Urgent - Strata Sinking & Admin Fund balances too low?

[monalisa]

Hi All

My sister and I are purchasing two units next door to each other. One settlement will be prior to X-mas so we can renovate the unit during the break, and the other one, which is in a more reasonable condition will be mid Jan.

I am currently going through the strata report, and the exchange is to happen by Monday at the latest to enable us to obtain vacant possession 3rd week of December.

There are 36 units in the block, and the strata plan was registered in 1975 - so about 36 years ago!

• The Sinking Fund is $340 in DEBIT balance (the forecast states there should have been at least $1,254 in there)
• The Admin Fund is positive $5,455

• Close to $5K in levies are in arrears!

The Strata recently raised a special levy $444 per unit for some fencing.

The strata report notes special levy will be required to get around the debit balance of the sinking fund. But I wonder why would they not pursue the outstanding levies first?

The unit I am purchasing has a leaking ceiling - which is meant to be fixed by strata prior to settlement (there is a clause in the contract to this effect).

The numbers look horrid, and I wonder if this will cause issues down the track. I think the properties are going to be $200 (each) negatively geared per month, I wouldn't want the strata blown out of proportion and impact the other all cash flow.

These are our 2nd properties each, so learning.

Would appreciate your insights.

Thanks
Mona

 

[Propertunity]

Mona, for 36 units I'd expect to see a min of $36,000 in the fund (which allows repairs of $1,000 per unit) or preferrably $144,000 ($4,000 per unit) NOT $5K - even if all the arrears were collected.....it is not enough.

This can only come about by 2 things:
1. Levies are too low - expect to pay $620-650 per qtr these days
2. They have had a large expenditure recently and now need to build up the fund again.

Go thru the strata report and look for large previous spends.
Also look for quotes called for and then not carried out - or you may be up for a LARGE special levy in the very near future.

 

[pennyk]

If you are still able to, I would pull out prior to exchange.

It sounds like the body corporate is not run well, and there is too great a risk here of having big levies in the near future...... or having problems unresolved cause there is no money

 

[DaveM]

I was going to reply, but instead will just +1 to what Propertunity said

Note that low monies in bank is not necessarily a bad thing - there are plenty of strata schemes out there falling to pieces that have hundreds of thousands in funds, and a committee full of old fuddy duddies who wont approve a cent of expenditure.

Levies are raised to be spent - otherwise there is no point in raising them. The admin fund is healthy(ish) and is probably run in surplus. The sinking fund is likely run out due to the levy arrears (sinking is typically a lower % contribution than admin).

Personally I would not pull out just yet, but look at the recent financials per Propertunity and see if there have been recent large capital expenditures. In NSW is it is now law to have 10 year sinking fund budgets in place, allow $100 per quarter increase over current levies to cover this in your calcs.

 

[twobobsworth]

Have you seen the movie The Money Pit?

I recently sold a unit in similar circumstances. Was harder to sell because buyers were scared off with the high strata and constant special levies.

Would want to be a bargain price or something special about the unit to proceed for me.

 

[monalisa]

Thank you all for your responses.

Admin Fund had some major expenses paid out from - which includes management fees (which appears to be 12% of the levies raised and other income of about 86K for a nine month period).

It appears some of the recurring expenses have been paid out of the admin fund - e.g. water usage ($17K - this is unusually high!!), cleaning and gardening of $7.5K, R&M of 5.5K.

With the sinking fund - had a few expenses- total levies raised of $8K.

Something doesn't seem right - the levies (excluding other income) add up to $70K over a 9 mth period - An average of $648 pq - but the strata pq is $400.

It seems the owners of the building over time have not managed the levies to ensure they account for the future - so its at the expense of the new owners.

The most interesting bit I found is they have to fix the bathroom ceiling - how would they afford this now!

 

[monalisa]

Have you seen the movie The Money Pit?

I recently sold a unit in similar circumstances. Was harder to sell because buyers were scared off with the high strata and constant special levies.

Would want to be a bargain price or something special about the unit to proceed for me.

I think we are getting a good price. But I don't think this factor is something which will compel me to get a place like that, as we are only starting out with our second property each -so I wouldn't want our future cash flow impacted - and rather be more cautious with what may lie ahead - having said that, can't mitigate all risks involved.

 

[twobobsworth]

The most interesting bit I found is they have to fix the bathroom ceiling - how would they afford this now!

Another special levy.

I should note the place still went up in value 21% in 2.5 years.

 

[Random Eagle]

If you do go ahead, I'd be looking to get onto the Council of Owners to establish some control over the direction being taken by the current owners / strata managers. It may turn out that you have to work to the give strata managers the flick and get a new outfit to look after your concerns.

 

[Edmond Dantes]

......Something doesn't seem right .....!

You wrote it yourself... you'll always be worried if you buy them. Unless it is a bargain -which doesnt sound like it- i'd let it go....

 

[Rolf Latham]

Run baby Run

ta
rolf

 

[lizzie]

I'm with Rolf ... there are plenty of deals to be had out there without deliberately buying problems.

 

[monalisa]

Hi all

Just a quick note to let you know we successfully pulled out of the purchase.

I think it would have been quiet detrimental to our cash flow.

I feel we made the right decision! No regrets. The contracts had not been exchanged, so we are getting our 0.25% back.

Thanks for your input.

Rgds
Mona

 

[Jen_PFR]

Definitely the right option. We sold a property in a similarly badly run complex for the same reasons - it was incredibly poorly managed. It just wasn't worth our while hanging onto it and hoping things would improve.