If you are in the market to buy an apartment, you will need to start getting Strata Reports for properties you are serious about.
If you haven’t bought an apartment before, you might want to read our introductory article first.
Here at EYEON, we carry out multiple Strata Records Inspections each day. And one of the most common enquiries we receive is:
Is this a good Strata Report?
What our clients really mean here is: Are there any major issues affecting the building that might make them think again about buying the property. And while we can’t make that decision for them and may not know their reasons for buying, we’ve come up with a few significant items to look out for in any Strata Report.
Special Levies are additional levies raised by a Strata Scheme when there aren’t enough funds available from quarterly levies to meet specific expenses. And while some Special Levies should ring alarm bells, others might not be a problem. So, how do you tell them apart?
Often, Special Levies are raised to pay for a large one-off project such as lift replacement or a foyer upgrade. Once the project is complete, the Strata Scheme should be free of any further Special Levies for a while. These Special Levies, while unpleasant, might not be hugely concerning as long as they are being included in your overall purchasing budget. And if the project involves upgrading facilities or common areas, it could end up being a better building after the works is done.
Special Levies might also be raised to fix problems in the building. These issues might include legal disputes or significant building defects. In some cases, legal action is related to building defects so both costs occur around the same time. Such situations are a lot less predictable and, therefore, are more dangerous as there is no guarantee that current special levies will be enough to resolve the ongoing issues.
If you are looking at an apartment with ongoing problems, there is a higher risk that further special levies will be required, and depending on the issues, longer-term impacts from building works should be expected.
In short, Owners Funds mean the net financial position of a Strata Scheme. Strata building usually operate two funds: an Administrative Fund and a Capital Works Fund.
The Administrative Fund is designed to cover day-to-day expenditures of the Strata Scheme and, consequently, it is unlikely that a large balance would be held in this fund (unless a special or standard levy has just been collected). If the Administrative Fund is in deficit, especially without any unusual expenses, it might mean that the Owners are not collecting enough in Administrative levies and might need to increase them.
The Capital Works Fund is designed to fund longer-term maintenance and capital works projects. Depending on the size of the building and range of facilities, the amount needed in this fund can vary considerably. To properly estimate these needs, a Capital Works Fund Forecast needs to be prepared by a quantity surveyor or similar expert. The Forecast will help identify whether the Strata Scheme is collecting enough in Capital Works Fund levies.
So, if funds are low and little has been spent on building maintenance, it is likely that the levies are set too low and special levies might be unavoidable in the long-run. It could also mean that the building is not being properly maintained and will eventually start deteriorating and can even become hazardous to live in. For these reasons, it’s important that Capital Works Fund Forecasts are kept up-to-date and the recommended levies are followed.
By-Laws are a set of rules that owners, tenants and visitors of the Strata Scheme must follow. The main challenge Strata Inspectors face is identifying whether the By-Laws they see are the most current and complete set. For this reason, it is always best to cross-check with the By-laws provided in the Contract of Sale.
Why is this section important? Because By-Laws may prevent you from doing things that may be important to you. For example, if you have a pet, or really want to have one, but the By-Laws state that pets are not permitted – there is not much you can do apart from walking away from the property. Similarly, if you are looking for an investment property to rent out on Airbnb but the By-Laws indicate that short-term rentals are not permitted – you’d have to either reconsider your rental options or, again, move on to something more suitable.
Future Remedial/Upgrade Projects:
In most cases, we would expect these projects would be discussed during General meetings or at least during Strata Committee meetings. And while in the long-term such initiatives are great as they ensure that the building is well-maintained, there are some financial and disruption risks. For example, if the owners need to get lifts replaced in the next year or two but don’t have enough funds in the Capital Works Fund, they will most likely need to either significantly increase annual levies, raise a Special Levy or take out a Loan which would require either of the former options to be implemented to get it repaid.
In some cases, quotes may have already been obtained which makes it a lot easier to adequately assess the situation and check whether there are enough funds available at present or whether there is a shortfall. In other cases, quotes may not have been requested yet and you can only guess how much it may cost to go ahead with a project.
How we can help?
The above are just a few issues to look out for when reading a strata report. Often, you need to look at a combination of factors to determine the current situation in a building.
At EYEON Property Inspections, we provide quality follow-up support with every Strata Report we complete. So when you get your EYEON Report and have some questions or need help to understand it a bit better, please give us a call and we’ll assist you as much as we can!
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The EYEON Property Inspections Team
At EYEON Property Inspections, we help you buy and sell with more confidence.