PROPERTY: “GOOD BUY BAD BUY”

2012-01-17 09:17

 

For a first time home owner, purchasing a property can be a life changing experience and in the not too distant past the focus of any aspirant home owners was limited to investigating the technical attributes (or potential defects) of the property on the one hand, and on the other hand, the legalities of the Sale Agreement governing the purchase. However, since the advent of the global economic slowdown, there are other important enquiries that every prospective property buyer should make before putting pen to paper, and where the property that is being purchased forms part of a Sectional Title Scheme or a private estate development which is governed by a Home Owners Association.

Sectional Title Schemes such as apartment blocks and private estate developments, unlike freehold properties, comprise of a cluster of properties which are collectively responsible for the charges relating to various communal services which are rendered to that particular development. By way of example, in a Sectional Title apartment block, the Body Corporate (the legal body constituted in respect of the Sectional Title Scheme) is responsible amongst other things for the maintenance, upkeep and repair of the exterior of the buildings, provision of security around the perimeter and reception area of the building, maintenance of common gardens, common electricity and water usage, insurance of the building complex, and the like.

In a private estate, the functions of the Home Owners Association (“HOA”) is similar to that of the Body Corporate, except that each owner will be responsible to maintain and repair his or her own dwelling, including the exterior, as well as the insurance thereof.

The Body Corporate or HOA determines and approves an annual budget to cover its anticipated expenses and then go about collecting these monies from each owner by way of levies. Accordingly, to the extent that one will be buying into a scheme where either the Body Corporate or HOA will be expected to conduct, amongst other things, the necessary maintenance and repairs as and when required so as to maintain the standard of the complex that one buys into, it is imperative that the financial soundness of that particular Body Corporate or HOA be thoroughly investigated.

Regrettably however in the past, when loan finance was readily available from financial institutions and good financial returns were virtually guaranteed on property investments, many investors over-extended themselves by buying more than one property and have since been experiencing serious financial difficulties. Unfortunately, many property owners who find themselves in this financial predicament prefer to service their bond repayments as opposed to the levies payable to the Body Corporate or HOA. In other instances owners are simply not able to pay either the levy or their bond instalments.

The result is that a significant number of Bodies Corporate or HOA’s are finding that the percentage of defaulting home owners have risen dramatically over the last 3 or so years. This in turn places more pressure on the remaining owners to make up the shortfall of cash flow so as to ensure that the budget expenses are met which in turn translates to increased levies or even special levies. Where the burden of unpaid levies have not been taken over by the remainder of the home owners, the standard of services have inevitably deteriorated due to cost cutting.

It is also imperative that the Body Corporate or HOA makes provision for future capital outlay and periodic maintenance for example repairs to lifts, repainting of buildings, etc and as such it is imperative that a Reserve Fund is in place so as to pay for expenses, especially where the development is on the older side.

Accordingly, it is important for any prospective buyer who is buying into a Sectional Title complex or a private estate, to make specific enquiries relative to the financial health of the HOA or Body Corporate and the best source of information would normally be the last audited Financial Statements of the HOA or Body Corporate (“BC”).  This should give you an indication as to the amount of owners who are in arrears with their levies and the extent of such arrears. It should also indicate whether or not a reserve fund has been created.

There are naturally various other practical and legal issues that prospective buyers should be alerted to, but this will be dealt with in the next article.

The circumstances as set forth above are obviously not prevalent in all Sectional Title or private estate developments. However, no harm will be done by conducting the necessary financial checks.

Basilio Roberto de Sousa

Tel : (021) 422 1323  ext 236 

Direct Fax: 0865111884

Internet:   http://www.abgross.co.za

Email:     basil@abgross.co.za

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