Buying a family home is an age-old way of generating wealth creation, however the foundation to wealth creation comes from making rational money decisions and buying such a home can easily be influenced by emotional bias.
It is therefore very important to consider balancing the practical decision (need vs want) with the financial consequences on your wealth creation – are you over extending yourself? Have you paid off your current home?
Having a conversation with a Certified Financial Planner® professional on the home buying decision can bring a useful dimension to your investment decision.
Here are some guidelines to understanding the pitfalls of sectional title home purchase:
The modern trend in South Africa is for people to buy into a Sectional Title dwelling – it is generally more affordable than a detached property and you have the additional security of an element of communal living, as well as an assurance that certain maintenance aspects of the common property will be looked after for you.
I have had the privilege of chairing a Body Corporate for three years and whilst this was an interesting learning curve, it also made me very mindful of some of the pitfalls that you should avoid.
Here are some tips for you to follow to ensure that when you are finally handed the keys to your new home, that you have done the necessary research into the Sectional Title into which you have bought:
- Complex Rules – Be sure that you ask the Estate Agent for a copy of these prior to signing anything. These rules will tell you a great deal about how the Body Corporate expects owners to behave and what, if any, limitations are imposed. For example, is the complex pet friendly or are pets not permitted? Estate agents will gloss over issues like this in order to secure the sale – and very often people will move in with pets only to find that they have to get rid of the animals.
- General all-round condition of the complex – Have a good walk around the property and observe whether it is well looked after. Remember that the “common areas” of the property are the responsibility of the Body Corporate to maintain, so if paint is peeling, gardens are scruffy and the place looks generally down at heel, this could point to bad management or a dysfunctional Body Corporate. This will ultimately affect the potential resale value of your property.
- The levy – be aware of what the monthly levy will be up front and whether it is affordable. The levy is based on a cost per square meter of the property and there is additional provision for maintenance of the common property.
- Talk to some existing owners – they can be a great source of information as to the efficient running of the complex and what works and what does not work.
- Audited Financial statements – The amendments to the Sectional Title Act make provision for Bodies Corporate to make provision for a two tier reserve fund, designed to ensure that ongoing maintenance as well as maintenance of a capital nature is accrued. It can cost upwards of R1 million rand to completely repaint the average complex, so these reserves are essential. If the audited financial statements paint a bleak financial picture, then you could find that the monthly levy could be subject to large increases and there could even be the imposition of a “special levy” to cover capital maintenance costs. When you have just started servicing bond and levy repayments, a special levy can spell serious financial hardship. If the estate agent is unable to obtain this for you, contact the managing agent of the complex and request one from them.
- Common property versus exclusive use – Ensure that you understand which parts of your property are subject to both definitions. Common property implies that this can be used by anyone in the complex and exclusive use is for the owner’s enjoyment only. Exclusive use portions are also the responsibility of the owner to maintain. Therefore, if you have an exclusive use balcony that is leaking water into your property, any repairs undertaken by the Body Corporate will be recovered from you.
- Alterations and additions – Ensure that before you sign the offer to purchase that you are aware of any alterations and additions to the property that may have increased its external dimensions. The seller should be able to tell you, but very often, a property may have changed hands several times and no plans are available. Should this not be in order, you will be required to have plans drawn up and approved retrospectively by both the Body Corporate and the City Council. If they are not approved, then you may be compelled to demolish any unapproved extensions at your own cost.
In conclusion, it is worth spending some time verifying these points before you buy – in the long run, you will be thankful that you did!
Author: David Crossley, Certified Financial Planner ® Professional, BDO Wealth Advisers