Buying in a Strata Title Property: Is it Financially Secure?
When you’re buying a new home or investment property you’ll probably be weighing up the location and how close it is to local shops, transport or schools. Maybe it’s how big the bedrooms are or if there’s room for you to renovate? But if you’re buying an apartment or unit in a shared building, are you also considering how financially secure the building is?
When you buy a home in a strata title property, parts of the building like communal areas, stairwells, hallways and external walls are ‘common property’. This means the cost to manage and maintain these need to be funded by the owners in the building, known as the ‘Lot Owners’.
You’ll pay a regular contribution, called a strata levy, to cover the admin costs, operational expenses, insurance and to add into a Capital Works Fund for future repairs and improvements to the building.
How much is the strata levy?
The amount of strata levy you pay will differ depending on where you live in Australia and will vary from building to building.
When you’re looking around a property, look at the entire building and take into consideration the facilities, garden and quality of materials that have been used. If there is a swimming pool, gym, lifts, gardens, security systems or even expensive interiors, like marble floors, this will indicate that your levy might be much higher to accommodate the maintenance costs.
Likewise, if the building is looking a little worse for wear, you’ll need to consider that there might be repair works required in the near future. This means your levy might be slightly higher to make sure there are enough funds to cover the renovations. All of this information can be provided by the real estate agent representing the property.
Am I getting a bargain if the levy is low?
Everyone loves a bargain, but if the cost of your strata levy seems a little too good to be true this could be a red flag that your building isn’t financially prepared for the future.
Sometimes low strata levies are advertised to entice buyers in, but if a building doesn’t have enough money in their fund, you’ll likely end up being out of pocket when the building needs repairing. And it might be a large lump sum or special levy, instead of a manageable regular levy payment.
A low levy cost can also be a sign that the owners corporation are not making decisions with all of the owner’s best interests at heart. It could be possible they have purposely left off essential maintenance plans for the building to help keep the levies low for residents.
How do I check the finances of a strata title property?
When you’re ready to make an offer or go to auction, here are the documents you should be requesting to see how healthy the finances of the building are before you seal the deal:
Read the Strata Inspection Report
The strata-titled building may have a Strata Report available to provide comprehensive details about the property, the residents and any legal issues or disputes within the building. It’ll also tell you when levy payments are due and how much they are, plus any proposed special levies. These special levies are to pay for any upcoming building works that need to be paid for outside of the normal contributions.
Although you can read it yourself, it’s best to get a professional to read the Strata Inspection Report, as they can be very complex documents. A strata specialist will be able to see any potential shortfalls or risk of underfunding, and they’ll be able to advise that you’re buying into a well functioning strata scheme. To note that Strata Inspection Reports are not mandatory so they may not always be available.
Most Strata Inspection Reports can cost up to a few hundred dollars to obtain, depending on how recently they were completed. You might also need a solicitor to arrange getting the report for you and to also review it for any potential issues.
Check the buildings body corporate certificates
All body corporates need to keep stringent records of the building’s finances, and they need to be made accessible for potential buyers, usually in the form of a certificate. The names of these records differ by state, for example in NSW it’s called a Section 184 Certificate, but in Victoria you’ll find an Owners Corporation Certificate as part of a Section 32 Statement.
These documents will contain all the key financial information about a specific lot, and you can use it to determine if there are any prepaid or outstanding levies. It should also include information about the strata management and any financial commitments the building has, as well as where you can find records of previous financial statements.
Review the Capital Works Plan - The Sinking Fund
The building’s Capital Works Plan (NSW), sometimes referred to as a Sinking Fund Plan (QLD/NT/SA/ACT) or Maintenance Fund Plan (VIC/WA), is a plan (in many states is a mandatory 10 year plan) which outlines any upcoming or required building maintenance and repairs. The plan is prepared by the Owners Corporation to help anticipate any future costs to lot owners, as well as the quarterly levy.
If you’re looking at a newer property, the fund might be more limited as there may not be as much building maintenance required. However older properties might include some big ticket items like replacing the roof or putting in new windows.
While each state has its own name and timeframe, Capital Works Plans are a legal requirement for all strata title properties and should be included in strata inspection reports.
Check the insurance and level of cover - The Certificate of Insurance
As well as being able to get an up to date valuation of the building, it’ll also help to determine how prepared the Strata Manager or Owner’s Committee is for any unexpected events. Without appropriate residential strata insurance cover, you and the other lot owners might be at risk of underinsurance, which will mean any additional costs or fees to repair or replace the common property will need to come out of the building’s fund.
Plan for the future of your new home
There is a lot to think about when you’re buying your new home. So before you start measuring it up to make sure your beloved L-shape sofa fits, first make sure you’ve checked that the building has a healthy and robust funds.
Give yourself plenty of time to do your research to ensure you’re investing in a financially secure property. And if the strata levies seem low or too good to be true, then perhaps the building isn’t as financially prepared for the future as you are.