As Sydney and other Australian cities grow in population size, medium-density living is becoming the norm. You’ve probably noticed apartment buildings going up along main thoroughfares where houses once stood, and may even have decided to live in an apartment long-term yourself.
No longer is apartment living reserved for single young professionals and retirees living out their twilight years. Buying a house as a first home has become out of reach for many, and smaller-space living has become more accepted here and around the world. It is now commonplace for apartments to be inhabited by couples, families and downsizing empty nesters well ahead of retirement.
For newcomers to the property game, or those who have sold a house in favour of living in an apartment, knowing the ins and outs of strata reports is vital.
“Whether you’re planning to live there or you’re going to rent it out, a strata report helps you make sure what you’re investing in is sound and gives you a solid understanding of its financial health,” says LJ Hooker Avnu agent Jason Georges. “It gives you a snapshot of what’s happened in the past, and what’s in store over the next five to 10 years.”
What is a strata report?
Strata-titled buildings such as apartments and townhouses have multiple owners, and although you might own your own apartment, you also own a share of the common areas and grounds with the building’s other owners.
A strata scheme is a way to manage the issues around this joint ownership. A set of bylaws outlining what owners and their tenants can and can’t do forms the basis of a strata scheme (pets or no pets, garbage disposal rules, noise restrictions, and even whether you can hang out your washing on your balcony – and whether you can paint it purple).
Strata fees, or body corporate fees, are required from each owner towards the greater good of the building and its occupants – now and in the future. The larger your apartment, or the more apartments you own within a building, the more you pay.
Administrative levies fund the cleaning and maintenance of common areas such as gardens and lifts, gyms, pools, and driveways.
Some of the fees owners pay also go towards future repairs or structural changes that may be needed, such as a plumbing overhaul, external repainting or renovations. These are known as sinking fund levies.
Special levies come into play when unexpected expenses arise and the amount of money sitting in the sinking and administrative funds won’t cover it. These added expenses have been known to cause friction between owners and the elected strata committee (and strata manager if this role has been outsourced rather than the committee being entirely self-managed).
A well-run strata scheme will plan ahead for the unexpected. Whether or not this is the case is right there in black and white when you arrange a strata report.
What to look out for
If a strata report gives you valuable insight into how an apartment building is being managed and what the future holds, it makes total sense to get one before committing to a property purchase.
“The best time to get one is before you make your offer; I’d certainly want to know what the financial position is of an apartment before I bought it,” says LJ Hooker Avnu agent Cameron Maxwell. “Once you’ve bought it, you can’t really get out of it.”
If you’re hoping to make the winning bid at auction, get the strata report done before auction day, he advises.
Strata reports aren’t expensive but they do have to be done by a licensed strata inspection specialist. They cost $250-$350 and can be arranged through your conveyancer. If you’re lucky, a strata report may already have been carried out for your convenience.
“If I’m selling an apartment, I usually ask the vendor to get a strata report so we can hand it out at opens,” Maxwell says. “That way we can answer any questions on the spot.”
Maxwell advises looking at how much is in the sinking fund and the 10-year proposed plan for spending it. “If there isn’t much in it, depending on the age of the building, you could end up with special levies down the track.”
LJ Hooker’s Jason Georges agrees. “You need to know what you’re in for,” he says. Georges advises looking for consistency in the records and ensuring annual inspections (such as pest and fire) have been carried out.
Importantly, strata reports can alert you to excessive strata management costs that could impact your ability to pay the mortgage or reduce your net rental return. The report will also tell you about any major disputes between owners or unresolved legal issues, as well as any recent major repairs or building improvements.
But don’t rely on red flags being pointed out for you, Georges advises. “You have to go through the report carefully yourself or send it to your lawyer or conveyancer to go through on your behalf.”
It can be disappointing to discover that an apartment building has been badly managed, but think of it as dodging a bullet. If you were to go ahead and buy the apartment anyway, not only could you be up for high fees now or in the future, keep in mind that the property’s resale value may be negatively affected when a potential buyer gets their own strata report done and spots the flaws.
As any experienced investor will tell you, strata reports are crucial when buying strata-titled property. The small fee it costs you to get one done now could well save you from major costs later.
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