- This topic has 3 replies, 4 voices, and was last updated 9 months, 2 weeks ago by .
-
Topic
-
We are looking at buying an apartment (with a personal mortgage) at around $500k. The strata is in place for 70ish units and we would have 10/1000 entitlement (as in 1%).
We got the strata report and on the face they are listed as being $1.5mil in debt. That is because of a loan they took out to fix quite a lot of stuff – and it does look like all the work has been completed.
The admin fund is listed as just under -$1.5mil and the capitol works fund is about -$30k.
On the face of it, that is incredibly worrying for us, but we want to know: should we run immediately or look into finances deeply first?Also, the REA when showing us the place said there weren’t any special levies, but of course there are (3, in fact). That obviously bothered us, but is it just to be expected?
Thanks for any help with this.
-
Replies
-
70 units in a block. 1/70 = 1.4% Your 10/1000 entitlement is less than 1/70th. That means some units have more than 1/70th entitlement. Possibly because they are bigger. The unit entitlement also determines how much levy you are asked to pay. The 10/1000 entitlement pays a lower levy than for example, 20/1000.
Admin fund: $1,500,000
Capital works fund: $30,000
If you really like this unit and it has a fantastic location, you should take a closer look at the finances. You need to see their budget, past transactions, insurance claims / premiums, levy payment history of the owners and their ten year capital works plan. Are there embedded networks? Otherwise, run.
If they have a debt of $1,500,000 and they have the same amount in their administrative fund, why don’t they pay off the debt AS FAST AS THEY CAN? Debt usually incurs interest. No one lends $1.5M without charging interest.
Or is this a debt where the interest charged is LESS THAN the interest earned (minus 30% tax) from the admin fund?
You need to look at their budget to find out how they spend their money from the administrative fund. Does this place have a lift, building manager, manicured gardens, swimming pool, gym, tennis court as a well as $1.5M debt to pay off? How many years will it take to pay off this debt?
The relatively tiny amount reserved for capital works is interesting. If you are an investment property owner, you can claim the administrative fund levy as an expense for income tax purposes. You cannot claim the capital works fund levy. Has someone made the administrative fund levy really high to help property investors get a bigger tax deduction?
The tiny capital works fund might also be the result of recent $1.5M capital works. They just have not had time to rebuild the fund. I worry that they don’t care about property maintenance. They leave everything to deteriorate until they can no longer ignore it and then take a massive loan to fix everything. If that is their attitude, you should run.
If there is an embedded network in this strata property, I would continue looking for something else.
1 user thanked author for this post.
1.5 million in debt isn’t a lot for a 70 unit block. You have 1% so your share is $15,000. They will probably be paying 9% interest, so there is likely a move to firstly get rid of the debt, so they aren’t paying interest, and there are probably other things that they want to do. It also is possible that some of the debt is due to strata arrears and that can take a while. You will need to take into account that there will be special levies.
1 user thanked author for this post.
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.
If you want to be alerted when anyone replies to your posts or responds to this topic, please register and login, then you will be able to subscribe to the topic. The opinions offered in these Forum posts and replies are not intended to be taken as legal advice. Readers with serious issues should consult experienced strata lawyers. NB: Longer threads may spill over to additional pages - look for the numbers on the bottom right, under the last post.
1 user thanked author for this post.