After buying into sectional title scheme, buyers might discover – too late – that the scheme’s body corporate has not been run properly, that AGM’s have not been held regularly, or that the financials are showing signs of discrepancy or debt.
This is according to Michael Bauer, general manager of property management company IHFM, who says the Sectional Titles Act does not specify that owners have a fiduciary responsibility in the sectional title scheme in which they live – but owners should take an interest in their scheme.
Bauer says owners should ask about the financials of the scheme and, if meetings are not held, they should question why.
“If you have shares in a company – and have invested a certain amount of money – and there is a loss, you would ask what happened. The same principle applies if you live in a sectional title scheme – the owners must take some responsibility for the management of that scheme,” he says.
When you want to sell your unit, Bauer says you have to ensure that all the necessary documents from the body corporate – which will be needed by the bank to approve the buyer’s home loan – have been given to the estate agent as soon as they start marketing the unit to avoid unnecessary delays in the sales process.
Banks will assess the financial status of the sectional title scheme before granting a home loan, and if the seller waits too long to request these, the bond approval process would be delayed.
“When banks look at the financials of the body corporate, they will check what is owed by the scheme, whether loans have been taken to cover accounts where there have been shortfalls in levies paid, and whether the scheme is being managed properly and is solvent,” he says.
“However, over and above the banks’ basic due diligence, buyers need to do their own due diligence to ensure they know what they’re buying into.”
In cases of sales in execution, Bauer says the municipality will be paid first if there are outstanding amounts on the rates and water accounts – which there usually are, the bank will be paid second, and the body corporate third.
“If there is not enough left in the proceeds of the sale to cover the outstanding levies, the buyer will have to settle the outstanding amount. This is something that is sometimes not taken into account when buying into a scheme at an auction,” he says.
Bauer says at auctions, shrewd property buyers will often ask bodies corporate to produce their levy and interest resolution. They must then produce this, as well as a resolution passed by the trustees on the interest charged on overdue levies.
Without proof of these resolutions, Bauer says the overdue levy account can be reversed and this, then, would be to the detriment of the scheme as, in most cases, the funds must be written off.
“This is where is it imperative that the body corporate does everything ‘by the book’,” says Bauer.
In normal situations, the sale of a sectional title unit can go through without a hitch, but there things that are sometimes forgotten.
“We have seen cases where the conduct rules of the scheme have not been given to the buyer – nor did he or she request these before signing the offer to purchase,” he says.
“There are schemes that have strict rules regarding pets or the number of occupants in a unit, and if these rules have not been read beforehand, it can cause problems.”
Bauer says rules can be changed, but it does take some effort to get other occupants to vote in the change’s favour.
“Buying a property is a long-term investment, and all the preliminary investigations into that property must be done before a commitment is made,” says Bauer.
“Before buying into sectional title scheme Check that everything in the scheme you are buying into is sound – and that the conduct rules are acceptable to you – before signing on the dotted line.”