NSW Need second opinion on this strata search report

Discussion in 'Property Analysis' started by KM798, 25th Apr, 2022.

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  1. KM798

    KM798 Member

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    Hi Everyone,

    I'm a first-time buyer looking for an apartment in Sydney. I did a strata search on a unit in a 1970s red brick building (2-3 storey, 15 units in total).

    The strata search revealed that they had a building inspection done a year ago that uncovered "exposed concrete reinforcing on the balcony" on one of the units. It is not limited to the balcony of that unit, this was observed throughout the complex. It also says that "the work in some areas will be extensive".

    It's been more than a year, and Strata management hasn't done anything about it.

    It's unclear how big the problem actually is and how much it's going to cost to repair. They have $19k in the sinking fund (raising $7 annually). A couple of years ago they had a special levy to fund major roof & gutter repair, so looks like another special levy is on its way.

    This concerns me because:
    • I did some googling and found out that this "concrete cancer" might cost up to $30-60k per unit to repair in the worst-case scenario. It also appears that initial remediation costs are often underquoted, and go up as more damage is discovered. So there's huge uncertainty there.
    • The sinking fund balance is about half of what it should be as per the 15-year capital plan, and this issue wasn't even known back in 2015 when the plan was created.
    • Also, the seller is in the real estate business (judging by their Pty Ltd name on the contract) and a member of the strata committee, so they are fully aware of the problem. I suspect they might want to get rid of this apartment before the special levies are imposed.
    Given that this is my first strata report and I'm not sure if I'm reading it properly - is this a big enough red flag to run away from this property?

    Or is it a typical issue found in older apartments that owners just have to deal with?

    Thanks for your expert advice!
     
  2. bunkai

    bunkai Well-Known Member

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    I would give this one a miss unless you are buying with the potential cost factored in as a discount (difficult to quantify).
     
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  3. Marg4000

    Marg4000 Well-Known Member

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    A low sinking fund is a red flag.

    It means that levies have been, or still are, inadequate. This often results from short sighted (or absentee) owners who argue against any levy increases.

    I would avoid this one unless it is priced well below comparable properties and you can deal with a sudden special levy.
     
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  4. Stoffo

    Stoffo Well-Known Member

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    So it's taken approx 50 years to become an issue, unless the report states there is a danger then it could take up to 10 years to address

    Not if there's been one/several capital works evens in recent times (like roof replacement).

    Though I'm finding more and more that many owners will argue against capital levy rises and in fact want them reduced arguing raising a special levy when required :confused:
    (I base their choice on several reasons, 1 new/current mortgage, 2, they have no idea just how much any repairs actually cost, 3, they hope to have sold/upgraded before these costs come :eek:).

    If there is any plan/discussion to have these works done there should be some mention of it in the meeting minutes ;)

    THIS ^^^^^^
    If it isn't super cheap then walk away o_O
     
  5. Scott No Mates

    Scott No Mates Well-Known Member

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    Those levies are very low $7k/15 units, is there a lack of common areas? What's it covering?

    How's the administration fund looking?

    As others have said, treatment of concrete cancer isn't cheap, especially if signs are visible.
     
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  6. KM798

    KM798 Member

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    Thanks, bunkai

    It's actually advertised at a premium because the owner recently painted the walls, laid new floorboards and updated the kitchen. Actually because it's freshly painted, I couldn't see any damage inside the apartment.
     
  7. KM798

    KM798 Member

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    Thanks, Marg4000

    Today I spoke with the person who did the strata search and they said exactly the same thing. The sinking fund is underfunded compared to the capital repairs schedule. There were only 3 owners at the last AGM in 2021. They didn't discuss the issues with the building and simply agreed to keep the contributions as they are, so your guess was right.
     
  8. KM798

    KM798 Member

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    Thanks, @Stoffo, these are all very valid points!

    No, it doesn't say the building is going to fall apart if this issue doesn't get fixed in the next year.

    And there's been no mentioning of the issue in the last AGM meeting, so....

    Wow this is an interesting observation! I'd assume this would be very common for the older buildings that I'm looking at right now.
     
  9. KM798

    KM798 Member

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    There are plenty of common areas, incl. 3 entrances, parking spots, lawns, obviously a roof & a garbage area. No pool or lift though.

    Administration fund doesn't look healthy either. Year-end balance reduced from $11k to $2k in the last 5 years as they have been going over budget each year.

    Actually, I was wondering if $35k / year in the admin fund is enough to manage a building like this? Or is it too much or too little?
     
  10. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Concrete cancer on balconys is normal in older buildings. It is likely evident on all balconys. It can take years to resolve these issues and costs can be significant. Tens of thousands.. per unit with new railings etc. Then if the strata decides to renovate the fascade it could be more and more. Strata decisions may be slow, deadlocked or pushed through depending on owners. If there is little owner interest in fixing a major issue then this will be a decaying building. Or it may even just be covered over by tiling which wont actually fix anything.

    I would move on and look elsewhere
     
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  11. KM798

    KM798 Member

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    Thanks for putting it into perspective, Paul. This really helps.
     

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