When is a body corporate regarded as healthy?

One of the most common concerns for potential sectional title buyers include the purchase price of the unit paired with likely rental return on investment. As an owner-occupier, the focus is different as it is generally focused on the scheme’s performance and the people entrusted to run the affairs of the body corporate.

Before you buy into a sectional title scheme, consider the following factors to help you ascertain the overall health of the scheme:

The financial state of the scheme

Request a copy of the last audited financial statements. This will indicate how much reserve funds the scheme has, what the income versus the expenditure has been for the past two years, how much debt is owed to the body corporate and how much the body corporate owes to creditors.

A big debtors book will indicate poor financial management by the trustees and managing agent. It also implies that the scheme potentially has financial difficulties and will have trouble financing emergency maintenance issues.

A quick assessment will give you an idea if your money will be spent wisely.

The reserve funds of the scheme

It is always a good sign when a body corporate has extensive reserve funds available. This indicates prudent budget management that allows for the accumulation of reserve funds that may be needed for any expected – or unexpected – maintenance requirements of the complex.

This aspect of the financial position of a scheme is now even more relevant considering the requirements of the new Sectional Titles Schemes Management Act that came into effect in 2016. These requirements established the scheme’s obligation to budget for reserve funds on an annual basis.

General condition of the building

It is always worth the effort to view the building in person. A quick walk around the complex will give you an indication if the building is being maintained or not. If it is not in a good condition, it is safe to assume that a major building redecoration will be due imminently.

A major redecoration will significantly impact the financial position of the scheme as well as the respective owners, especially if they don’t have sufficient reserve funds. If a building is well-maintained and has a healthy reserve, then you are buying into a healthy scheme. Another alternative is that the building is not maintained but has a large reserve. This may indicate that the trustees do not consider building maintenance to be important. In the long run this may affect your investment and your financial position.

The worst position to be in is when the scheme does not have any reserves and the building is in desperate need for maintenance and renovations. The funds for this renovation can only come from the members in the scheme which means the body corporate is about to enter a period of financial stress for all concerned.

Management of the scheme

Be sure to familiarise yourself with the annual general meeting minutes of the past few years along with the trustee meeting minutes, if available. Meetings of a general nature is often the only meetings where all the members of a scheme participate in. A wealth of information can be gained from the minutes such as the most pressing concerns for owners of the scheme in question as well as their plans for the scheme going forward.

Trustee meeting minutes will assist in getting insight into how trustees manage certain issues and how they make decisions. The frequency of these meetings indicates active trustees that are involved in the management of the scheme in a hands-on manner.

Scheme compliance

With the latest changes in the Sectional Titles Act, trustees and bodies corporate face rigorous compliance requirements to ensure they abide with health and safety, forward planning of maintenance, financial planning as well as correct and sufficient insurance assessments.

Although some of these compliance requirements are intermittent, most will be achieved with methodical management processes. A short update from the relevant scheme’s managing agent will give you an idea if the trustees are performing their fiduciary responsibilities relating to the scheme.

A prospective purchaser of a sectional title scheme unit can never do enough to ensure that they have relevant information regarding he scheme. By doing the due diligence, an informed and calculated purchase decision can be taken.

*How healthy is YOUR scheme? Do the Stonewood Health Check here.