ONLY FOOLS AND HORSES

Only Fools and Horses?  See HERE

I’m writing this blog to give you a “heads up” if you own a Unit or Apartment in a complex, or are thinking about buying one.

There are plenty of people who attempt to get rich quickly and don’t care how much stress, pain and suffering they inflict along the way. There are others who don’t care about the people they are engaged (and paid) to work for and treat them with contempt.

I’m going to talk about Bodies Corporate, also referred to in the USA for example, as I understand it, as Homeowners Associations (common-interest developments – CIDs) and the like, and the Managers of such complexes.

I’ve been the Chairman of 2 Bodies Corporate and both times for me it was a non-remunerated nightmare.

There were, as I saw it, four groups in constant battle.  Firstly the owners (represented by the Body Corporate) of apartments who wanted their rent returns to be maximized and costs minimized.  Fair enough.  But many owners were not business people, did not understand their responsibilities and were, in the main, unreasonable to deal with.

The second group were On Site Managers, those people who had purchased the Management Rights to the complex of apartments. Some were experienced, but many, including three I dealt with sometimes on a daily basis, had no idea what their legal (and moral) responsibilities were to the other three groups.

Thirdly, the companies engaged to provide secretarial and billing services otherwise known as strata community management companies. I found the very senior management within these companies to be, mostly, experienced and knowledgeable. Sadly though, they often sent junior staff to Body Corporate meetings and these poor souls were out of their depth and made a complete mess of their involvement, often turning up ill prepared for an often hostile audience.

And last but not least, the tenants, the people who rented, either long term, 6-12 months or more, or holidaymakers who stayed for a week to a month.  Most were happy to be on vacation and took everything in their stride; others were just demanding, whining, whingeing, complaining pains in the nether region.

I’ve identified the protagonists. Now to issues you MUST consider before buying into a complex either as an owner occupier or an investor. This list is not comprehensive and is from my own experience.

The owners of the Management Rights in a complex that provides predominantly holiday accommodation do not like owner-occupiers – FACT.  All they get from us is their annual fee per Unit and no letting or other income, so we cost them money.  Be prepared for a frosty reception, especially if the Unit you’ve just bought to live in, was formerly in their “letting or rental pool”.  You’ve just cost them say $4,000 a year in income and a $20,000 capital loss depending on how valuable the letting is to a potential buyer of the Management Rights.  They may smile to your face but some will do almost anything to get you so angry that you want to move out and (hopefully) sell to an investor.

In my State there are two Forms that a purchaser receives when they buy into a complex.  One is a Warning Statement (BCCM Form 14) and the other a Body Corporate Information Certificate (BCCM Form 13). Both are useless to potential buyers!

The ONLY way to get a true picture of what is going on within the Body Corporate is to get your lawyer to conduct a thorough reading of the Body Corporate records, or better still, get permission to examine the records yourself. Your lawyer can arrange this.  Now, you may not be able to interpret some of the legal or accounting issues contained in the reports and general correspondence but I’ve found that you will discover arguments, fights, major issues and get a sense of where you are about to buy… is it a calm and peaceful place, or a nightmare where everyone is at war!

I’ve seen inadequate disclosure on these forms where figures are obviously false and misleading. I’ve also seen cases where no mention was been made of major issues with the building, such as failing flood pumps in the underground garage, or that the building is riddled with “concrete cancer”. A further and deeper examination in one case revealed so little money in the “Sinking Fund” that every Apartment owner would be up for a special levy of $20,000.00 to fix the spalling concrete!

That brings me to the regular fees (contributions) that you will have to pay to the Body Corporate. This will vary from state to state, country to country but the basics are the same.

The contributions here in Queensland are designed to be collected in 2 parts. One (The Admin Fund) for the day to day running of the complex, and the other (The Sinking Fund – are you getting a sinking feeling yet?) to be put aside for major, long term expenses such as painting the outside of the building, re–roofing, replacing the swimming pools and so on.

When buildings are first put on the market a Developer will often try to make the contributions as low as possible. They don’t want to frighten people off. Sales proceed and the new owners, occupiers or investors, are really happy with the “low” fees. It doesn’t take long for the cracks to appear.

I’ll give you an example.  Say you owned your own freestanding home. You alone would be responsible for setting aside money to paint the outside, for major repairs, replacement of a large number of items as they wear out, chemicals for and maintenance of the pool, building and other insurances, yard maintenance and cleaning, mowing and so on.  That is a lot of money and, if you do an honest ten year forecast, allow for contingencies, and work it back, allowing for inflation too, you will arrive at a reasonable figure.

In my experience, that figure is normally 2 to 3 times the amount set up by most developers and is therefore a recipe for disaster.  I’ve seen complexes where the contribution rate was set at a mere $39.00 a week. What a joke.  After a Quantity Surveyor was called in to complete a ten year sinking fund forecast for example, the contribution rate should have been more reasonably set at $85.00 a week.  Oh my goodness, you should have been at the first meeting where the owners were told their contributions SHOULD immediately rise from $39.00 a week to $85.00 a week AND, to rub salt in the wound, that the $85.00 would be $88.00 in Year 2, $92.00 in Year 3 and so on.

You can see what I mean when I say “are you about to move into a War Zone?”

The number of Apartments that go on the market as a result of such disclosure can also have a horrible effect on the values in the complex. Suddenly,10 or 20 Units go up for sale at once. Buyers become suspicious and delve into the problems, rumours fly and the offers are low.  Everyone suffers.

Common Property and Exclusive use areas.  There is plenty of information out there about what constitutes “common property” that is where anyone can go, and “exclusive use” that is, otherwise common property that has been allocated for the exclusive use of an owner.  The number of fights and arguments over this has to be seen to be believed.  I think disputes in this area are only exceeded by brawling over dividing fences. You’ve been warned!

It is important to know and understand how the Contract between the On Site Manager, those who have bought and hold the Management Rights, and the Body Corporate (in essence you and your fellow owners), works. If you don’t it will lead to friction, misunderstandings, fighting, and even major legal battles where only the lawyers win.

One area that really used to grind my gears were issues arising from On Site Managers “trying it on” where their contracts were “to do” contracts. In these cases, part of your contributions were paid to the On Site Managers to actually DO the work around the complex, not hire someone else and charge the Body Corporate.  Sure, they could hire someone else to do the work if they didn’t want to do it themselves, but they had to pay them out of their own pocket, not “double dip” as it were.

This is where close examination of the accounts is crucial and is an area where I’ve been highly critical of Strata Managers in the past. I’ve seen many sets of accounts where the On Site Mangers have tendered accounts to the Strata Manager to which they were clearly not entitled to be paid, and have been paid.  Do not let this slip through your fingers as you, and your fellow owners, are being ripped off!

On the other hand, some On Site Managers have a Supervisory Contract where they are paid a basic salary to “supervise” gardeners, pool maintenance companies and the like. Oh boy, have I seen some things where this arrangement has been milked for all its worth.

Again, careful examination of the accounts and demanding to see source documents should protect you from this unscrupulous activity. And don’t be afraid, at your meetings, to cross examine the On Site Manager and the Strata Manager, to get the answers you want and that the Body Corporate needs.

To some examples… Nepotism. My absolute favourite.  Why engage a competent and competitive contractor when you can get your cousin in, who may or may not be qualified and competent?  But what the heck, he’s family, and, that idiot Body Corporate are paying so who cares?  “That idiot Body Corporate” may be right.  The owners may be fighting with each other so much that they don’t care or can’t see they’re being ripped off.

Be aware of endless repairs to the same broken down piece of equipment. Someone may be getting a kickback every time its “fixed”.  Far better to bite the bullet and replace it.

Question everything.  Look, watch, observe. Don’t become paranoid (a shade of paranoia or suspicion is good!) and if it doesn’t “seem’ right, it probably ain’t…

More (much more) on Bodies Corporate in another blog…

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3 thoughts on “ONLY FOOLS AND HORSES

  1. Linda says:

    Excellent read – thank you Gordon!

  2. Lyn says:

    Very interesting and relevant. thank you

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