If You Are Thinking of Buying Into Sectional Title - Read This

5 Questions to ask the estate agent before asking “Where do I sign?”

By Ané de Klerk
When searching for an apartment to purchase, as an investment or to call home, potential buyers are often excited by 3 things: a well-maintained unit (inside and out); a perceived “good price” and low levies. While these are indeed important aspects to consider, it is my opinion that they often lure prospective buyers into a false sense of security and discourage them from doing a proper due diligence investigation into an apartment within a scheme that appears to be “perfect”. So, here are my suggestions for five pertinent questions to ask the estate agent before signing that offer to purchase:

When is the body corporate’s financial year end?

Why is the body corporate’s financial year end relevant? While the monthly levy amount payable at the date of signing an offer to purchase (“OTP”) may be X, that levy could increase by the time the property is transferred into your name. This will, of course, have an effect on your budget and could factor into whether you can afford the ongoing monthly costs associated with the purchase.
For example, if you sign an offer to purchase on 15 June and the monthly levy at that point in time is R2 000.00, you would of course budget a monthly amount of R2 000.00 for your levies. If the body corporate has a June year end, however, there is a real possibility that the monthly levy payable could be R2 200.00 by the time the property is registered in your name. Therefore, you should in fact budget for an additional expenditure of R2 400.00 per annum (or R200.00 per month).
A potential buyer should also be mindful of whether or not the body corporate has held its Annual General Meeting (“AGM”) (which is to be held within four months of the financial year-end), as a levy increase in excess of 10% could be on the agenda for approval at the said meeting. As with the example used above, the levy payable once the property is transferred into your name may differ from the levy payable at the date you sign the OTP if the AGM is held after you have signed off the offer, but before registration has gone through at the deeds office.

What additional monthly costs are associated with the property?

First-time buyers in sectional title are often under the impression that their monthly costs will be limited to their bond costs (if applicable) and their levies. However, it is important to note that you may be liable for additional costs, including, but not limited to:

1. rates payable to the local municipality;
2. utilities such as water and electricity (if not included in your monthly levy);
3. special levies;
4. exclusive use contributions; and
5. levy payable to the Community Scheme Ombud Service.

Will you please give me a copy of the body corporate’s latest AFS?

It is of vital importance that prospective buyers ask for a copy of the body corporate’s audited financial statements (“AFS”) as at the end of the previous financial year. While this document provides a lot of important information regarding the body corporate’s financial status and wellbeing (and it is well worth asking a friend with a financial background to have a look through it on your behalf), the most important part of the AFS for prospective buyers is to note the auditor’s opinion.
The auditor will explicitly state if a body corporate’s audit is qualified, which means that the auditor encountered a situation which did not comply with generally accepted accounting principles. While a qualified audit does not necessarily mean the body corporate’s finances are in bad shape (it could simply be as a result of insufficient information provided to the auditor), the comment that you ideally want to see is that the body corporate’s finances fully comply with the following:

1. the Sectional Titles Schemes Management Act;
2. the Sectional Titles Schemes Management Regulations; and
3. the Management Rules of the Body Corporate.

Does the body corporate have an approved Maintenance Repair and Replacement Plan?

From October 2016 onwards, all bodies corporate are required to have an approved 10 year Maintenance Repair and Replacement plan (“MR&R plan”) in place. This plan will highlight major capital expenditure the body corporate needs to budget for in the upcoming 10 years. Perusing this approved plan is of vital importance as the cost of major capital items will have a direct impact on your pocket.
For example, if the 10 year MR&R plan requires that the entire building be waterproofed in the following year and a recent set of AFS shows that the body corporate does not have a reserve fund sufficient to cover the cost, you can expect a high levy increase at the beginning of your upcoming financial year and are likely to face a further increase at the AGM to cover the costs of the waterproofing.

What are the body corporate’s management and conduct rules?

It never ceases to amaze me how many owners buy apartments without first familiarising themselves with the body corporate’s rules. While prospective buyers without pets may not care about pet rules and those not owning cars be indifferent towards rules pertaining to vehicles, every potential owner should be very concerned with the rules that will inevitably affect their finances. Requesting the rules and carefully perusing same before signing an OTP will give you the opportunity to consider the financial implication of some rules.
For example, some rules provide for a fining system. If you are planning on renting out your apartment, you may want to include in your lease agreement the fact that any fine incurred as a result of the tenant’s conduct will be for his/her account.
Another example would be a rule that provides for a refundable deposit to be paid before you/your tenant is allowed to move possessions into the apartment. If the deposit to be paid is a hefty one, you may not be able to afford the cost of moving into your own apartment. Potential lessees may, in turn, find the accumulated initial cost of a rental deposit, first month’s rent payable up-front and moving-in deposit too heavy a burden to bare and may leave your apartment standing empty for extended periods of time.  
If you are in the process of purchasing an apartment within a sectional scheme and would like any assistance with the review of, or have any questions relating to, any of the above documentation, you are most welcome to contact us via email (consulting@paddocks.co.za) or telephone (021 686 3950) for an obligation free quote.
Ané de Klerk is the newest member of the Paddocks team. Ané joins us as a specialist community schemes attorney. Get to know more about her, in this video.
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