Whether you are thinking about downsizing or trying to step into the real estate investment world, buying property in a strata scheme is something every purchaser takes into consideration. With housing affordability continuing to decline, many first home buyers are looking at strata properties as a more feasible alternative. Strata schemes can offer an affordable entry into the property market, but they come with specific financial obligations. It is important for purchasers to understand their financial commitment and avoid potential pitfalls associated with buying in a strata scheme.
If you’re considering buying an apartment, villa or townhouse, the first difference to a freestanding house that comes to a purchaser’s mind is that there are levies and rates to be paid quarterly in a strata. However, most purchasers fail to understand the structure of levies or how they are calculated. Sometimes, this lack of knowledge causes purchasers to steer away from buying in a strata scheme and in other cases, clients buy in a strata scheme enthusiastically only to face unforeseen financial consequences later.
Most strata schemes require lot owners to pay levies quarterly. These levies are then distributed within two funds – an administrative fund and a capital works fund. The administrative fund is used to pay for the day to day expenses such as upkeep of the property and strata management fees. The capital works fund is for major costs for the building repair such as replacing the roof, reinstalling a lift or solving drainage issues around the property.
The amount of levies is decided by the owners’ corporation at annual general meetings. The contribution sought from owners for the administrative fund is decided based on the total outgoings. However, the amount sought for the capital works fund is calculated by putting together a legally mandated ‘10 year capital works plan’. This plan forecasts when the major maintenance works may come up and determines a budget for those building works. It allows the owner’s corporation to decide if the levies need to be increased to account for those costs in future.
Lot owners in strata communities may also be required to pay special levies. This is typically a one-off payment issued when the owner’s corporation has insufficient funds in the capital works fund to cover an urgent or unexpected repair. All levies are apportioned according to the unit entitlements for each lot. Unit entitlements are decided by a certifier at the time of strata plan registration based on the size and value of each lot.
It is important to be aware of the financial health of the strata (particularly the capital works fund) and to understand what the 10-year capital works plan covers for future costs before buying into a strata scheme. This prevents any surprise down the road when a special levy may be issued. Obtaining a strata report, a building report and getting legal advice on the contract of sale can help to make an informed decision when buying a strata property.
Our Property Team has decades of experience in buying and selling strata lots. Let them help you with this complex area of property law.
