This is what I wrote in the lead Forum piece on the front page – in the right circumstances, this could be a bargain. An apartment in a building that’s had its defects fixed, at a reduced price because of the debts.
Our Flatchatter is seriously considering buying an apartment for about $500k. However, he has discovered that the 70-odd unit development is about $1.5 million in debt and the capital works fund is $30k short.
There seem to be a number of special levies in the pipeline too – presumably to top up the capital works (or sinking) fund.
“Should we run immediately or look into finances deeply first?” they ask.
The first instinct is, of course to run away very far and very fast. But is it the smart thing to do? After all, there are people spending a lot more on units with no idea of what the ultimate costs of defect rectification may be.
Simple fact: all apartment buildings in Australia have defects. This building’s defects have been discovered and, it seems, have been fixed.
So let’s break down the finances. It may be that the vendor has already factored in the debt, knowing that will keep the price down.
So how much cheaper is this apartment than a unit in a similar block in that suburb but which doesn’t have a $1.6million hole in its bank account?
Also there’s the money the purchaser is saving from not having a higher mortgage for the next few years. Let’s call the total difference Factor X.
Now, with one per cent of the unit entitlements (10/1000th), our Flatchatter is up for $16,000 to pay their share of the debt that they would be taking on when they buy the unit.
Weigh that against whatever Factor X is and they could be ahead of the game because what we have is a reduced mortgage and a building that could be defect-free (although you’d want to look into that quite closely).
I wouldn’t run away just yet, not until I’d discovered how thorough the defect checks and rectifications have been. It could be that this was previously a bad block that’s been fixed up and is now being well run and that would add up to a good investment to many people.