The Truth Behind Sectional Title Properties
Buying In To Eutopia
The real estate agent takes you to a lovely little cluster development and immediately you're seduced by the dream of an "ideal neighbourhood".
You start ticking off all the boxes:
It's a limited access electric gate which makes you feel secure.
The gardens and general grounds are all tended by a garden service so its neat and pretty.
The homes are all maintained by the body corporate, all wooden doors are varnished annually and the complex looks neat and tidy
Right now this is all looking pretty good! You understand that everyone pays in a levy and their utilities, that seems fair enough! You'll have a lovely home with minimal effort and maximum joy!
If You Aren't Doing To Work, Who Is?
It's one thing to have services but even those services to take over the chores, but even these need to be managed and paid. It's a common misconception among new sectional title owners that the Managing Agents do all the grunt work.
In fact, it is the group of volunteers at the Complex, the trustees, who are actually doing the hands on work, managing and planning.
What's the difference between the Body Corporate, Board of Trustees and the Managing Agent?
Body Corporate: All units owners in the scheme, form the Body Corporate. So if you are an owner in a complex with 50 homes you have a vote that counts 1/50.
Trustees: A board of volunteers, selected from the willing Body Corporate owners, each with a portfolio to share the workload, forms the board of Trustees. They represent the greater body Corporate in their actions and management of the funds.
Managing Agent: the Managing Agent (MA) is usually a corporate company, registered with all the legal bodies and educated in the Sectional Titles Act, tasked with the function of managing the Body Corporate's finances in terms of invoicing owners, running the monthly statements and proving a neutral form of communication and legal guidance for both the Trustees and the Body Corporate.
As much as the notion of handing over the work to a third party to maintain your home appeals, it also comes with the dire truth that when you hand over responsibility you are handing over your power.
Not all managing agents are efficient, as we recently learnt in our complex. We had used the same agent and had been represented by the same Chairperson for several years since our complex's inception - and with dire consequences.
We were lulled into a sense of security and whilst some homes were not getting the assistance and guidance they needed to deal with some very serious damp damage issues, most seemed to be ticking over quietly like clockwork. The financials showed we were never generating a profit and yet most clearly didn't seem to mind as long as all was well and the bills were being paid.
The only real conflict was in the politics - the Chairman ran the complex as though he owned it, rather than it being an equal share holding by all owners and pretty soon, there were conflicts of interest and tumultuous meetings with trustees resigning and refusing to work under a dictator - specially as they were volunteering their time.
In all the years that this Chairman had been present, the trustees of various portfolios had come and gone after a term of two, he was the only consistent force and relationship link with the managing agent.
Pretty soon it was decided that at the next AGM the incumbent would not be voted in again but that fresh an approach was needed, with a new board willing to work together in harmony.
This coincided with the sudden reality that our appointed Managing Agent had been caught operating fraudulently and had stolen hundreds of thousands of Rands from several complexes, They were closed down and investigated and all of our funds, which were managed from their account - frozen.
At the AGM, as predicted, everyone elected a new chairman and board of trustees. The lady who had been handling our account at the previous managing agent had moved companies and since her new company is widely known in A, we elected to move with her as she was familiar with all of our accounts etc. The previous board had their budget proposal approved as all seemed to be in order and the meeting was adjourned - and then the truth hit!
Our new board of trustees were eager to get started and asked for a handover of each portfolio's file - much to our surprise, there were no files. Not a single piece of paper, other than the proposed budgets in the AGM packs were kept by the previous chairman and the trustees - everything was in the hands of the managing agent.
A new banking account had been set up in the complex's name and she had access to that too, with some of the trustees having signing power.
Within a few months of taking over, a lot of irregularities suddenly started popping up. It turned out that there were homes who were threatening to sue the trustees because their houses were so badly damaged, and nobody had attended to them. the new managing agent suddenly fired the lady who had been our account manager all these years and no new account manager was forthcoming, leaving the trustees in the lurch as nobody had access to the accounts and invoices. The trustees had agreed to repair some homes based on the funds showing as available in the account and suddenly those funds were gone. After several inquiries and LOTS of confusion and frustration, it came to light that the managing agents had paid ALL of our funds - without authorisation or approval from the trustees or any form of notification - to the local town council as we had an outstanding utilities bill of R 250 000!
The trustees couldn't believe what they were hearing and we started looking deeper into the mess.
A wife of one of the trustees volunteered to go down to the council and look into all the paperwork and really get to the bottom of it all.
She was mortified to discover the following:
- The addressee on the council bills did not match the complex, but the meter numbers did. the previous managing agent and the chairman had not been paying the utility bills on a regular basis claiming they were incorrect but had never actually gone into the council to resolve.
- The previous chairman and managing agent had been under collecting the utilities every month as nobody was double checking the meter reading company's data vs the council bills to make sure they balanced
- The funds the previous chairman, board and managing agent were collecting was not being paid over to the council. Where the body Corporate runs up a hefty bill of R 50 000 a month with the council, the MA and board were only occasionally paying across R 5000 every other month and claiming to not pay the balance as a dispute - however, there were no funds in the account saved to pay this bill once it was resolved.
- taxes on the utilities were not being accurately charged over to owners and so were short collected monthly.
- The previous Chairman and board's budget was inaccurate and fell short by over R 10 000 p/month to cover expenses
- Maintenance to homes had been purely superficial, based on the poor budget and many homes were in severe need of repairs with the damp situation becoming unbearable.
Suddenly, this new board of trustees had the extraordinarily difficult task of not only correcting the budget and paying back the deficit to keep the lights on in all the homes, but the arduous task of trying to repair homes and explain to many frustrated and angry homeonwers that there were no funds to make repairs and in fact were unlikely to be funds at all until a new budget could be drawn up - that everyone could afford to stick to!
What We Learned - How to Protect Your Money and Your Investment
Its taken nearly two years now to get out of the debt we'd unknowingly created and we've learned some valuable lessons!
- Your trustees MUST keep a record of their activities to pass on or to be investigated at will
- have your OWN bank account. many managing Agents have what they call a "trust account" where all their clients pay into one account and their team of accountants has to sit and sort through all of that to allocate payments etc. it also makes keeping track of your own monies and balances impossible. have your own and everyone knows exactly where the money is and where its going to - all the time.
- Communication is paramount - All of the trustees need to see the bank account at least twice a month so they know what is going on
- Somebody must keep track of the levies and make sure that the funds being collected balance to the expenses monthly, or there will be a deficit
- Maintenance to homes is expensive and EVERYBODY believes there home is the most important! Set up a schedule and use it to keep working on everyone's home in rotation - no favourites! In our case, damp damage had accumulated over years and had to be done according to extent of damage
- Get to know the law! Sectional title is tricky and nobody really understand what their rights are until they feel they've been hard done by.
- Everybody owns a share of everybody else's home - that creates all kinds of complications! the exterior and garden of every home is actually owned by the Body Corporate - so your neighbour owns 1/29th of your unit on the outside, that can have some nasty ramifications
- Due diligence is absolutely vital! its imperative that the trustees keep looking out for better, cheaper services. in today's economy we all have to save where we can.
- Build up a savings kitty - you never know when disaster may strike! Living moth to month is dangerous for a single family and now you are a unit of so many more homes, don't take chances and don't cut corners!
- switch to prepaid or sustainable energy systems as soon as possible - the reality is that in South Africa the cost of electricity is escalating every year and very few homes have escalating incomes. Outstanding levies are a real problem with as much as 40% of levies outstanding. Moving to a prepaid system is a good idea as every home is then responsible for their own usage and getting off the grid is even better than that!
Share Your Opinion!
Is Sectional Title Worth It?
You can learn about the Sectional Title Act and download it for free from Paddocks, a respected authority: http://www.paddocks.co.za/
Paddocks also offers courses for trustees and managing agents.
You can learn more about what is expected of Managing Agents here:
Being a member of this association is strongly recommended
Information on the duties of a trustee is available here:
Think Before You Buy
There is going to be conflict.
When people of different cultures and beliefs suddenly live in a small area and are almost dependent on each other, there are going to be misunderstandings and differences of opinion.
You don't like your neighbour's dog barking all night and he doesn't like you hanging your underwear on the balcony where he can see it - a Managing Agent is there to keep communications neutral and write to both parties to ask for the peace to be kept.
This is not like having your own yard. You cannot control what your neighbour's dog does and there's little you can do if your neighbour plays loud music till 4 am in the morning every Saturday.
Your neighbour's children may be running rampant in the communal areas, just meters from your open windows whilst you are trying to get a baby to sleep, and there is nothing you can do about it.
Your neighbour's child may climb the trees in your garden or right in front of your kitchen window in the Common Area and you are not allowed to raise your voice and chase them because the parents become angry and verbally attack you.
Your neighbour may come home drunk one night and drive into the gate, smashing through it and breaking the motor - compromising the security of every other home in the complex - and there is nothing you can do about it. The complex will have to pay up front for the damage and could wait months for him to pay it off.
You may have a particularly difficult neighbour who harasses the trustees because they always believe their home to be the most important and eventually nobody wants to be a trustee anymore.
the list is endless and the horror stories countless when one speaks to managing Agents and hears of the pitfalls of managing a complex and the politics that comes with it.
These are things to seriously take into account before buying in a Sectional Title Scheme.
THINGS TO LOOK OUT FOR
Financials that Show a Deficit Year on Year - even a slight Deficit!
Ask to meet the trustees first or sit in on a meeting
Houses that are unkept - they may be in arrears
A Stagnant Board of Trustees
Damage or damp spots on walls both in communial areas and individual units
Gardens in disarray or empty
Lack of Uniformed Security Guards
Ask who the managing Agent is and Look them Up!
Visit some of the neighbours and ask about the complex.
Check the distances between houses - remember those loud music neighbours!
Check whether there are pools or renovations allowed
Check the communal clubhouse and its allowed use