Tips to look for in your Pre-purchase Strata Report
The first thing you need to understand is that the quality of reports are highly variable and can only be as good as the quality of the information that’s made available for the inspector.
Not all strata managers are the same and some are terrible at keeping records… There’s no standard that you can rely on and random things can impact on the report quality – for instance, sometimes an important file is actually on the strata manager’s desk at the time of inspection.
And if the building is self managed, it can be very difficult to get up to date information.
A good report should have a list of documents that the inspector expected to see – take a note of what’s missing and ask why.
Don’t rely on your solicitor to review the strata report, they aren’t qualified in this area, you’ll need to read and understand the report yourself.
Many people only look at the fund balances when they get a strata report but there is a lot more than money to be mindful of, more about that in a moment. Fundamentally you need to be confident that they are raising enough money to run the building as well as putting enough away for larger capital works.
Which brings us to the Capital Works Forecast – every building has to have one done, however there is no requirement to get a good one, or to follow the recommendations.
Firstly, check whether it’s current. Then look at how detailed it is (or is not). Was it done by a quantity surveyor and does it contain a table with a recommended fund balance for every year? Or have they purchased the cheapest option?
Check whether GST is payable on levies or whether their total income is close to the level where they’ll need to register – (currently this is $75K pa for a “profitable” enterprise and $150K pa for a “non-profitable one”). If they do need to register for GST, this will mean an immediate 10% levy increase!
Remember that buildings are run by people, which means that disputes are a very real possibility. There are clues to be found in the email correspondence between committee members and the strata manager – is there evidence of any disharmony?
Check the bylaws for anything that might impact on your lot – and be aware that the bylaws in the report may not be completely up to date (although there should be a full set in the contract of sale).
History is the best predictor of the future, so any building less than 5 years old should be approached with caution as a large proportion find themselves with major defects to address and often find themselves in litigation.
You don’t have to rely on a third party to provide you with a report – you can go in and inspect the records yourself.
Regardless of whether you order a report or inspect the records yourself, make sure that you ask questions whenever there is something missing or there’s anything you don’t understand. If the strata manager won’t speak to you, talk to the person who provided the report (ideally both).
We hope these tips on what to look for in a pre-purchase strata report have been useful because a strata report is an essential part of the due diligence process and it’s something to be read and understood. You really must do everything possible to avoid the potential cost and stress that will result from buying into a poorly run building.
If you’ve found an apartment or townhouse that you’d like to buy and would like help with the due diligence, we have a service to assist you – click on the link in the notes below. And please like the video while you’re at it!!
Published: 20 June 2018
DISCLAIMER: The tips included in this video are intended to be of a general nature. Please contact us for advice that is specific to your individual circumstances. You may also need to get advice from other professionals such as an accountant, mortgage broker, financial planner or solicitor.