Strata report issue - Should I buy this investment property - advice please?

Hi All
I'd be grateful for any advice please.

I have had an offer of $670k accepted (but no contracts exchanged yet) on a 2bdrm unit in an upmarket complex in Sydney. I think i am paying a little over the market rate as it suits my personal/investment needs perfectly. it is unit in a 105 apartment complex. The site was originally a ceramics factory with steel frame but converted to an apartment complex, (retaining much of the original steel frame), in 2004

The problem is that the strata report i requested identified the issues below (please see extracts from reports below).

Would any of you still proceed with buying this property at the same price if the vendor will not accept less, if not what is the maximum you would pay or would you just walk away and forget it regardless of cost? I am not sure how serious these identified issues are?

Is there anything else i should do?

thanks for any help in advance!

Excerpt from Strata report:

Defects Claim
In July 2011 report from consulting engineers, identified building defects in common property and various units. As the building was still under warranty at this time (the period is now expired), the defects were the builder’s responsibility to rectify under the warranty provisions of the Home Building Act, and a copy of the report was forwarded to them.

The owners are currently making a claim for defect rectification against the builder (their second such claim) and have engaged Lawyers to act for them in relation to a Construction Defect Claim.

The strata manager advised that no estimates have as yet been obtained for the rectification work, however he expects costs to be in excess of $1 million.
This claim is still in its early stages and as the outcome is unknown, any eventual costs to owners are also unknown. If the owners are unsuccessful in the claim, a Special Levy may be required if they are obliged to fund the necessary work themselves.

However, the deficiencies raised as a result of inspections by Fire Consultants, Paint and Coatings Consultants, and Acoustic Consultants cause much greater concern. If the defects these Consultants have detected in a small sample of units are replicated throughout the complex, the cost of rectification may well escalate to millions of dollars.

Excerpt from engineers report:

We understand that extensive corrosion to new and existing steel beams throughout the complex has been the subject of numerous past reports.
Over large sections of existing steel or where new and old steel have been welded together, the incidence of corrosion appears to have manifested much earlier than one would expect using a Micaceous Iron Oxide system that should have received correct surface preparation and application.
We note that Dr X (edited name) has been engaged to provide a detailed report on the issues of coatings failures to the structural steel at the subject building and when his Expert Report is complete it will attached in Appendix B.

Appendix C
Building Code Solutions Report of Inspections of Units dated February 2011
A number of items of concern are noted in the report relating to possible non-compliance with fire separation of bounding walls between units and unprotected steel beams and roof purlins passing through these same bounding walls.
Building Code Solutions Report of Inspections of Units dated June 2011
All 3 units had the ceiling void above their bathroom inspected by viewing through a ceiling hatch. All 3 bathrooms displayed ventilation ducts penetrating bounding walls without fire dampers installed. This is a possible compromise of the fire rating of the bounding wall.

Appendix D
EMGA Acoustic Report dated 17 June 2011
A sample of 6 units was tested for sound transmission and most failed the less stringent BCA 1996 requirements while all units tested failed the 2004 BCA requirements.

The possible breaches and failures noted in the reports have the potential to escalate to a very significant claim if the same pattern of deficiency is proven to be replicated throughout the entire complex.

We recommend that the Owners Corporation seek legal advice to determine if the sample of units which appear to show anomalies in their Fire Protection and Acoustic Rating is sufficient in number to substantiate a claim or if a broader sample of units should be inspected and tested to arrive at a definitive conclusion.
 
I would run a mile, catch a bus across the state, then keep on running.

You would be nuts to buy into a complex which looks like it may need millions of dollars of remediation work. The structual steel corrosion and failing of sound proofing alone would be a deal breaker.
 
Would any of you still proceed with buying this property at the same price if the vendor will not accept less, if not what is the maximum you would pay or would you just walk away and forget it regardless of cost? I am not sure how serious these identified issues are?

... The owners are currently making a claim for defect rectification... and have engaged Lawyers to act for them... expects costs to be in excess of $1 million... [other deficiencies] may well escalate to millions of dollars

... possible non-compliance with fire separation of bounding walls between units

... A sample of 6 units was tested for sound transmission and most failed the less stringent BCA 1996 requirements while all units tested failed the 2004 BCA requirements.

You're prepared to pay over-market for a building with upteen-multiple million dollar defects because it suits your personal/investment needs perfectly.

I'd at least get the vendors to knock off the tamp duty.</sarcasm>

You're kidding right?
 
I figure that if the owners lose the case then it might cost upto $2million which equates to $20k per unit - tax deductible and only a worse case scenario not the most likely outcome

If its a mistake by the builders which it sounds like it is then it may not cost anything

I thought maybe reducing my offer by $20k would compensate for the risk?
 
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if you estimate the cost of repairs plus legal expenses is say 1.5m and there are say 30 units in the block.

Then 1.5m PLUS 20% = 1.8m divided by 30 = $60000. Thats how much Id be knocking off the market value of the unit.
 
I've seen this type of scenario many times before. It is a recipe for lawyer fees for ongoing court cases, strata levies being increased, special levies being raised and no one being able to sell for a decent price for years while all this drags on and on......
 
I figure that if the owners lose the case then it might cost upto $2million which equates to $20k per unit - tax deductible and only a worse case scenario not the most likely outcome

Sounds like you have already made up your mind then.

Trouble is you cant guarantee its going to be 2 mill or 3 mill or 5 mill. And depending on unit entitlements will depend on the share, not an even divide by 105.

You also have the stigma of the building faults, and you can tell future buyers "its all been fixed" down the trac, but as soon as they see the scope of the defects it will make them wonder what else will come up in the future.
 
If you are looking for an investment, this is not it. Full of major problems, and you said yourself you're paying over market.

This is madness.
 
the reason that i offered $670k is that the owner refused any lower and I want it because the apartment and complex are very nice and ideal for the 1st tenant who will be my Mum and its location is ideal for her to walk to my house and provide some childcare duties

if the defects are going to be the liability of the original builder as it sounds like they should be then it shouldn’t concern me too much and if the liability is the owners, I can compensate for this by lowering the price i pay - is there anything wrong with this logic?

there are 105 units so $1.5million costs should equate to $14k per unit which i can bear (and this is a worst case scenario since it seems the builders should be liable) athough i understand this figure may be a bit higher or lower depending on various factors

an identical apartment in the complex sold for $650k in Oct 2011 - this issue was known about at the time although legal action had not started

FYI i have now withdrawn my offer partly based on the forum responses

is there anyone that would still buy in this scenario?? -what if the price was lowered by $20k??

does anyone know how serious the steel defect is?

- i have never bought into a large complex before but i would have imagined that all large complexes would have a few various issues as in this case - am i wrong?
 
You can justify it any way you like, but as someone who has bought quite a few units, I would run a mile. You have no real way of knowing if other owners will come up with the money, or just how bad the problems are. If the builder cut corners on steel, what else did they cut corners on?

Seriously, look harder.
 
I've seen this type of scenario many times before. It is a recipe for lawyer fees for ongoing court cases, strata levies being increased, special levies being raised and no one being able to sell for a decent price for years while all this drags on and on......

i wouldn't be looking to sell again anytime within the next 10 years - have previous cases you've seen ended up ok in the end?
 
You can justify it any way you like, but as someone who has bought quite a few units, I would run a mile. You have no real way of knowing if other owners will come up with the money, or just how bad the problems are. If the builder cut corners on steel, what else did they cut corners on?

Seriously, look harder.

ok thanks everyone for advice so far - i have withdrawn my offer and am planning to keep on looking but it is hard for me to do because the apartment is so ideal for my needs
- i would really like it to work and do not mind if i don;t make a profit or make a small loss but i do not want a massive loss

i didn’t post the rest of the engineers report but it basically said that the building contruction and fitting and wear so far was of a higher than average standard - it was generally a very positive (and in-depth) report aside from the issues raised
 
the reason that i offered $670k is that the owner refused any lower
I can compensate for this by lowering the price i pay - is there anything wrong with this logic?
:confused::rolleyes:
and ideal for the 1st tenant who will be my Mum and its location is ideal for her to walk to my house and provide some childcare duties
Duties eh! fair dinkum.:rolleyes:


FYI i have now withdrawn my offer partly based on the forum responses
Good move.

is there anyone that would still buy in this scenario??
Probably not, and they probably won't if you have to get rid of it.
 
i wouldn't be looking to sell again anytime within the next 10 years - have previous cases you've seen ended up ok in the end?
No, I am sorry to have to tell you that the cases I know of are still ongoing. Builders quotes often blow out by, in some cases, 100% or more. Lawyers seek continuance after continuance and milk Body Corporates dry. It is emotionally draining and time consuming.
My best professional advice to you is to run a mile. There are plenty of buildings to buy into without these issues. Buy in one of them.
 
ok thanks everyone for advice so far - i have withdrawn my offer and am planning to keep on looking but it is hard for me to do because the apartment is so ideal for my needs
- i would really like it to work and do not mind if i don;t make a profit or make a small loss but i do not want a massive loss

i didn’t post the rest of the engineers report but it basically said that the building contruction and fitting and wear so far was of a higher than average standard - it was generally a very positive (and in-depth) report aside from the issues raised

FWIW, I think you have made the right decision. Building reports are not always reliable, either, so while they are good for identifying problems, lack of problems doesn't necessarily equal good.

You don't need to make a loss buying property. If you're worried about your mum, perhaps find a nice rental and help with the rent.
 
I think i am going to have to go to bed tonight admitting defeat and trying to forget this property but it will be hard!

is there nobody out there that would buy this?
 
I think i am going to have to go to bed tonight admitting defeat and trying to forget this property but it will be hard!
is there nobody out there that would buy this?

Let me assure you that the emotional pain of trying to get into this property now, when you know you shouldn't, is MUCH LESS than the emotional and financial pain you would be experiencing if you were an owner right now and wanting/needing to get out. :eek:
 
ok - i am getting the message loud and clear now

BUT!...

what if i could show the vendor this info and get her to sell for $630k - surely this would compensate for the issues described?

- i don;t think i would be stressed about on-going legal issues as i wouldn’t get involved in the strata discussions - i would leave it in the hands of the other owners and forget all about it, apart from when i pay the strata/special levies

- I don't foresee a need for me to sell the property again in the foreseeable future and i think my Mum would love it there - the structural problems don;t sound life-threatening or likely to physically impact her unit much?
 
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