is in the clear from the warranty. Once the insurance expires, the cost and risk of the respective issue reverts to the owners of the strata.

Millions and millions of dollars have been spent on court cases between developers and strata complexes in recent years. During the court case, it is common for the market to heavily discount the value of properties within the development that are put up for sale.

Special levies to fund capital expenditure

Special levies arise when there are necessary works required and insufficient funds in the accounts. Special levies are not a reason to avoid buying a property in itself. A special levy or intention to strike one is definitely a reason to investigate matters further.

Depending on the scope of works being proposed the special levy could be paid in one amount or over several quarterly payments. Continued from page 1 The works that the special levy intends on funding fall into two categories - remedial works or capital improvements.

In regards to capital works, a $10,000 or $20,000 special levy can add substantially more to each property. Many of the apartment blocks built between the 1950s and 1980s are rendering and modernising their façade. The Waterpoint development in Drummoyne was a dated, somewhat unsightly apartment block when compared with its contemporary peers.

The owners agreed to a modernisation of the building's façade and common areas. The works were funded through a series of special levies.

The result was a stunning transformation that added a financial windfall on the investment of the special levy to each of the owners. The above points don't serve as a complete safeguard against strata title issues. Nor are they designed to frighten anyone from buying into strata. Similar issues can arise with houses also.

Given so many Australian's will live in apartments for the first time in the decade to come, being aware of the potential issues is paramount.Hopefully you agree it is a mistake to simply outsource the strata report to your lawyer or conveyancer when buying a unit.