Why your strata manager doesn’t respond to calls

If the recent insurance commission scandals have taught us nothing else, it is that some strata management firms are more about profits than service. That is not likely to change any time soon, regardless of the NSW government’s proposed new laws.

The state, indeed the country, needs tens of thousands more apartment blocks and that means hundreds of thousands of strata “newbies” which will require hundreds more strata managers to wrangle them. 

And when it comes to profit-fixated strata firms, it’s not just Netstrata that was finding novel ways to fill its coffers, although it was the company caught with its pants down and made the headlines partly because its boss was also the president of the SCA Strata Community Association (SCA-NSW) the strata manager’s professional body. 

But there are logical reasons for a culture of maximising profits to have evolved.  In short, strata managers don’t get paid enough and they are often expected to spread themselves too thinly to be as effective as they might be.

One of the most common complaints is that they don’t spend enough time working for their clients.  But when you look at the way the industry is structured, there can seldom be any outcome other than poor service or inflated charges.

Then when you examine the other big companies using vertical integration models similar to Netstrata’s, you can see the potential for maximising profits through worryingly opaque means.

For instance, using their subsidiary insurance brokerages to reclassify commissions as “fees for service”, thus by-passing the requirement to declare them to owners, is the strata “crime” of which Netstrata has been accused. But they are not alone in this as smaller strata companies who don’t have the luxury of being able to integrate their services complain when the issue of getting rid of insurance commissions comes up.

Meanwhile, an as-yet exposed area of vertical integration sees allied and sometimes subsidiary legal firms making the most of the opportunity to rack up costs in pursuing levies defaulters’ debts.  The majority of owners don’t mind this because it means levies debts get paid at zero cost to the OCs concerned. 

Slap on the wrist

The current reviews of SCA-NSW by Fair Trading, plus their internal review, plus oversight (such as it is) by the Professional Standard Board will not result in the breaking up of these businesses that seems so badly needed. The proposed laws intended to make strata managers more accountable barely qualify as a slap on the wrist

More pressingly, our state government desperately needs a stable strata management industry because of the number of new strata schemes required to tackle our housing shortage. We need competent people to manage them but we need quality, not just quantity. 

To get that, we need radical reform of the industry, but radical reform means disruption, and disruption will reduce the number of strata managers just at a time when we need more to manage the proposed increase in apartments. That’s a hell of a catch, that catch-22.

Francesco Andreone of GoStrata explained to me recently how the strata management industry has a systemic flaw which means that commissions, integrated subsidiaries and poor service are almost fundamental requirements for businesses to succeed and grow.

Let’s start with the fees, which currently run between $200 and $260 per apartment per year (they may be more or less but that’s the ballpark). Regardless of the size of the buildings, those fees are locked in at every contract negotiation.

Now, if the building has an established, settled and well-informed strata committee, the impost on the strata managers’ times may be minimal.  Collect the levies and pay the bills, organise the AGMs and send out the minutes, fire off the occasional Notice To Comply to naughty residents, and that’s it. 

Now, all of that changes if the building has a newly minted strata committee, featuring people who have never lived in strata before and have no idea about strata laws or regulations but just want to be on the committee so they have a say in how their building is run (a very common motivation).

In that case the strata manager is likely to be called on frequently to advise and adjudicate – roles that are probably not specified in their contracts – all of which increases their costs versus profits. 

Costs versus profits

So how does all that work out? If they are getting, say, $250 per unit per year in a 100-unit block, that boils down to a whisker over $480 a week.

The average salary for strata managing agents in NSW is between $80k and $110k for a 40-hour week. If you settle on $95k, that works out at just over $45 an hour. Add in super payments, annual leave, sick leave, public holidays and the cost of running the office etc etc and that could easily blow out to a cost just under $60 an hour.

So, if your strata manager is spending more than eight hours a week on your 100-unit building, including all the ancillary admin services, they could be operating at a loss.  If the building is smaller, the income is less but the amount of time required to service it is not necessarily diminished: often, the smaller the block the more personal and therefore intense the problems.

If the block is larger, that means more income but potentially bigger and more frequent problems.  If the block is brand new and the residents – especially the committee members – are new to strata, the imposts on the strata managers’ time could go off the scale.

But whatever the costs balance is, when the income is effectively fixed, the more work a strata manager does, the less profitable he or she becomes, so the impetus is to do less rather than more for their clients.

That’s why a lot of strata managers will charge more for what seems like insignificant work, like reading and responding to emails – though few of them reach the dizzying heights of charging $16,000 for sending five emails. These are called Schedule B charges and, once again, they are wide open to exploitation (as in the example above). In the worst cases, strata managers get commissions from their bosses for ramping up the Schedule Bs.

Fatally flawed business model

When you look at the bigger picture, strata management – an increasingly essential service in growing communities – is fatally flawed as a business model.  The residents want and need better and more frequent service, the strata managers are eating into their profits when they provide it.

One answer would be for the government to set minimum strata management fees and maximum numbers of households for each agent to manage.  The additional costs to owners could be offset by banning strata insurance commissions. 

The number and amount of schedule B fees would be regulated and strata managers would be limited to one-year contracts.  With a minimum fee structure, strata managers would be allowed to charge more for better service but the big companies would no longer be able to undercut the smaller ones before swallowing them up into their huge conglomerates.

This is, of course, pie in the sky.  We should not underestimate the profound influence that SCA-NSW has on the state government. Furthermore, the SCA has always rejected the idea of setting its own fee structure, as that would mean it was acting like a cartel which, ironically, is effectively what it is.

Radical change in the strata management industry is desperately needed, for the benefit of both strata managers and their owner-clients. But, like the overworked strata manager with too many clients in overly dysfunctional buildings, it will never come.