SECTIONAL TITLE Read this before you buy!
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.