Sectional title developments are one of the fastest-growing sectors in the property industry, and, under the right circumstances, can be excellent investments. Learning how to recognise these circumstances, can be somewhat daunting – especially as an inexperienced or first-time sectional title investor.
“The most important thing to remember when buying into a sectional title scheme,” says Bill Rawson, Chairman of the Rawson Property Group, “is that it’s not just your own finances, management and maintenance that will affect the value of your asset. The competence and expertise of the development’s trustees or managing agent, coupled with the efficacy of the Body Corporate, will play a significant role in your property’s appreciation as well.”
With this in mind, Rawson recommends investigating not only factors that affect you and your prospective unit, but also some key indicators that can shed light on the scheme’s management style and proficiency.
Factors that affect you and your unit
- The plans
The best way to understand exactly what you’re getting out of a development is to check the plans, thoroughly and in detail. “Make sure you know which areas are part of your section, which areas are for your exclusive use, and which areas are common ground for all residents to enjoy,” says Rawson. “These definitions affect your maintenance responsibilities, so make sure you know the difference. Also double check parking allocations and make sure your unit number corresponds with the plans.”
- Your Participation Quota
Your participation quota determines your levies, your share of ownership of common property, and your voting power when it comes to decisions affecting the development. “Make sure this is clearly defined, and that you understand any factors that could affect your rights in this regard over the course of your investment,” says Rawson.
- The scheme rules
All sectional title developments will have a set of rules drawn up by the Body Corporate. These can include maintenance responsibilities, design restrictions, and noise and behaviour limitations amongst other things. “Make sure there’s nothing that you can’t live with,” says Rawson, “because you’ll be stuck with them once you’ve signed on the dotted line.”
Factors that indicate good/bad scheme management
- Good financial management
“Positive cash flow is essential for a well-run sectional title scheme,” says Rawson. “Make sure you ask to see an audited, up-to-date balance sheet before making any decisions on a purchase. There are a lot of borderline-insolvent schemes around, and you don’t want to buy into that kind of trouble.” Good indicators of solid financial management include up-to-date budgets, realistic and annually-increasing levies, and a sizeable reserve fund for unexpected arrears or large, future upgrades. “Evidence of regular maintenance is also a good sign,” says Rawson, “as it shows consistent cash flow and attention to detail.”
- Strong governance
There are strict conditions set out in the Sectional Title Act that govern the way the managing agent and Body Corporate should operate. These include holding comprehensive (and properly minuted) annual general meetings, having all financials audited and signed off by the trustees, and keeping insurance policies up to date with sufficiently broad cover. Make sure the scheme you’re investing in can show proof that these conditions are all being met. “There are a lot of schemes run by trustees who aren’t aware of their responsibilities under the Sectional Title Act,” says Rawson. “This can lead to erratic leadership and management, which tends to allow important issues to slip through the cracks – usually resulting in the slow deterioration of the development as a whole.”
- Effective day-to-day management
Having the right rules in place is one thing, but being able to enforce them is another. “Check the status of members’ levies,” suggests Rawson, “and think twice if there are serious arrears. Allowing a culture of non- or late-payment is a sure sign of weak management, and a good indicator that the development may descend into financial difficulties in the future.”Rawson also advises taking into account the condition of the common property. “For a development to flourish, maintenance alone isn’t enough,” he says. “The best sectional title schemes will show signs of ongoing improvement, which can be seen in well-kept and modern common areas.
All the necessary information to perform these checks should be made available by the sectional title scheme’s managing agent or Body Corporate. “Don’t be afraid to ask questions or clarify anything you don’t understand,” says Rawson, “and above all, don’t be tempted to buy into a scheme with questionable or ineffective management.”
For more advice on sectional title ownership and opportunities, contact the Rawson Property Group on 021 658 7100.
