A Search Agents View

Tuesday June 5th, 2018

As a Body Corporate records search agent, my role is to find out what’s going on in a body corporate so my clients which are buyers for the most part, can choose to either commit to purchase or walk away from a bad investment.

What qualifies as what’s going wrong? How long is a piece string?

Buyers have different resource levels and different goals. The cashed-up investor may be fine with a body corporate with significant issues so long as they get a great deal. Conversely the first home buyer might be scared off at even a hint of the dreaded special levy.

As the person preparing these reports, my role is to point the finger at anything and everything that might be or could develop into an issue.

There are five key areas where bodies corporate experience problems. They are:

  • Financial stability
  • Common property defects
  • Legislative compliance
  • Body corporate management
  • Disputes

These areas are like pieces of a jigsaw that together, make for a solid investment. A problem in one area can easily lead to problems in other areas as they are usually reliant or linked in some way.

Let’s look at some examples of issues in each area.

FINANCIAL STABILITY

Tasks in a body corporate cost money. Problems anywhere in the system will lead to more work for someone, and that inevitably translates to more cost.

The higher the costs the more owners will have to contribute via levies.

Budgets

In the body corporate world “the Budget” is the bible. The budget dictates contributions which are the life blood of the scheme. Not surprisingly the most common place for financial trouble is in the budgeting.

Under-budgeting the administrative fund levies (running costs for the scheme) leads to fund deficits which can in turn leave the scheme without enough funds to pay their expenses.

Running costs are crucial so it tends to be capital accumulation, or sinking fund contributions that gets short changed most often. A low sinking fund balance may not have repercussions for several years.

If the scheme under collects today, in the future someone is going to have to make up the shortfall. This is easily identified by reviewing the sinking fund forecast against the current financial position of the sinking fund.

Collection of Contributions

Once the budget’s have been set the contributions must be collected. It is unusual to see a body corporate without levy arrears which can be for a number of reasons ranging from intentional to just forgetting to pay.

Unfortunately there is a cost to collect. The collection costs are added to the lot owner’s account and are a recoverable debt, but in the mean-time the body corporate must cover the debt collection cost and the shortfall in unpaid levies.

If collection is delayed for too long or legal action goes awry, the body corporate can find themselves stuck having paid amounts they’re never going to collect. That could be anything from $100 up to $150,000 or even more!

Problems with collection also have the potential to impact cash flow and a body corporate with a cash flow crisis is not pretty. Owners who pay on time can find themselves having to prop up the body corporate finances until collection can be made.

Couple collection problems with cash flow problems and financial instability is the result. The body corporate can end up haemorrhaging money for not much result and owners end up paying more and getting less.

Throw in another issue such as defects in common property and things start getting very tense indeed.

CONDITION OF COMMON DEFECTS

The most common problem affecting common property is water ingress, a lovely catch all term the building trade uses to indicate there’s a leak.

And therein begins the drama. Where is the leak coming from? And where is it going? Turns out, that can be quite hard to define.

The most common culprits are:

  • Roof leaks, gutter leaks or leaks to any one of several elements that make up the roofing system
  • Failing / failed waterproof membrane on roofs, balconies or planter boxes
  • Windows, window sills and/or window frames
  • Leaks from plumbing infrastructure
  • Leaks to, or under the slab, which then leech water upward into the building

Anywhere in the building could be at fault, or, as is most common, multiple areas at once. No wonder water ingress is the single biggest common property issue.

Other potentially expensive problems that come up with common property include:

  • Concrete spalling (usually resulting from water ingress)
  • Cracking to internal and external walls, which can be a symptom of subsidence
  • Sink holes, usually caused by shifting fill
  • Failure of the electrical switchboard or fire safety infrastructure
  • Flooding (both event specific, such as storm damage, or site specific, such as failure of drainage systems)
  • Retaining wall failure

Every one of these issues will require funds to rectify, often rather a lot.

The core of body corporate responsibility is maintenance of common property. The issues discussed above are additional issues that most buildings will face at one time or another.

A solid program of maintenance, good record keeping and reporting, and a healthy sinking fund are all important tools for maintaining common property.

LEGISLATIVE COMPLIANCE

Body corporate legislation controls how decisions are made, actions that can be taken and reporting required. The goal here is fairness, transparency and equality.

Non-compliance with body corporate legislation is a private issue for each scheme and its owners. No one’s going to come and tell a rogue committee off or fire a lazy manager. It’s up to owners to be watchful and challenge circumstances themselves.

The same is not true of other legislation.

Workplace Health & Safety legislation requires that properties be well maintained and safe. A failure here can lead to accidents and law suits.

Fire safety legislation is about providing safety, protecting the rights of the owners and the wider public. That means that failure to adhere to legislative requirements can be punished by fines from Queensland Fire & Rescue Service and even incarceration for extreme cases of negligence causing serious injury or death.

BODY COPRORATE MANAGEMENT

Like any democracy, a body corporate is run by the people for the people.

The most common problem in body corporate management is owner apathy. Essentially the people don’t care. Owners don’t vote, and they don’t nominate or sit on committee.

Without leadership the body corporate stagnates, and the scheme becomes rundown.

It is possible for a building to become derelict, and shockingly quickly. Since apathy usually goes hand in hand with stagnation of capital accumulation, the longer it continues the larger the bill to eventually get the scheme tidied up.

Contractors, Strata Managers and Caretakers, are another level of management that can and do go pear shaped.

If an elected committee has no confidence in their paid support the business of managing the scheme becomes difficult until the dispute is resolved.

DISPUTES

There are two types of disputes: external and internal.

External disputes are those with ‘outside’ contractors. Disputes can arise with neighbours, developers and even the local council.

Disputes with Caretakers are common, difficult to resolve, and cause much turmoil for committees and residents alike. Similarly disputes with Strata Managers accrue costs and derail business for a time.

New buildings often find themselves complaining to Queensland Building and Construction Commission (QBCC), or even seeking legal action in the courts to force rectification of defects.

Up to now everything we’ve talked about is going to translate to higher contributions for owners.

Internal disputes are a different breed of problem.

These are issues that arise between committee, owners and residents. The thing is, we’re talking about people’s homes. Internal disputes are usually emotive and can be incredibly distressing to all involved.

Some people are not suited for body corporate living. It’s that simple. They struggle with sharing facilities and find the strictly regulated management oppressive. Simple issues, like where you can and can’t park your vehicle, can turn into intense dramas.

One person has the potential to create significant problems.

If that person is someone in authority, such as a committee member or Caretaker, the problems are amplified. A body corporate is a tool for joint ownership and allocation of costs. It should never be used as a weapon to punish.

CONCLUSIONS

I spend a lot of time focussing on the negatives in strata schemes, but the reality is that majority of schemes are well maintained, well managed, happy communities, that occasionally have challenges.

They can however have significant, costly problems.

Knowledge is power. Knowing what issue arise, and how to spot them, can help owners and buyers alike navigate the often complex world of shared investing and living.

This article was contributed by Lisa Rutland – Principal, My Body Corp Report.