Buying sectional title? Get the full financial picture first
Given the current economic climate, buyers really need to do their homework on the financial standing of the complex if they are buying into a sectional title or cluster scheme.

Gerhard Kotzé, CEO of the ERA South Africa property group, warns that the effects of economic conditions on the property market are not limited to full title homes and that levy defaults by residents in group schemes are becoming an issue.

The extent of the problem is highlighted by the news that the collection of arrear rentals and levies is now regulated under the Council of Debt Collectors, including the imposition of penalties and charges for late payments.

“There’s a perception that cluster and sectional title units are somehow financially safer than stand alone homes and while financial risk in terms of matters such as levies and amounts owed by the body corporate is indeed spread among owners, too many defaulters in a complex can obviously become a serious problem.”

Kotzé says it is therefore important to examine the books of a body corporate or home owners’ association before you buy – “particularly in respect of an age analysis of accounts payable and accounts receivable (including levies, special levies and other contributions due), all of which are key pointers to financial health.

“Also it’s frequently true that the audited financial information you should receive when contemplating a purchase in a group scheme is long past the scheme’s financial year end, and in such cases you should ask for a schedule of accounts payable at the date on which you intend purchasing a property.”

You should also check cash balances, Kotzé says, and whether there is a reasonable reserve to cover contingencies in the maintenance and upkeep of common property. A good rule of thumb is either three to four months’ levy in reserve per unit.

“The income statement is another pointer and there should be a comparison of the budgeted and actual income and expenditure for the previous financial year as well as an explanation for any variances. And if the accounts are not audited alarm bells should really ring.

“Finally, you should try to establish if there are any special levies pending - and do yourself a kindness by taking a good look around the complex to gain an impression of how well the common areas are maintained.”

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