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Don’t invest in property if you can’t afford it

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UNIT OWNER’S OBLIGATION . . . One cannot opt out of paying levy, which must be paid in full in advance – that is at the beginning of each month

 The purpose of this article is to explain to new investors in the sectional title market why it is necessary to pay your levies. 

It seems many new property investors are entering the market because they see it as a way of getting profit but have no idea how any business works.

They are getting into trouble because they don’t understand property and have not been properly primed by the agents that they bought from.

Also, they think it is possible to make arrangements when times are tough.

One even tried to justify this by giving the example of an Edgar’s clothing account where you can make arrangements to pay off.

It does not work like that with levies.

Some of these new property owners complained bitterly at one annual general meeting because they were being penalised for late payments.

The penalty fees go towards compensating the managing agent/trustees in a self-run building for the extra work involved.

They also have to pay attorney fees because if their accounts are handed over.

This was despite the fact that they have never been up to date for over two years and that late payment fees had not been added for the first five months.

So, what is a sectional title and what are the owners’ obligations?

Like I have already said, it is quite clear that many buyers of sectional title units buy property without understanding exactly what it is they are buying.

It is a great pity that estate agents that sell sectional title property do not, as part of the selling process, clearly explain to their buyers exactly what it is that they are getting involved in.

Essentially, sectional title is a way of investing in property by buying an individual property (unit) in a communal scheme.

Each owner buys a box plus a communal share in the common property.

The common property is anything that does not form a unit.

When a buyer buys into a sectional title scheme, they automatically in terms of the Sectional Titles Schemes Management Act (STSMA) become part of the body corporate and must pay their levy.

The levy is their share of the running costs of the common property of the building.

You cannot opt out of paying your levy and the levy must be paid in full in advance – that is at the beginning of each month.

There is no negotiation on whether or not you have to pay your levy and there is no negotiation as to when the levy should be paid.

Not paying your levy on time means that in effect you are forcing the other owners to pay your share of the running costs of the building.

None or late payment has consequences, which will include:

·        Late payment fee: at Platinum Global, this is R200 and is there to compensate the manging agents or the body corporate when self-managed for the extra work required to do credit control over the non-payers. It is in the rules of the body corporate.

·        You will be handed over to the legal authorities for collection of your arrear levies. In the rules of your body corporate anyone who is more than 30 days in arrears is automatically handed over.

Attorneys are expensive and all legal costs are borne by the owner who is in arrears.

The alternative is to hand over the owner to the Community Schemes Ombud Service (CSOS).

Until recently, this was not effective, but they seem to have become more efficient of late.

Here the process is less expensive, but the outcome will be the same.

An owner who is in arrears, after the arrears have been confirmed, will be found to be in arrears and an order – equivalent to a court order – will be issued to pay.

In either case the body corporate will be able to blacklist the non-paying owners which has serious consequences.

The CSOS or the attorney are able, on behalf of the body corporate, to attach furniture and goods, including cars and the like, of the non-paying owner.

If the owner still fails to pay, the body corporate can sue them to attach the property or have the tenant pay all rental to the body corporate.

The fact that they are in arrears will be noted by the credit bureaus and they will find it very difficult or expensive to get credit.

Trustees, as part of their duty, must hand over an owner who does not pay their levy.

If they don’t and there are any losses as a result, they can be held personally liable for this lost debt – the trustee will have to pay the lost levy of the defaulting owner.

The amount of the monthly levy is set based on two things:

·        The running costs of the building.

·        The legally required long-term maintenance reserve for the building.

The running costs are the day-to-day costs of managing the building and paying the accounts of the body corporate, such as wages, fees, insurance, maintenance, water, electricity and managing agent fees etc.

Rates and taxes are levied on individual units, not the body corporate, and the individual owner must pay their own rates and taxes.

The body corporate is forced to have long-term maintenance reserves in terms of the Sectional Titles Schemes Management Act.

These long-term maintenance reserves are specific funds that are saved over a period of 10 years to do maintenance to the building that happens in the future.

For example, the roof of your building needs to be re-waterproofed every five years and is estimated to be R500 000 when it is done.

That means R100 000 per annum would need to be added to the levy so that in five years’ time the money to re-waterproof the roof would be in the body corporate’s account to do this work.

If the approved budget for your building was say R120 000 for the year that would mean that the body corporate should collect an additional R10 000 levy from all the owners each month.

Each unit must contribute to the levy based on the size of that unit as a percentage of all the units. ‘

So, if there were 10 units of 100 square metres, each one would need to pay 10 percent of this amount each month, which is R1 000.

Anyone that does not pay means that there would be 10 percent less in the levy than is needed to run the building.

That is why owners must pay their levies on time each month.

It is important to understand that the levy is the money needed by the body corporate to run and maintain the whole building.

When people do not pay their levies or pay late, it means that there is not enough money to settle the body corporate’s account.

It is not possible for a body corporate to “make arrangements to pay off the levy”.

Each month a new levy is due.

Not only will an owner who “is having a hard time” and does not pay owe more each month, it will mean that the levy will have to take this into account and get all the other owners to pay more to make up the difference.

In effect, it means that all the other owners are paying the levy of the defaulting owner.

The same applies to unpaid water and electricity accounts.

Clearly an owner living in a unit is paying his own levy and expenses, but this applies even more to an owner who has bought a unit as an investment.

An investment property is bought with the idea of making profit – but it also comes with risk.

Nobody should buy an investment property if they don’t understand this.

If you buy a flat but cannot find a tenant, you have to bear the costs that are still there.

The bond still has to be paid as does the rates and taxes.

Even more importantly, the obligation to pay the levy does not stop because you don’t have a tenant.

If you don’t have money to pay the costs of owning a property when you don’t have income, then maybe you should not be buying investment properties.

It is not the obligation of other owners to keep the body corporate going until you can find a tenant.

You need to find the money to pay your levy from somewhere else – friends, family, the bank, short term lenders, from your savings or sell your car.

If owning an investment property is too much or too risky for you then you should sell it.

Unfortunately, too many estate agents are too eager to do the deal and do not educate those who have not invested in property before.

Too often buyers buy at the margin – for as much as they can afford – and don’t have the reserves to cope when problems arise.

Being able to pay your levy every month, in full and on time, is an obligation of being an owner of a property and especially of an investor buyer.

Don’t enter the property rental market if you cannot pay your levies when you don’t have a tenant or the tenant does not pay.

·        Mike Spencer is the founder and owner of Platinum Global. He is also a professional associated property valuer and consultant with work across the country as well as Eastern Europe and Australia.

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Property

Bigger can be best

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MAJOR UPGRADE NEEDED . . . Many of the original sectional title schemes were existing buildings that were converted

I want to be very brief in this article so that those interested may have more time to think about my discussion point.

We have previously discussed shortcomings with the Sectional Titles Schemes Management Act (STSMA), which are many.

I want to focus on just two of them today.

The STSMA was signed into law and became effective on October 7, 2016.

Ideally, the STSMA was introduced in order to provide for the establishment of bodies corporate to manage and regulate sections and common property in sectional title schemes.

Its main purpose is to apply rules applicable to such schemes – establish a sectional title schemes management advisory council and to provide for any related matters.

The two biggest problems have been, firstly, the age of buildings that were converted to sectional title schemes and the size of many of the early schemes.

Buildings have a practical lifespan.

Many of the original sectional title schemes were existing buildings that were converted.

Some of these buildings are now approaching 80 years and need major upgrading – particularly piping and wiring – and modernisation and owners just don’t or have not made provision for these upgrades, especially in less affluent areas.

The second problem is that these schemes have a small number of units and are uneconomical for a managing agent to administer.

The reality is that the larger the scheme, the easier it can be managed.

I wonder if it would be worthwhile to have two schemes combining for admin purposes.

Food for thought . . .

  • Mike Spencer is the founder and owner of Platinum Global. He is also a professional associated property valuer and consultant with work across the country as well as Eastern Europe and Australia. You can contact him via email: mike@platinumglobal.co.za

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Property

Fix and protect your building from rain damage now

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FIX ROOF LEAKS . . . Protect your building from rain damage

Last year saw some very good rains but this year has been exceptionally wet.

At regular times more than 50mm of rain was received in a single day.

We have just had some rains in Bloemfontein and the surrounding areas which have left the ground thoroughly soaked with open water lying around.

Lawns remain verdant green!

If your building was going to have any roof leak problems, I would suggest that it be fixed by now, though it is possible that there could still be damp problems.

Of course, the rainy season is well behind us now but we could still experience occasional rains during the rainy season.

I would really recommend that now is the right time to do a full building inspection.

Many of you will know of my dread of overgrown trees.

Well, this year they have grown like weeds – my pecan nut tree in the garden has grown its branches by nearly two metres this year!

Trustees could do well to investigate the entire property for overgrown trees that need to be trimmed and to make sure that none are leaning against buildings or walls.

Trees in gardens belonging to individual units should be attended to by those owners – after all they planted these trees or left them to grow.

It might be a good idea to have one contractor remove/trim the problem trees and share the cost if owners don’t have the time to do it for themselves.

But do it they must.

The cost of removing whole trees can be expensive but trimming must be seen as maintenance.

Also, check for damp in walls caused by overgrown flower beds – the best way is to ask owners and tenants to report any serious damp problems.

It’s also advisable to buy a set of drain rods and clear your drains, especially stormwater drains that can easily be blocked with soil or sand.

Check for water leaks as these could have been hidden by the wet conditions that we have experienced.

  • Mike Spencer is the founder and owner of Platinum Global. He is also a professional associated property valuer and consultant with work across the country as well as Eastern Europe and Australia.

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Property

Banks now hesitant to lend to property buyers

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BOND RISK . . . It has now become near impossible from a cost and time point of view for banks to sell a property in execution

Banks make most of their money when they lend to customers and charge interest.

That is essentially how they get money to run their businesses and generate profit.

In other words, no lending, no profit.

When a bank lends you money to buy property, it allows you to purchase a property that otherwise you would never have the money to buy.

It is the best investment you will ever make.

Over time, property values rise and you get the benefit, as banks don’t participate in your profit.

It used to be that banks lent 70-80 percent of the price of the property and you had to find the cash for the balance.

You also had to find the bond and transfer costs.

That means the banks risk was about 75percent.

So, if you defaulted and the banks sold the property as their security on the bond.

If they achieved 75 percent or more of the current market price of the property, they would get their money back.

But times have changed.

The Consumer Protection Act (CPA) and a whole raft of other “consumer-based” legislation have changed the situation.

While the CPA was introduced in a bid to “promote a fair, accessible and sustainable marketplace for consumer products and services and for that purpose to establish national norms and standards relating to consumer protection, to provide for improved standards of consumer information, to prohibit certain unfair marketing and business practices, to promote responsible consumer behaviour”, among others, it has brought with it some challenges.

It has now become near impossible from a cost and time point of view for banks to sell a property in execution – ie when a client fails to service their bond.

Just getting a magistrate to agree to the sale, despite the lender being years in arrears, is a nightmare and the costs involved are horrendous.

Further, bonds are mainly 100 percent nowadays, so banks are unlikely to recover the outstanding bond and interest.

Arrear levies and rates need to be paid by the buyer so the price achieved is often half of the real value of the property.

If it was my money, the last place that I would lend it would be as a 100 percent loan for somebody to buy a home.

Times need to change.

  • Mike Spencer is the founder and owner of Platinum Global. He is also a professional associated property valuer and consultant with work across the country as well as Eastern Europe and Australia. You can contact him via email: mike@platinumglobal.co.za

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