Purchasing a property is generally a large and long term investment for most people. Carefully evaluating all elements of the property structure both inside and out together with the property location are fairly obvious considerations for deciding to go ahead with purchasing a property. In addition, there are service providers readily available who offer building maintenance inspections to double check for latent defects and other building maintenance requirements to factor into the purchasing decision and online property valuation reports can also assist with determining an appropriate price to offer.
For purchasing a sectional title unit, far less obvious, but equally important, is to evaluate the financial and governance performance of the body corporate which can have a significant impact on the property asset value growth as well as levy payment escalations ahead. Purchasers should request the seller or estate agent to provide a copy of the latest audited financials, AGM minutes and rules for the body corporate, all of which should be reviewed for relevant context to inform an investment decision when purchasing a sectional title unit.
Where audited financial statements are outstanding for several years, this is a significant warning bell to investigate further, and may indicate poor financial management or financial distress in the body corporate which poses a serious risk to potential purchasers. The audited financial statements should be carefully reviewed to identify whether the body corporate has reasonable reserves (3 month’s levy income is a preferred reserve for a well managed body corporate), whether levy arrears and defaulting owners are a problem, whether maintenance expenses appear reasonable and consistent and importantly if the body corporate is achieving a surplus indicating that current levy income matches expenses. The audited financial statements can suggest whether significant levy increases or special levies may arise in the short term which will need to be budgeted for when investing in a sectional title unit.
The latest annual general meeting minutes generally record further relevant information: special maintenance projects either completed, underway or planned, governance or other risks to the body corporate (e.g. the trustees’ report included with the AGM is a very useful commentary to look out for) and important focus areas currently being debated or investigated. Also, the body corporate rules which are binding and enforceable should be checked to ensure compatibility and to pre-empt potential difficulties down the line. Common concerns are rules regarding pets, parking, external fixtures and aesthetics and are best understood in advance before committing to purchase a section in the body corporate.
Sectional title investors are therefore urged to take the time to perform a due diligence on the body corporate using the tools and reporting outlined above. When in doubt, either the estate agent or a sectional title management specialist such as Trafalgar can be approached for advice and an independent view is worth adding to the property investment decision making process.
Written by Andrew Schaefer – Managing Director at Trafalgar Property Management