SEC­TIONAL TI­TLE Read this be­fore you buy!

Fairlady - - CONTENTS - BY EULOGI RHEEDER

Sec­tional ti­tle own­er­ship is one of the fastest-grow­ing sec­tors in South Africa’s prop­erty mar­ket. But for many ex­cited new home­own­ers, this type of prop­erty can come with ma­jor fi­nan­cial headaches. Here’s how to en­sure that you’re mak­ing a sound in­vest­ment.

‘Ilearnt the hard way,’ says Shan­non Schoe­man (34), who was just 26 when she bought an apart­ment in a high­rise com­plex in Cape Town’s in­ner city. ‘I didn’t even know what “sec­tional ti­tle” meant. It was only once I’d moved in that I re­alised what I’d got my­self into.’

Sec­tional ti­tle, ex­plains Leigh Main­gard of LM Sec­tional Ti­tle Train­ing and Con­sult­ing, is ‘the name given to the sep­a­rate own­er­ship of units or sec­tions in a prop­erty de­vel­op­ment or com­plex’.

Sec­tional ti­tle own­er­ship is also one of the fastest-grow­ing sec­tors in the SA prop­erty in­dus­try.

‘The cost of liv­ing is in­creas­ing and peo­ple have less dis­pos­able cash, so many are down­scal­ing to smaller, sec­tional ti­tle prop­er­ties,’ says Leigh. ‘More peo­ple are also

mi­grat­ing to ma­jor cities for work op­por­tu­ni­ties. This cre­ates hous­ing short­ages in met­ro­pol­i­tan ar­eas, and these de­vel­op­ments are of­ten an af­ford­able so­lu­tion as they re­quire less land and can house more peo­ple.'

These prop­er­ties also seem to be ideal for first-time buy­ers – usu­ally younger peo­ple – as they're less ex­pen­sive than free-stand­ing houses. They're also favoured by re­tired peo­ple, and cou­ples who want to down­scale or em­brace a lock-upand-go life­style, says Leigh.

Tony Clarke, MD for Raw­son Prop­erty Group, says that while sec­tional ti­tle own­er­ship of­fers a good in­vest­ment op­por­tu­nity, the prop­erty's value isn't af­fected only by fi­nances, prop­erty man­age­ment and main­te­nance. ‘The com­pe­tence and ex­per­tise of the com­plex's trustees or manag­ing agent, cou­pled with the ef­fi­ciency of the body cor­po­rate, also play a sig­nif­i­cant role in your prop­erty's ap­pre­ci­a­tion.'

This is what Shan­non wishes she'd un­der­stood be­fore pur­chas­ing. ‘Shortly af­ter I moved in, I re­ceived a no­ti­fi­ca­tion from the body cor­po­rate about spe­cial levies that were re­quired to have the build­ing painted. They were ask­ing for an ad­di­tional R5000 to R7000, which had to be paid al­most im­me­di­ately! I had no idea where I'd find the ex­tra few thou­sand.'

She bor­rowed some money from her par­ents. ‘It was an eye-opener, and it was the start of many more spe­cial levies – se­cu­rity up­grades, ca­bling for satel­lite TV!'

So be­fore you take the leap, make sure you un­der­stand the com­plex­i­ties of buy­ing into a sec­tional ti­tle prop­erty. Tony and Leigh rec­om­mend fol­low­ing these four golden rules:

RULE 1 Check the scheme’s fi­nan­cial po­si­tion

‘Ask to see an au­dited, up-to-date balance sheet be­fore mak­ing any de­ci­sions,' ad­vises Tony. And ask to re­view their most re­cent an­nual fi­nan­cial state­ments, adds Leigh.

‘The au­di­tors will pass the state­ments as ‘‘qual­i­fied'' or ‘‘un­qual­i­fied''. If they've passed a qual­i­fied opin­ion, it could in­di­cate that the scheme is in some fi­nan­cial trou­ble and not man­aged well – and that ad­di­tional levies may be raised when ur­gent main­te­nance items need look­ing at.'

She also sug­gests you check the age anal­y­sis of the cred­i­tors and debtors of the body cor­po­rate in these state­ments.

‘An overview of these two items will in­di­cate how well own­ers in the scheme pay their levies and to what ex­tent the body cor­po­rate is in­debted to ser­vice providers.'

‘Find out about the scheme's re­serve fund – this is cru­cial for un­ex­pected ar­rears or large up­grades,' says Tony. By law, ev­ery sec­tional ti­tle scheme should at least work to­wards a size­able re­serve fund. ‘

Body cor­po­rates are en­cour­aged to plan for main­te­nance and re­pairs in ad­vance, and to save to­wards those ex­penses as op­posed to rais­ing spe­cial and ad­di­tional levies,' says Leigh.

Un­der­stand­ing the fi­nan­cial well­be­ing of the scheme can give prospec­tive buy­ers some in­sight into their fu­ture fi­nan­cial obli­ga­tions, says Leigh.

RULE 2 En­sure that there is strong gov­er­nance

Strict con­di­tions set out in the

Sec­tional Ti­tles Act and the new Sec­tional Ti­tles Schemes Man­age­ment Act gov­ern the way the body cor­po­rate op­er­ates. ‘These in­clude hold­ing com­pre­hen­sive (and prop­erly min­uted) AGMs, hav­ing all fi­nan­cials au­dited and signed off by the trustees and keep­ing in­sur­ance poli­cies up to date,' says Tony.

An AGM must be held within four months of the scheme's fi­nan­cial year-end. ‘If these meet­ings are late, it could sug­gest prob­lems with fi­nal­is­ing the fi­nan­cial state­ments or with gen­eral man­age­ment.' This could in­di­cate fi­nan­cial woes for the scheme, its mem­bers and any new own­ers.

Shan­non un­der­stands this all too well. ‘The first two AGMs I at­tended were in com­plete dis­ar­ray. I now know this was an in­di­ca­tion of a badly run scheme.'

Reg­u­lar meet­ings are a good sign that the trustees take their re­spon­si­bil­i­ties se­ri­ously and are ac­tively in­volved in the man­age­ment of the scheme. ‘But trustees of very well-run schemes may also choose not to have reg­u­lar meet­ings un­less ur­gent is­sues arise,' says Leigh.

Tony rec­om­mends re­quest­ing the min­utes of trustee meet­ings be­fore mak­ing a de­ci­sion on a sec­tional ti­tle prop­erty. ‘Well-min­uted meet­ings in­di­cate a well-run board, and will of­fer in­sight into any is­sues within the body cor­po­rate.'

Reg­u­lar meet­ings are a sign that the trustees take their re­spon­si­bil­i­ties se­ri­ously and that they’re ac­tively in­volved in the man­age­ment of the scheme.

Own­ers need to ad­here to the man­age­ment rules of the scheme. This in­cludes main­te­nance re­spon­si­bil­i­ties, de­sign re­stric­tions, noise lim­its, pet own­er­ship and gen­eral codes of con­duct…

RULE 3 Know your re­spon­si­bil­i­ties

Buy­ing into a sec­tional ti­tle de­vel­op­ment or com­plex comes with cer­tain rights and re­spon­si­bil­i­ties. ‘Ev­ery sec­tion owner au­to­mat­i­cally be­comes a mem­ber of the body cor­po­rate and has vot­ing rights pro­por­tional to their own­er­ship in the scheme, or par­tic­i­pa­tion quota,’ ex­plains Tony.

‘This means that you play a role in the man­age­ment of the scheme – some­thing ev­ery sec­tional ti­tle owner should do to pro­tect their in­vest­ment.’

Leigh adds that own­ers have the right to make them­selves heard at AGMs and ques­tion de­ci­sions made by the trustees. ‘You’re al­lowed to at­tend trustee meet­ings but only trustees may vote on any agenda items. They may also re­quest that an owner in at­ten­dance leave the meet­ing if they feel a con­fi­den­tial mat­ter needs to be dis­cussed.’

Own­ers also have to ad­here to the man­age­ment rules of the scheme. This in­cludes main­te­nance re­spon­si­bil­i­ties, de­sign re­stric­tions, noise lim­i­ta­tions, pet own­er­ship and gen­eral codes of con­duct.

‘En­sure that you’re on board with all the rules,’ says Tony. ‘You’ll be ex­pected to live by them or en­force them on your ten­ants. You could sug­gest changes down the line, but it’s im­por­tant not to rely on that when con­sid­er­ing a pur­chase.’

RULE 4 Un­der­stand the value-adding ameni­ties

Buy­ing into a well-run

scheme of­ten means you’ll have ac­cess to sev­eral fa­cil­i­ties that many free-hold­ing prop­erty own­ers don’t, such as a gym, a laun­dry room, a club­house with a pool, on­site shops and res­tau­rants, and 24-hour se­cu­rity. But don’t as­sume you have free ac­cess to these fa­cil­i­ties.

‘The main­te­nance re­spon­si­bil­i­ties of ad­di­tional fa­cil­i­ties are the re­spon­si­bil­i­ties of the body cor­po­rate and can mean an ad­di­tional cost,’ says Leigh.

Look over the com­plex’s plans and ask ques­tions about any space al­lo­ca­tion that might look am­bigu­ous. Don’t for­get to dou­ble-check which ameni­ties are avail­able to you, and to make sure you un­der­stand any ad­di­tional costs or sub­scrip­tions that may be billed to you.

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