Check out their finances before buying property in sectional title schemes

Roughly 20% of South Africa's sectional title schemes experience financial difficulties at some stage in their existence and a fairly high proportion of these actually end up in liquidation or having to arrange substantial loans.

"One has to accept that the controlling bodies of sectional title schemes, the body corporates, are often made up of people who have little or no accounting or financial experience", says Tony Clarke, Managing Director of the Rawson Property Group. "In some cases they may have agreed to move onto the board because the chairman asked them to do so in order to achieve a quorum."

In these situations, said Clarke, the levies charged are often insufficient to meet the scheme's expenses - and the problem is compounded by the levies not being efficiently collected, allowing some members to fall far behind on their payments. This, in turn, he said, leads to the building and grounds not being properly maintained, the insurance payments lapsing and security becoming neglected.

"Inevitably the value of the units then declines," said Clarke, "and at some point a massive intervention by funding organisations and/or management experts will be necessary to put the matter right."

What lessons should be learned from these all too common problems?

The first, said Clarke, is that all potential buyers of sectional title units should postpone their decision until they have seen the body corporate's financial accounts. By law, he said, these have to be made available to any member of the public who asks for them and the estate agent with whom they are dealing should regard this as his duty to get a copy for them.

Once they have bought into the scheme, added Clarke, they should then also see it as a primary duty to attend every single annual general meeting, where the finances should be carefully scrutinized again.

"The main reason why many schemes do get into financial difficulty," said Clarke, "is that attendance at annual general meetings tends to be low and the committee is therefore unable to make decisions and operate in a way that is beneficial to the scheme as a whole."

Clarke also warned potential buyers contemplating purchasing in new multi-unit sectional title projects to beware of those where full sell out has not taken place yet and may take a very long time.

"In our experience it can be disastrous for a scheme to have large numbers of unoccupied units for months on end. Empty units are often not maintained and give a hollow, lifeless feeling to the complex. Furthermore, a high proportion of empty units will prevent the sold units from appreciating in value. It is essential, therefore, for the potential buyer to find out how fast the scheme is selling and to avoid one which is obviously sticking."

It is also important, said Clarke, to ascertain what percentage of the occupants are likely to be tenants.

"While it is true that many very successful projects have a high tenant proportion, in general, it can be said that owner-occupiers take more care of their homes than tenants do, especially in low cost areas. A big predominance of tenants could and possibly should serve as a warning sign to potential buyers."

In a well-run, adequately financed scheme, said Clarke, the residents will benefit for a wide variety of reasons. They will, for example, not be burdened with any of the usual external maintenance costs as these will be extracted from the levies. They will also enjoy security at a level difficult to achieve in a freestanding home and they can lock up and go in the knowledge that the unit will be safe.

In addition, said Clarke, they may also benefit from interaction with neighbours and participate in the scheme's communal activities, such as weekend braais, pool parties, gymnasium sessions, talks and film shows. This can be especially helpful to single people, single parents and those who are new to an area.

"Sectional title schemes continue to be the fastest growing property sector in South Africa," said Clarke, "and there are good reasons for this - but do take care not to buy into a badly run, inadequately financed scheme."

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