02 Aug Body Corporate pros and cons – Michael Yardney
When the topic of investing in apartments and managing strata levies comes up, it often generates some robust discussion centered around body corporate or strata fees and consequently some investors avoid these properties like the plague. So is buying a property with body corporates really a problem? We look at that today in an effort to see if that type of property is right for you. Michael Yardney is our guest.
Kevin: When we talk about investing in units, the topic of body corporate always comes up, and I guess that prompts us to ask the question, what’s a body corporate all about? Do we really need it? What’s its purpose? And should it be such a stumbling block? To answer those and lots of other questions about it, Michael Yardney joins me from Metropole Property Strategists.
Michael, firstly, tell me what is a strata scheme all about?
Michael: Strata schemes are a form of subdivision, and whenever there’s common land – it could be the gardens, maybe the hallways, the flights of stairs, foyers – a body corporate, sometimes known as an owners corporation, is formed to manage it on behalf of the collective owners, because if you buy an apartment, you own within the four walls, below your roof and above your floor, but there’s also a part ownership of the other common areas, and expenses of those are divided between the dwelling and paid by the various owners.
If you’re on a standalone property with no body corporate, you’re still paying most of those outgoings also, so the trick is to find a property with a well-run owners corporation who don’t pay excessive fees, things that you don’t use or you don’t need. So I wouldn’t exclude a property because it has an owners corporation, but I’d ask some particular questions before I look at one.
Kevin: Who decides on the levies in an owners corporation?
Michael: An owners corporation is run by a committee on behalf of all the owners. If it’s a small block of apartments – three or four – probably everyone will be sitting on the committee and appoint a chairman. Once a year, they’ll meet and they’ll decide “Look, I have to pay for some insurance, we have to pay for some garden maintenance, and maybe we should put a little bit of money aside for future costs,” and the committee decides on behalf of all the owners. It’s usually run by an external manager, in other words an owners corporation or a body corporate company, but sometimes, the committee runs it themselves.
Kevin: As I understand, there are two different types of fees: there are the ones for just the general, ongoing maintenance, but there’s also a need for a sinking fund, too, isn’t there?
Michael: That’s good management, because I come across investors who have a standalone property and all of a sudden, the guttering goes and they have to spend thousands of dollars, or they have to repaint the whole building and that costs them lots of money, as well, so they don’t have any reserve for it. But a well-run owners corporation will put a little bit aside each year in preparation for this, so you don’t get a shock in the future.
Kevin: And there could be shocks that come along. I’ve heard of a couple of blocks, particularly in Sydney, when you have these major rain events, where the roof may start to leek and there’s a lot of need to do some major waterproofing. I’ve actually seen these owners corporations have to go out and get loans to fund these sort of improvements.
Michael: That creates financial embarrassment for all the owners, so a well-run owners corporation will always have what’s called a sinking fund. In some states, they’re mandatory, and in other states, they’re not, but it’s just good management, running your property investments like a business, Kevin.
Kevin: I suppose it comes down to due diligence – when you’re coming to buy a unit like this to make sure that you thoroughly check those owners corporation minutes to see how much there is there and if there’s any history of problems in the past, Michael.
Michael: That’s a great comment, because the owners corporation prepare minutes for the various owners in the building, and that’s passed on to potential purchases. So you should look at those minutes, and what you should be looking for is a proactive committee. You’re looking for a building that’s well run, that’s modern, but that hasn’t got excessive expenses for things like swimming pools or gyms or lifts, especially if you’re not going to use them.
I always find it interesting that people on the first and second floor have to pay the same levy for their lifts that the people on the 15th and 16th floor – who use the lifts more and have got better views – have to pay.
You look for a well-run committee, because a poorly run one can create headaches in the future. Look for expenses, look for outgoing, look for whether they’re proactive, and the other thing you should really look for is signs of disputes internally amongst the owners corporation members, or externally, with disputes with neighbors or contractors, because if you were to buy the building, you’d be buying into those disputes, your part of it.
Kevin: Yes, make sure you go back and read those minutes, because there are a lot of things that sometimes just the body corporate searches or the owners corporation searches won’t show you and won’t reveal, so my experience is that you’re better off just going and having a look at them yourself. That’s my view.
Michael: Definitely. I think then once you own your investment property, you should become part of the committee. You should treat it properly. A lot of people get the annual notice and think “I don’t want to go, it’s an hour of my time at night, it’s inconvenient; I’ll just send a proxy in,” and then they complain a year or two later that the owners corporation isn’t looking after it, they’re not maintaining it, they’re wasting money. So take part in it.
And again, if it’s an investment grade property, if it’s in the right location and you can’t afford a house or a townhouse in that location, it’s better to buy an apartment there, and really, the only extra cost you tend to pay with strata levies is the body corporate manager’s fees, because you’d have to pay the insurance anyway, you’d have to pay the gardening anyway, you’d have to pay the maintenance anyway if you own the whole building, and owners corporation management fees are in the order of thousands of dollars a year, not tens of thousands. When you split it six or eight ways, it really doesn’t change the bottom line of your investment.
Kevin: Great talking to you. Michael Yardney, thanks for your time.
Michael: My pleasure, Kevin.