Investment property in a block with one majority owner: Purchase or Pass?

On this week’s episode of Purchase or Pass, Chris Gray is joined by Arthur Charlaftis general manager of Realestate.com.au and Tom Panos of News Limited to analyse an investment property where the block has one majority owner.

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It’s a two-bedroom, one-bathroom unit with an undercover car space, 8.4 kilometres from the CBD and 650 metres to the local facilities. It’s on the top floor in a block of 12 units facing north east, so it gets the sun in the morning and has some district views. It has a separate bath, shower and internal laundry. The uniqueness about this property is that one person owns eight of the 12 units and with a 75% vote; he effectively controls the majority of the decisions when it comes to what strata funds are spent or not spent.

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Chris Gray: In terms of the main unit as it is, it ticks all of the boxes.

Arthur Charlaftis: It ticks a lot of the boxes. It’s small in terms of the small block, I think there’s 12 in this. It’s well renovated and it’s got a balcony off the living space so it ticks a lot of the boxes. Location is good, I think rental return and rental demand in the particular suburb we’re talking about is high, so it does tick a lot of the boxes.

Chris Gray: Tom for you when auctioneering, and you’ve got something in the sun with a balcony, some outdoor living, a nice small block and in a reasonably quiet street, most of the time is that a no brainer to sell?

Tom Panos: Tick, tick, tick.

Chris Gray: But there’s always one thing, and this is where you have to have inside knowledge because how many people would know that one owner owns eight out of the 12? So what’s actually happened in this block is that there is no strata fees in the fund and the guy hasn’t spent any money looking after the building, so it’s getting into a bit of disrepair, even though those real estate pictures look really beautiful of the actual property. Arthur, would you get into a block where somewhere controls exactly what you’re doing and could raise a special levy for $50,000 overnight, or they could spend nothing and your property falls around you?

Arthur Charlaftis: You definitely want to be on the controlling side of that, in terms of any changes you want to make. Chris I was going to ask you, in terms of how the voting entitlements work, how does that work in terms of what percentage you need?

Chris Gray: Generally, for most decisions you only need a 50% vote, or they have it in reverse and not more than 50% can vote against it. But if you wanted to double the size of the building or something like that, then you need a majority like 75%, so then it’s if more than 25% vote against it. I think the real key here is he owns eight out of the 12, but you need to look at what proportions he owns because if you have the top more expensive units or the bigger units, they’ve got more of a vote. You could own eight of them and have 80% control on it, which means the other guys have absolutely nothing they can do.

Arthur Charlaftis: So you would do a check of the strata records to see what the situation is?

Chris Gray: The easy way to check on this kind of stuff is to do a strata check, which may cost you $250, or you could go off and do it yourself. Then you can see where all the mail is being addressed. If all the mail is being addressed to a certain place, you then know that they’re owners. This is a good way to see whether there’s owner-occupiers or investors, because if the addresses are in the building then you know they’re owner-occupiers and if they’re outside the building you know they’re investors. So, what do you think, purchase or pass?

Arthur Charlaftis: I would pass on the basis of the discussion we just had in terms of ownership.

Tom Panos: I would pass I think, you don’t know how good a person he is, or how reliable he is or where he is at. I think the safest thing is to keep looking.

Chris Gray: He could be the best guy in the world but then he could sell all eight apartments to the worst guy in the world. Certainly for me as a buyer’s agent, I often try to take over the majority control of the block myself with my clients, so we can actually control it. However, I wouldn’t like to be on the other side of that and wouldn’t be that keen on buying into a block where I have no control. For that reason, I’m going to pass.