Buying Strata Title
Buying a strata title property
City living, less maintenance, downsizing, a less expensive entry to market and conveniences are all reasons to buy a Strata Title property. Indeed, Strata Title properties are an excellent first step into homeownership and investment.
Just like buying a Torrens Title property you still must do your due diligence. When you buy Strata Title properties the fees you pay – Strata Fees – are for the maintenance of the whole complex. You must check out how it has been managed.
What is a strata scheme?
A strata scheme is a collection of ‘units’ where multiple ownership exists. Each owner shares ownership of any common property also such as the foyers, driveways, gardens indicated on the title. The multiple ownerships are combined in a legal entity called the owner’s corporation — or body corporate, strata company, or community association.
The owner’s corporation is responsible for the good management of the strata scheme. All owners can vote on management decisions at an Annual General Meeting (AGM), but decisions are usually made on behalf of the owner’s corporation by a committee of owners who are elected at the AGM.
The financial and maintenance decisions of the strata complex are recorded at AGMs and this record is important for new purchasers. When you buy a Stata Title property the history is recorded and it is in effect the Strata Inspection Report. Every change and dealing are recorded and it is essential you know the state of the building and lot you are purchasing.
There are a few terms that you need to understand when researching the strata records.
Terms you need to know
Administration, Sinking funds, Special Levies and By-laws
Property owners in a strata scheme must pay regular levies. These levies go towards two areas:
- An administration fund. This fund is used to cover the cost of any necessary insurances, budgeted repairs, and to pay contractors to perform ongoing maintenance tasks (lawn mowing, gardening and insurance premiums for the common property)
- A sinking fund. The money in a sinking fund is used to cover the cost of major capital works or emergency repairs. Expenses covered include:
- painting of the building;
- overhaul of lifts;
- driveway refurbishment;
- replacement of fencing;
- replacing common property on the interior and exterior of the building, including carpets, roofing and guttering and
- any emergency expenses that may arise.
A sinking fund is designed to accumulate the financial reserves needed to cover future capital expenditure. Sinking funds ensure that the financial burden for funding capital works and repairs is shared fairly and equitably among all owners in a strata scheme. This fund ensures that property owners in a strata scheme don’t have to pay large, one-off levies whenever an expensive emergency cost arises.
A special levy is needed when the administrative and capital works funds both have insufficient money available to finance an emergency project or one which wasn’t included in the scheme’s budget.
The discovery of unsafe balconies, non-compliant fire doors, or rapidly deteriorating cables are examples of situations requiring a special levy. Sudden breakages or malfunctioning of equipment essential to the scheme may also require a special levy, as well as burst pipes, damaged roofing and electrical problems.
By-laws are the rules by which you, or as an investor, your tenant must live by. The by-laws outline rulings on issues such as pets; smoking and restrictions for the use of your lot – enable certain works to be conducted.
The by-laws outline what works are allowed and this is important when buying into a Strata Scheme. For example. if you go into an older building and notice that the bathroom has been completely renovated then it is extremely likely that the common property was altered in doing so.
The by-laws for that lot should reflect that the work was authorised. In the case of bathrooms, common property involves the waterproof membrane which is damaged when tiles are removed and replaced. If the previous owner did no seek permission and there are issues you as the new owner would be responsible for any damage caused due to the work. If the waterproof membrane fails in the future, you may be required by the by-law to remedy it.
Knowing what to focus on in a Strata Inspection Report will inform your purchasing decision.
The Strata Inspection Report will tell you:
- if there are any known major issues such as building defects, proposed major expenditure;
- how much money is in the administrative and sinking fund – in case of works need to be commenced;
- whether Special Levies that have been raised or past special levies – to check whether the fund is depleted;
- whether you can keep an animal – by-laws;
- that the building insured;
- if the building complies with the Strata Schemes Management Act;
- compliance with the Work Health & Safety Act, Asbestos Management, Fire Compliance;
- if there has been a property valuation in the past 5 years;
- if there are enough funds to cover any potential major expenditure;
- are there currently any legal matters;
- if there is disharmony in the building;
- any special By-Laws and how they might affect you;
- whether the strata levies are up to date or in arrears;
- expenditure over the past 3 years and
- any known plumbing issues.
The Strata Inspection Report is important for the purchaser
When you buy into a Strata Scheme you become part of that complex’s community. You need to know the financial and structural state of the Strata Scheme before your purchase.
If there is insufficient money in the sinking and administrative fund and something major happens to the common property post your purchase you will be required to contribute to the repairs. So healthy sinking and administrative funds are very important.
A Special Levy is an amount that each lot owner would need to pay for repairs and this could be very high if the sinking and administrative funds are low. The lot size generally dictates the proportion of the Special Levy so larger lots contribute more than smaller lots.
Another issue for older buildings can be that some buildings do not comply with current Council Fire Regulations. Council can issue a notice to comply, which can be very expensive and problematic if there are insufficient funds.
When buying into strata complexes a Strata Inspection Report can be more important than a Building Inspection Report. A Building Report will only report on issues within the unit you are considering purchasing. The Strata Inspection Report outlines the entire complex.
Low fees are not a good sign
When buying into the strata complex many purchasers wrongly believe that low strata fees are better. Low fees initially will be cold comfort if the sinking fund is sufficiently depleted as a result of not collecting higher levies. Low strata fees could be a sign of a disaster you may soon be paying for. Higher strata fees often indicate that the complex is properly maintained and a better investment.
Look for an active Body Corporate when purchasing. Remedial work if treated immediately can be a matter of a few thousand dollars. However, if works are ignored it can lead to special levies that are prohibitive for many. All buildings need maintenance and low fees generally mean the owners are either ignoring or not maintaining the building sufficiently.
In the case of the Florida apartment building that collapsed, it has been established that residents ignored warnings of worsening structural damage first reported in 2018. It is easy to conclude many owners resisted higher levies for the repairs or were worried potential buyers would be deterred by high fees. The Florida collapse could happen anywhere in the world – we are not immune. If the strata actively spend money on a building to prevent problems from becoming more expensive that is better than low fees.
When you buy your vote counts
Those that can vote at a strata meeting include co-owners, first mortgagees and trustees of an estate. In committee meetings, only the votes of committee members are considered.
- Outstanding levies, or other amounts recoverable from the owner, at the time of the meeting notice and fail to pay those amounts owing before the meeting are deemed “unfinancial”. Unfinancial owners cannot vote at a strata meeting on motions requiring an ordinary resolution. They are also unable to be a candidate for election to the strata committee. In Victoria, an unfinancial member can still vote on decisions that require a special and unanimous resolution.
- Owners can have a representative vote at a strata meeting on their behalf, by selecting a “proxy” – a person who represents a voter at a general meeting.
- According to a Will, a registered proprietor of the lot can vote on behalf of a deceased owner if they are a registered proprietor or hold the proxy for the executor or executrix. The Will has to have been proven by probate.
- Each owner has one vote for each lot they own. This means if a lot is being co-owned, only one owner’s vote will count.
- Special resolutions and poll votes are determined on unit/lot entitlement. Unit or lot entitlement details are found on the strata plan or community management statement. They are used as the basis for levy contributions for each lot.
- Only motions on the agenda are eligible for a vote at a strata meeting. If you want something heard at the meeting, you need to first submit the motion on the matter you wish the owners’ corporation to consider. Motions must be submitted in writing. The committee may also agree to submit motions to be voted on at a general meeting.
The votes of some parties do not count if they are:
- A non-voting member such as the strata manager or building manager;
- A tenant or guest of an owner, unless they are formally authorized by the owner and recognized by the owner’s corporation as a proxy;
- A non-financial owner on ordinary resolutions
Buying in a strata complex has great advantages for many purchasers. Like all investments you must do due diligence for successful acquisitions – so get that report and fully enjoy your new property.