How to minimise the extra risks when buying an apartment or unit versus buying a house.

Wait, what? Extra risks?

There are some additional risks that apply when buying into body corporate schemes (units/townhouses/apartments) that you won't necessarily see in freestanding house properties.

Understanding bodies corporate - a brief intro

When you buy into a body corporate property, you’re buying into a complex with the other owners. This means that whilst you own your individual property lot, you also share ownership of the common areas, such as pools, gardens, paths, bbq areas and possibly even courtyards and parking spaces with the rest of the owners.

Collectively, all of the owners in the complex are known as the body corporate.

A body corporate has rules, or by-laws, that dictate what owners can and can't do. This can cover everything from requiring approval for renovations, to allowable flooring types, to specifying allowed colours and types of window coverings, and whether you can install pay-tv or an air-conditioner, or even have a pet.

Most charge quarterly fees to cover the cost of administering the scheme and operating those common areas (called an administrative fund). Most also charge quarterly fees to build up a fund for future maintenance and repairs (called a sinking fund). Some may also charge quarterly fees to pay for buildings and public liability insurance (called the insurance fund - but this may be included in the admin fund levies rather than a seperate levy).

A committee exists which decides on issues for the complex, such a setting an annual budget and levies, expending funds, completing maintenance and repairs, dealing with owner requests and complaints and puts motions to the owners to vote on for decisions. Most motions are approved or carried on majority rule, but some special motions require a specific larger majority, or even unanimous approval of all lot owners.

Particular risks

• Defects - if the complex has any major building defects, the cost to rectify is generally shared amongst the owners (an exception is for new buildings where defects can be rectified under builders warranties). A buyer of a freestanding house may undertake a building and pest inspection to discover any structural defects likely to cause issues or expense. Conducting the same level of inspection on a high-rise apartment block, for example, can prove almost impossible without engineering inspections and reports to ascertain major defects that may lead to expensive repairs. Several cases in NSW were recently in the media where owners were evacuated and locked out of their homes for months, and huge bills to rectify the perilous structural defects or combustible cladding.

• Financial - special levies may be introduced to pay for any necessary repairs if the sinking fund balance is inadequate. An owner has no choice but to pay any levies approved at a meeting of the body corporate. If the levies are high due to major defects, an owner may have to borrow to pay the levies and could end up owing more to the lender than the property is worth. Another financial risk can present itself if substantial arrears in levy payments across the complex exist, leaving the body corporate unfinancial with insufficient funds to maintain the body corporate on a day-to-day basis.

• Mismanagement - the committee may not be entirely competent to handle the affairs of the complex. Whilst their intentions may not be malicious or deliberate, inexperience may lead to poor decisions that affect all owners, and it can be time consuming and costly, and in some cases difficult, to call meetings and elect a new committee, and again, financial imposts are possible.

• Disharmony - are there problems in the complex that the seller hasn't mentioned or isn't evident until after you move in? There can be in-fighting between owners and/or the committee, problematic tenants or occupiers causing frequent headaches, constant parking issues, or prospective problems with neighbouring properties, for a few examples.

Mitigating these risks

The simplest way to minimise these risks is to have a proper look into the body corporate records via a full inspection of the records and to have a clause in the contract allowing a buyer to terminate the contract if any issues with the body corporate are discovered. This is known generally as due diligence.

The contract due diligence clause

Before you sign a body corporate contract, you should make sure the estate agent has included a clause that allows you to conduct your due diligence enquiries within a specified timeframe and if you discover anything detrimental, allow you to terminate the contract and get your deposit back. We'll help draft this clause if needed, and a sample can be found in our special conditions library. If a seller won't agree to having such a clause in the contract, this should ring some alarm bells and you should have the due diligence carried out before you sign the contract, or within the cooling-off period so you can terminate the contract. For auction properties where clauses like these can't be included, again, you should carry out your enquiries prior to the auction.

Conducting your due diligence

A buyer's full inspection fo records report is what you need.

Your conveyancer will arrange for an experienced search agent to go through the records and provide a comprehensive report that will bring to light any of the above risks that might be in the records.

The reports provide a comprehensive summary of the state of the body corporate for ease of reference, and provides, amongst other things; copies of expert assessments like insurance valuations, sinking fund forecasts and health and safety reports including combustible cladding, fire safety and occupancy certificates and the like. Full financial statements and bank balances are provided so you can ascertain the health of the body corporate's bank accounts and financial situation, certificates of insurance are copied and the last few years of body corporate meeting minutes are copied so you know exactly what has been voted on and what is planned for the future. General correspondence is also perused and copied as applicable, so records of current or possible issues, disputes, building issues or problem occupants that may not yet be raised in meeting minutes is discovered.

The search costs an average $300.00 to $400.00 depending on the property and complexity of records, but is money well spent considering the amount of money you are about to invest in a property, and the possibility of there being underlying issues ready to come out and bite you later on. A few hundred now can literally save you tens of thousands after settlement, or prevent you being stuck with a lemon or an unhappy environment in which to live.