Every property owner has to face the reality that sometimes serious and urgent work needs to be done. But, if you own a property that’s part of a strata scheme, that work can sometimes become huge.
Unexpected plumbing works, serious structural defects, large-scale painting jobs, or extensive balcony or roof repairs can leave owners scrambling, working out how they’re going to pay for it all.
So here’s a guide to making ends meet when strata suddenly find it has to spend a lot of cash.
The value of a healthy sinking fund
The least painful way to make sure you can pay for unexpected capital works is to contribute enough in regular levies so that the sinking fund can cover at least some of it.
So, while it can be tempting to keep levies as low as possible, a good owners’ corporation will always factor in a buffer when setting each year’s levies. But even the best run, and most cautious, body corporates sometimes need to raise money.
When they do, there are generally four options:
Selling common property to lot owners.
Raising a special levy or special levies.
Increase the amount of the regular levies.
Taking out a strata finance loan.
Here are the options in a bit more depth.
Selling common property to lot owners
It is unconventional but an amazing opportunity to create value out of thin air. The common property generally has little to no value to the Owners Corporation but then that space is transferred to a lot owners' title, there is an instant value add.
The benefits of selling common property
Instant value is created from an area that is most likely not being used.
All the owners can benefit from the sale and development of that space.
Up to 20% of a strata's value can be locked up in the common areas.
The owners can use the funds to repair the building without putting their hands in their own pockets.
You only need 75% of the owners to agree.
The disadvantages of selling common property
It generally takes a long time to get all the owners onboard with the idea.
There are increased administration and legal costs.
Raising special levies
Before it can raise a special levy or special levies, the owners’ corporation needs the approval of owners, either through a general meeting or special resolution. The money raised through the levies can then be used for any repairs.
The benefits of a special levy or special levies
The owners’ corporation can raise the money quickly and get work started.
The owners’ corporation won’t go into debt.
Any financial pain is usually not prolonged.
The disadvantages of a special levy or special levies
Not all owners will necessarily have the funds to go ahead.
It may affect property prices if you’re looking to sell in the short term.
There is a risk some owners may default or need to borrow to pay levies.
Increasing general levies
Increasing the size of your regular levies lets you spread any financial pain over time but it may not be an option if you need the work done urgently.
Benefits of increasing general levies
The cost of doing the works becomes more affordable.
There’s a reduced risk of any owner defaulting or needing to borrow.
Disadvantages of increasing general levies
The work may take some time to start and also to complete.
The problem or situation may get worse (eg leaking roof/blocked pipes) leading to increased overall costs.
Potential buyers may be put off by high general levies if you’re looking to sell.
Strata finance loans
As its name implies, a strata finance loan lets you borrow from a bank or other lender to carry out emergency works. The loan is taken out and repaid by the strata corporation rather than the individual owners. However, the owners – as members of the strata – will be indirectly liable for any defaults.
Benefits of a strata finance loan
Work can start more-or-less immediately..
Loan repayments usually get added to regular levies, causing less short-term pain.
Any work can be done at once instead of having to stage it over time.
The owners’ corporation doesn’t have to rely on all owners making their contribution upfront.
Disadvantages of a strata finance loan
The loan will attract interest, so this could be more expensive in the long term.
Because they’re relatively new many people – both owners and potential buyers – remain wary of them.
The value of any property in the strata scheme may decrease until the loan is repaid.
And finally…
If you own a strata title property it’s always best to be prepared for when the worst happens. But if you do need funds there are three main options. Which is best – and even which options are possible – will depend on both your circumstances and the personalities and points of view of the other owners.