Ross and Kate are not new commers to property investment and they have bought and sold several Strata Titled investment properties over the years. They signed a contract for sale and during the cooling off and Finance approval period they decided to seek some advice from the team at Strata Check. Upon reviewing the details provided the strata check team were able to identify some serious issues with the proposed budget figures particularly around sinking fund contributions.
Essentially a Sinking Fund is a pot of money that is contributed by the owners towards future capital works repairs and replacement of common property.
See here for more detail on Sinking Funds,
This development contained 50 townhouses with a pool and BBQ areas associated furniture, automatic security entry gates and the usual landscaped gardens and grounds.
The Strata Check estimate range for a Sinking Fund contribution for a property of this type and number of lots was between $750 to $1000 per annum and the amount being collected in the budget for year one was only $250 per lot per annum. Straight away this was cause for concern and the team at Strata Check advised the clients that this required further due diligence.
Outcome,
Ross and Kate quired the sales agent and the developer regarding the year one Sinking Fund contribution as shown in the schedule of levies and found that the as disclosed year one figure had been artificially lowered to make the levies more attractive to purchasers.
After some back-and-forth Ross and Kate found out that the expected year two contribution was to be $825 per annum. There were some other minor discrepancies picked up in the budget estimates and all up the total predicted shortfall for this development was circa $955 per lot per annum.
What does this mean?
This means in year two the levies for all the owners in the scheme would rise by more than $18 per week and no matter if you are an investor or owner occupier that is money that is better of in your pocket or paid off your mortgage. Due to the information provided by Strata Check Ross and Kate were able to cancel their contract in the prescribed time without penalty and find an alternate Strata Investment with more realistic levy expectations and much less exposure two “Second Year Levy Shock”