Strata's administration fund deep in the red in Coogee: Purchase or Pass?

On this week’s Purchase or Pass, Chris Gray is joined by John Edwards of Residex to take a look at a property whose strata’s administration fund is deep in the red and discuss whether or not it would still qualify as a worthy purchase.

It is a two-bedroom, one-bath unit in a block of 21 units, 8.6 kilometres from the Sydney CBD and under a kilometre to the local action. The main question is that while the sinking fund has $36,000 in it, the administration fund is $30,000 in debt and the strata levies have recently been upped to $1,250 per quarter. There have been some water issues and there have been some expensive contractors looking after the building and gardens.

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Chris Gray: Now, obviously for the administration fund, and that’s the fund that pays all the day-to-day bills and that’s $30,000 in debt. What are your thoughts on that? That’s usually a pretty scary warning sign straight away isn’t it?

John Edwards: Yes, I think there is probably something else worthy of looking at that we didn’t talk about there and that is, looking at the people that are actually in that strata unit block, are they elderly people? Or are they young people? Or young professional people? If they’re elderly people, it’s quite possible that they don’t have the resources behind them to fund that strata title and do the things that they really need to do. So you need to take some care and actually look at the people in the dwelling. The other thing in this is to be a little cautious about making sure the structure of such a building was good, and that building looks quite fine.

Chris Gray: So again, you have the building and pest inspections and the strata inspections as well. With the deficient, I guess the main thing to start with is, the actual overall funds are $6,000 in credit. So I’ve had a lot of buildings that have been taking the money from the wrong account, overall at least it is positive. One of the things that we actually found through the strata report is that a normal levy was about to come in, so if you have 21 people all paying $1,250, that almost puts it back to zero in one levy.

John Edwards: So this particular strata title looks ok and I don’t think it’s an issue here. However, just remember in all states of Australia, not all strata titles actually have to have management funds or sinking funds. You go to Victoria and small blocks of units don’t, so take some care when you get into those sorts of positions with some units. This is all about research.

Chris Gray: Another thing that we thought about is, these guys have decided to up it, say from normally $750 is normally what I would pay on a strata levy. They’ve said right, lets put an extra $500 a quarter in, because over the next five or six levies, we’re going to raise an extra $3,000 per unit, which is $60,000, that goes from $30,000 debit to $30,000 credit. Or, there’s an alternative, they could just raise $3,000 special levy each and then suddenly they’re $60,000 up.

John Edwards: And there’s another alternative; they could go and borrow money. A strata title can actually go and borrow money to actually manage short falls that its got. I don’t think that overall this is a big problem.

Chris Gray: The reason I’ve bought it up is I think the average person would see that as a major issue and certainly when you pass the strata report onto your solicitor, your solicitor would be going “no no, don’t go anywhere near this, it’s obviously badly managed.” So reading into things, the other things we found out was that they’d actually sacked a lot of the contractors and then found some cheaper ones, so a lot of the overrunning bills and the rest of it they’ve had the last few years maybe wouldn’t happen either.

John Edwards: And that so often happens in strata titles, you find that all contractors seem to think that they can actually hit the strata titles very hard and it’s a warning to all title strata managers, they really need to watch they’re contractors new expenses.

Chris Gray: So purchase or pass for you?

John Edwards: I would still be interested in this property.

Chris Gray: Good stuff, and look for me, I think the strata fund issue is a minor one and is of no major consequence. However, most buyers wouldn’t be able to read into it and would probably be scared off by it, but it could be fixed by $3,000 a unit. So, I would definitely make a purchase as I think it’s a great opportunity to buy it at a good price for a reasonable property where other people are scared off.

John Edwards: And a gem of a negotiation position.

Chris Gray: Exactly, a great negotiation position even though it’s a booming market at the moment or a heated market.