Ep 7. Buying Into The Community Of Strata
This episode is a continuation of strata reports and building maintenance. The importance of looking through building maintenance reports is the main focus to ensure you don’t get sprung with unaccounted maintenance down the track.
Here’s what you’ll learn from today’s episode:
What are strata reports?
What is in a strata report?
How to understand strata reports
Things to keep an eye out for in a strata report
Speakers in today’s episode:
Michelle May - Michelle May Buyers Agents
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VIEW TRANSCRIPT
Hi and welcome to Buy Your Side property podcast, the podcast to help you buy better property. My name is Michelle, and today I would like to talk to you about apartments and strata reports. What are strata reports? How do we understand what's in them? And what to look out for.
So when you are thinking about buying an apartment, it is crucial that you do your research about the health and the wealth of the building before committing to a purchase. Because you're not just buying the beautiful apartment, you're also buying into a community, and if that community is not looking after the building, i.e. your home and your investment, things could go awry very quickly. The easiest way to do that is to go through the strata report.
Now, the Strata Report is a report that is compiled by a strata company and you can either commission that yourself, but quite often the agent or the vendor will provide you one for free or at a subsidized price. The strata report looks at the history of the building, the meeting notes, how much money they have in the funds, and will give you a really good understanding of whether this is a good building to buy into or whether this is one to stay away from now in order to get a strata report. Obviously, a building needs to be a number of years old to have had meetings and to have had money dropped into the capital works fund, of course. So and this is one of the reasons why me as a buyer's agent; I don't buy into new buildings, because it is very high risk to buy into a building where really you don't know about the commitment of the people who live there, the quality of the building and what the developer has done with it. And obviously in New South Wales, we've had recent examples of buildings that have had to be evacuated because they were of such poor quality. So therefore, I would recommend you stay away from buildings that are too new and shiny unless you have a really clear understanding of who the developer and the building were so that it's not too high risk for you.
But let's talk about this strata report, what's in it, and what should you be looking for? So first, look at the financials, the financials in a fund, balances are broken into two parts. There is the admin fund and the Capital Works Fund. The Capital Works Fund was previously called the Sinking Fund. So you may remember that name. Now, there is a general suggestion, a general rule of thumb that says it's good to have 1% of the building’s insured value as the amount that you keep in that fund. It's obviously a rough guide, but you'll see that the Capital Works Fund forecast usually hovers around this number. On top of that, you should have a minimum of $20,000 for an average building because it's pretty easy to have a disaster that will take $10,000-$15,000 in one hit. As an example, I recently had my roof replaced and that cost $35,000, and that was just for one house. So if you have a building that comprises 4 or 100 units, you can imagine that would be a lot more.
The amount of money that is put into the Capital Works Fund and the Admin Fund is determined by something called the Capital Works Fund forecast. Now, the owners corporation, i.e. the people who own within the building, is required to prepare a plan of expected major expenditure to be met on that fund. The plan is usually for a 10 year period and must be reviewed every 5 years. So this is actually a legal requirement. Items of major expenditure could include, for example, the replacement of a roof, like I just said, but also for, you know, smaller things like painting, plumbing, and other things like that. So as far as possible, the owners corporation is to implement each plan as prepared. So usually in a strata report, you will have the fund balances as current in the bank, but you should also get a copy of that Capital Works Fund forecast. And you can see and compare whether the owners committee is actually raising the amount of money in-line with what has been recommended by the Capital Works Fund forecast, because that is done by an independent company. So you can tally up whether they're in-line or whether there's going to be a shortfall.
The other thing to look out for is, as I mentioned before, it's very important that you have that money and it's sort of in line with the building's insured value to get an idea. So you need to look out for the certificate of currency, for the building and then look at the building's insured value and when that valuation was done, because building insurance, at least to the value of the building as determined by valuation, must be obtained every 5 years. As you can imagine, in a very hot and rapidly rising market, the buildings of apartments obviously also rise in value. So it's important to have at least a minimum of every 5 years to get the building revalued, to make sure that if there were ever anything to happen, the replacement cost would be covered by the insurance. So then have a look at the insured value of the building and look at the building valuation when it was done and whether those two are in line with one another, and then bear in mind how long ago that valuation was done. So if you are looking at a very healthy strata, they would typically be insuring the building for a little bit more than what the valuation said if it was done a couple of years ago.
So that is the big overview of the money and the insurance and making sure that that is all OK. Then you need to look at the strata levies for the apartment that you're looking to buy now. Make sure that you look in the strata report for this, because I know quite often it is advertised in the marketing material, but that's not always correct. So make sure that you look up the current stress levels in that strata report, and then also what you can find out is the responsibility of the owner of that apartment over the overall cost of the building, because obviously you're having the quarterly payments into the capital works fund and the admin fund and that should all be fine. But say there was a special, unfortunate event where all of a sudden they needed to raise what they call 'special levies' so extra money to pay for something to be fixed, you would be liable for a percentage of that cost overall. So something to look out for is obviously your percentage of responsibility - how much your strata levies are. So that would be a component admin fund, a component capital works fund. But then look at the likelihood of special levies in that building. So some buildings are very good. They raise the money on a quarterly basis, it's in line with the Capital Works Fund forecast, but some buildings have a habit of raising special levies almost on a yearly basis. So if that is the case, that usually means that the quarterly levels are very low. But it also means that you could be liable for an extra however-much every year or every couple of years because they don't keep that money in the bank. So have a look at are there any current special levies and what are they for? Is there a history of special levies and what were they for? And is there a likelihood of special levies? So this would all be documented in the meeting notes that should all be supplied within that strata report.
I think your head is probably spinning all this talk about money and responsibilities in the strata, but this is only the starting point. So I think I'll leave it here for now and I'll bring it up again in the next episode on what else to look out for in your strata report. Now, if you've got lots of questions for me, please drop me a line, hello@buyyourside.com.au, and thank you for listening.