Misconceptions around strata should not scare off buyers
Many buyers are spooked by strata fees and perceived complications around managing properties with shared elements, but the potential pitfalls can be avoided and profitable investments made.
Strata property management has a few descriptors; from body corporate to owners corporation. They don’t all incur management fees, and for those that do, management fees can vary greatly.
Many buyers actively avoid strata properties. One of the most common misconceptions is that they are all expensive, and all have limitations to what an owner can do with their own property. For some, this is true but not all.
Firstly, understanding strata properties and what determines whether they attract strata fees is important.
Strata typically suggests that land has been subdivided into smaller lots that share either services or land (or both).
On a subdivision plan, a strata block will be made up of units, each separately owned. Within the strata block may be common area too, and as denoted by the name, this common area is owned collectively. Ownership is usually shared in equal portions.
Not all strata properties are managed.
Depending on the state or territory, there is a maximum threshold for the strata block to be unmanaged. In Victoria, for example, three or less units in a development need to attract any Owners Corporation annual general meetings, or ongoing management.
Provided common areas are suitably insured by a public liability insurance policy, the owners can go about their business and avoid the need for official owners corporation activities.
At the other end of the size spectrum, some high-density blocks have multiple, managed strata groups, sometimes catering for a multiple-building development. Others may cater separately to car parking areas or communal recreational areas.
Strata fees
Let’s talk about fees. Another misconception among buyers is that ‘cheap’ fees are optimal.
Sadly, cheap fees can often spell trouble down the track. Taking a boutique block of 1970’s apartments as an example, a reasonable strata fee should cover building insurance, public liability insurance, gardening, maintenance, and a sinking fund for larger ticket items.
If the annual premium per resident is below $1,500, I am mildly concerned. Insurance alone should contribute to the lion’s share of this fee, so the question must be asked; what building items are actually getting maintained?
When residents and owners vote to minimise fees and remove sinking fund contributions, older properties start to present problems that could have been prevented with maintenance. Paint peels, timber rot sets in, gutters rust, tiles break, roof leaks develop, and water ingress sets in. Tree roots can play havoc when ignored, and cracked plumbing can impact foundations.
Suddenly a basic $20,000 task becomes a re-blocking event, costing residents up to half a million dollars in a smallish block.
When strata can get scary
What do strata groups do when expensive issues arise and there are no savings in the kitty? They raise a special levy.
A special levy is an additional cost, borne by the collective owners. It may be amortised out over a three- or four-year period with hefty, short-term fees being raised each quarter. However, if the issue is urgent, the strata management may determine that a loan is required for urgent remedial works to be carried out.
In the case of foundation-related or safety-related issues, this is often the case. Not only are residents paying for the cost of the remediation, but they are paying an interest bill too.
Things can get even more scary when the block is a high-density, high-rise building.
The cost of remediation at height is significantly higher. Scaffolding, underground concrete works, large scale plumbing and flammable cladding removal all cost significant sums.
Unfortunately, the age of the building is not a perfect correlation to maintenance requirements either.
Some new buildings have demonstrated poor workmanship and structural issues. We only need to cast our minds back to the Opal Towers debacle to remind ourselves that not all buildings are equal.
Detecting the strata warning signs
So, how do buyers determine whether a block is problematic or potentially costly down the track?
The first hint is in the strata meeting minutes.
In several states and territories, a certificate relating to the strata management should also be included. The certificate contains a declaration of fees, charges and current levies. They also flag orders on a building. Orders are serious and often spell significant expenditure and/or timeframes for removal of the order.
For any strata exceeding the minimum size and requiring management, an annual general meeting (AGM) should be held, and minutes should be available and included in the contract or supporting documentation. If the minutes aren’t available, this should be the first warning bell.
Warning bells should sound if rates or levies seem excessively high. Details relating to the breakdown of costs will be contained in the minutes.
The minutes tell the story as at the last meeting. Attendee numbers give a clue as to how engaged and active the owners in the block are.
If a quorum cannot be reached, the minutes will state this, and this will indicate that insufficient residents attended for a vote to be struck. This is another clue as to the healthy functioning of the block.
Minutes include social grievances, (i.e. disruptive or problematic residents), issues that may require financial resourcing, safety concerns and quotes for earlier identified problems. When we have any doubts or questions, we either discuss with the strata manager or relay the questions to the agent to send to the strata manager.
In some cases, the manager won’t discuss issues directly with buyers, but there is always a work-around with important questions. If in doubt, a buyer’s legal rep can ask the vendor’s legal rep to source the answers.
The importance of a discussion with a strata manager cannot be underestimated.
Strata managers should not only discuss with prospective owners the items that are mentioned in the minutes or the certificate, but also advise if any items or issues have been raised since the last AGM.
If an AGM date is nearing, almost a year could have transpired since the last AGM. With this could bring new potential expenses or issues that a buyer should be privy to.
When it comes to understanding strata fees on higher-density blocks, buyers need to be prepared for significantly higher fees.
Depending on the number of lifts, recreational services such as gyms and pools, concierge and/or building managers on staff, and age of the building, fees can range from $3,000 to $25,000 per year (without levies). Larger dwellings (such as penthouses) will often attract higher fees also.
Strata is not to be feared, nor is it necessarily expensive or restrictive, but it should be understood before a buyer signs a purchase contract.
Buyers need to remember; they are part of the committee. And they should make sure they have their say.
