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Why reserve funds are compulsory in sectional title schemes

There are all sorts of sectional title buildings and they vary hugely.

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There are all sorts of sectional title buildings and they vary hugely.

As a result, there is pressure for them to be run in different ways – think a block of flats or townhouses versus a duet scheme or a golf course estate versus a marina complex or even an industrial park.

People buy sectional title properties for different reasons.

Some buy them as investments, others as a home while others could well be buying them as holiday homes. 

Not all owners even live in the same place that they own property.

Imagine how difficult it would be to hold owners’ meetings, even by Zoom, if you had most of your owners living in Australia!

Where most of the owners live in the building or complex, they usually understand that there is a need to be ready to do regular maintenance and that they need to add something to the day-to-day levy to build up funds to do this work when it is required.

But in more upmarket buildings, wealthy owners may decide that when the time comes to repaint the building, they can afford to haul out large sums to pay their share of the cost.

In the past, where schemes were run on the basis that special levies were the way to go, quite a few owners found it very hard indeed to have this money ready when it was needed.

As a result, the current Sectional Title Schemes Management Act (STSMA) says that every body corporate must build up funds so that when major work has to be done there should be enough money in the kitty to do the work without having to have a special levy.

In my opinion, a very sensible way of doing things and Platinum Global has always set aside suitable reserve funds for specific items.

The STSMA talks about ring-fenced reserves.

This means that if you have saved R100 000 for re-waterproofing the roof, you cannot take this money to use for painting.

The money collected for each item being isolated from the funds collected for another purpose. 

It is possible to move funds from one fund to another if it is approved by a general meeting but is not normally a good idea, though it can be done in a real emergency and requires a resolution of the body corporate.

While the ideal is that the entire building should be painted at one time, it is often more practical to paint only parts of the building.

For example, the north-facing side is likely to need repainting more often than the south side – your ring-fenced levies should take this into account.

Care should also be taken to adjust the target for inflation.

Waterproofing only takes place every three years or so and at the end of the period the cost of waterproofing could be as much as 30 percent more than the cost at the beginning. ‘

It is all a juggling act.

What can be done to reduce the amount that is needed to be collected in the long-term reserves? 

Most new buildings take into account that the cost of running a high-maintenance building (painting, lots of flashings on the roof, wooden windows that deteriorate) is very high and by building a building that deliberately has near to no maintenance the cost of the levy can be brought down by at least half. 

As an example, I had a new roof put on our offices in 1987.

This Harvey tile roof has had ZERO maintenance on it in 35 years.

Plastic gutters and down pipes require no painting. 

Although quite expensive, slowly changing poor quality wooden windows to no-maintenance aluminium ones will reduce a continually high-maintenance item to a zero-cost one.

Painted exteriors can be changed over to cladded artificial marble finishes where maintenance is a thing of the past.

Rubberised waterproofing lasts far longer than conventional waterproofing and helps to protect tile roofs from cracking.

Owners and trustees need to look at how to reduce maintenance costs in their buildings to reduce the cost of the maintenance reserve.

  • 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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