Warning to strata title buyers – Grant Mifsud

Warning to strata title buyers – Grant Mifsud

If you’re looking at purchasing a strata title apartment or a townhouse, you should carefully examine the costs of levies connected with maintaining the property. Why – well, we will tell you as strata title expert Grant Mifsud joins us to outline the reasons.

Transcript:

Kevin Turner: If you’re looking at purchasing a strata title apartment or a townhouse, you should carefully examine the costs of levies connected with maintaining the property. That’s according to Archers Strata Professionals.  Joining me from Archers, Grant Mifsud. Grant, thank you very much for your time. Tell me what we can learn or what we need to be aware of with these levies

Grant Mifsud: Hi, Kevin. Thanks for having me on. I suppose that there’s different levels of understanding when it comes to purchasing a property as to what the outgoings are, but then there’s more detail when it comes to a strata property, because there’s levies associated with it. Essentially everybody that is an owner of one of those units has part of what’s called the common property, and that’s where you’ve got the lifts, you’ve got the outside of the building, you’ve got a pool or whatever it may be, so the biggest thing is to do your due diligence before you’re committing to purchasing that property and knowing what your outgoings are going to be.

Kevin Turner: Okay. There’s two different types, though, aren’t there? There’s the sinking fund. Could you just explain to us what the costs are and how we should check on them?

Grant Mifsud: Yeah. So, you’ve got the everyday running cost of the building where you’ve got someone that does the lawns and gardens. You’ve got your annual cost for insurance, pools, those sorts of things, but then there’s also, as you mentioned, the sinking fund. That’s your long-term fund where you’re putting money aside for the future capital costs of replacing things. Like it might be a lift refurbishment, or painting the building is a common one. So, what we do see is those levies at times can be kept low, or understated, which ends up in a problem for the current owners or the future owners, because that fund doesn’t have enough money when it comes to paying for the painting or whatever it may be that’s needed.

Kevin Turner: I can imagine, like on a new block, you probably wouldn’t require much of a sinking fund. How soon after building does the sinking fund have to be established so everyone knows what they’re going to be paying into it?

Grant Mifsud: Yeah. Great question. So, when you’re buying a new block, there’s a requirement to disclose what the future outgoings are going to be, but the body corporate legislation doesn’t require that you actually have a written forecast, which is done by a quantity surveyor or professional that goes out and surveys the property and puts costs to each of those items. But that forecast is required to plan ahead for the spending for the next 10 years’ worth of costs, so essentially you start putting a little bit away for those costs that are going to be in the next 10-year period and beyond.

Kevin Turner: I imagine it would be difficult too, because no two blocks are the same. There could be different construction, even different rooves that might require particular care. I’m thinking of some of the flat-roofed buildings, particularly down in New South Wales and areas like that where they do actually have a lot of trouble with leaking.

Grant Mifsud: Yeah, yeah, and the leaking’s one thing, so that’s more of a general maintenance issue, but then when you’ve got replacement costs, and realistically, that professional you get out to do a physical inspection of the building, they’re going to have a look at that roof and see if it’s, “Okay, you’re having chronic leaks. You’re eventually going to have to replace this thing. Let’s put aside some money in your forecasting or how much you need to put aside on an annual basis so that when we get to two years or three years, whatever it may be, you need to replace the whole thing, you’re going to have enough money.”

Kevin Turner: When you say that leaking is a maintenance problem, it’s something that should be forecast and therefore the money put into the sinking fund. Am I reading that wrong?

Grant Mifsud: Well, not exactly put into the sinking fund, because if you know it’s going to happen or it’s happening, that’s more of an administration cost, so it’s general repairs and maintenance. The sinking fund is more for your capital replacement items, so long-term deterioration before it gets to that point where the water is going to be coming through the roof and damaging the rest of the building. If it gets to that point, you’d need to just replace the thing so you should have money put aside.

Kevin Turner: If the money’s not put aside, that’s when there could be a special call for a levy.

Grant Mifsud: Yeah, well, that’s a bit of a dirty word in strata, special levies. Nobody likes them, because what-

Kevin Turner: But, you know, I tell you what, we see them happen quite often, don’t we? Is that just bad planning?

Grant Mifsud: Yes, it is. Effectively, it’s just bad planning where you haven’t done your due diligence when you’ve bought in. or the strata committee that’s running it has been understating what the levies are when they have a fair idea or having got a professional in to get what the reality is of what they’re going to need for roof replacement, say.

Kevin Turner: You mentioned calling in a quantity surveyor. I’m just wondering, at the time of purchase, if I’m buying an older-style unit, it’s one thing to get the body corporate disclosures, but then should I be checking to see if the amount that’s in the fund is going to be sufficient? Should I be getting a building and inspection report or some sort of quantity surveyor’s report?

Grant Mifsud: What you should be doing is getting a record search completed, so this is going to lead into a few different areas, but one area in particular is to search the records to see if there is a quantity surveyor’s report on record. And then once you get a copy of that report, you can compare it to every year it says what the fund should have in it, and then you can look at what the actual fund is for the sinking fund and what it states in the sinking fund forecast, if indeed there is one, and if that’s out of kilter, you know that there’s going to be a problem.

Kevin Turner: Yeah. Good warning here for anyone buying a unit, is you get a body corporate search done, but unless it goes back far enough and is thorough enough, it may not disclose some of these things.

Grant Mifsud: That’s right, so the advice that we would always suggest for a potential purchaser is to engage professionals to do that search, because they’re the ones that are looking at the records on a day-to-day basis. It’s not just the funds that they’re looking for. There’s a lot of other areas, but when it particularly comes to the funds, they know what to look for with this sinking fund forecast, and then they’re going to give you a report to say, “Well, your forecast in the end of 2018 should have, say, $500,000 in it, but the reality is, it’s only got $250,000  in it.” This is an area that needs to be investigated further.

Kevin Turner: Very timely. Very good warnings there too. Grant, thank you very much. Grant is from Archers Strata Professionals. Thanks very much for your time, Grant.

Grant Mifsud: Thank you, Kevin.

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Kevin Turner
kevin@realestatetalk.com.au
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