An investigation into the operation of ‘Body Corporates’ and a major crackdown on their policies and procedures
I must admit to feeling that this topic is a sleeping giant waiting for the right person to cast a spotlight on how some of them operate.
There are often two types of Body Corporate organisations involved in managing properties.
The first should not be feared…a type of ‘self-managed’ arrangement within a multi-dwelling complex or residential estate (often can involve a small number of properties) whereby the entire fund and management is run by the residents themselves.
Other than insurances and some basic maintenance, there isn’t a lot of expenditure to perform and these sort of arrangements are usually very fair for everyone involved…and more importantly, the Body Corporate fees are often quite low.
Many older complexes or estates operate this way and you’d think that you’d have to be on your guard to make sure all things are fair and equal but, in my experience, a ‘self-managed’ Body Corporate usually represents fair value for money for all owners involved.
And then there is the other type…the professional Body Corporate operations that manage large complexes where everyone seems to pay a King’s ransom in fees.
I don’t want to tarnish all companies with the same brush – that wouldn’t be fair but some of the profit that these organisations generate must be quite staggering!
I’ll give you a few examples of where I see far more transparency required…
A few years ago, I sold a unit in a multi-unit residential complex and couldn’t believe it when I saw that the Body Corporate fees were a little under $8000 per year.
There are approximately 36 units in this complex (which means that the total fees accumulated were a staggering $288,000 per year.
The complex does have a lift and swimming pool and by admission, these facilities do require on-going maintenance and plenty of money in the Sinking Fund should something go wrong.
Lifts in particular are very, very expensive to service.
In case you’re not aware, the Body Corporate fees are normally made up of two components – the ‘Sinking Fund’ (an amount of money is put aside for maintenance or capital related expenses where major work is required to be spent…for example, new paint on the exterior of the complex, a new lift, replacing an electric gate, new pool equipment etc).
The other component is the ‘Admin Fund’ which is the amount that is paid to the company that manages the Body Corporate for that particular complex.
One of the many tricks of unscrupulous developers is to quote a proposed low Body Corporate fee to entice buyers to purchase the stock and after the first few Body Corporate meetings, the fees need to be ‘re-adjusted’ as the amount of money is simply not enough to cover these components…hence a sharp rise in fees occurs often within the first 12 months.
Again, I’m not trying to tarnish every developer with the same brush here and right now, we are selling some stock for developers that I’ve had a long involvement with and I can assure you that these developers are very ethical in their handling of these matters…otherwise we wouldn’t be selling their stock as it’s our reputation on the line here too!
But let’s get back to my example where each of 36 owners were paying $8000 per year…
I made a comment to the owner that these fees seemed very high and she informed me that they were at this level for quite a number of years.
When we looked at the historical amounts of money that she was paying for her Body Corporate fees, we noticed that the Sinking Fund was very healthy and had more than $200,000 in it…a great sign if you are looking to purchase as there’s plenty of money available should things go wrong.
(On a side note, if there isn’t enough money in the fund when things go wrong, there may be no choice but to impose a ‘Special Levy’ where all owners are asked to contribute extra monies in order to rectify serious issues and as you can imagine, this is not generally well-accepted for those owners involved.
The history of this complex was that the Sinking Fund had a lot of money in it for a very long time and over the years, the ‘Sinking Fund’ component of the Body Corporate fees had come down by almost 300% but the ‘Admin’ component had increased by the same amount.
The net result was the total Body Corporate fees had remained almost the same for a long time and it seemed that the residents were quietly satisfied that this is how things were.
I remember saying to our seller “Do you realise that this Body Corporate’ company are charging in excess of $180,000 to run your Body Corporate now? Have you asked where this money is going?”
Like many owners, she accepted the ‘Status Quo’ and had never questioned it.
There were no gardens in the complex at all and virtually no ‘week-to-week’ maintenance.
Upon further investigation of the expenditure, the units were charged for water on the same meter, meaning that one bill came in and the costs were evenly divided by the unit owners irrespective of how much water you or your tenant actually used.
In other words, if someone left a tap running all day in any unit, everyone had to pay for this.
The water bill seemed excessively high at the time (keep in mind that this was quite a few years when water was a lot cheaper than it is today) and I prompted her to question this amount at the next Body Corporate meeting.
She did ask to see the original bill that was sent to the Body Corporate…but as you’d expect, it was never provided despite several requests.
I’m 99% sure that this Body Corporate was profiting from the water invoicing and when my owner asked for an amount of money from the Sinking Fund be used to individually meter the units, this request was quickly shot down in flames…not by the residents but by the Body Corporate that provided a ridiculously high quote to enable this to happen.
At my request, she contacted many of the owners involved and successfully voted to change Body Corporate companies…finding one that seemed to be able to run the complex for approximately half of what the initial company were charging…and as such, everyone’s fees were reduced by approximately $2200 per year…thus saving the owners almost $80,000 of unnecessary expenses that were clearly going into someone’s pocket.
Furthermore, these units are now individually metered for water and everyone is paying for the water that they actually consume without anyone (other than ‘Unity Water’) profiting from this utility.
Next week, I’ll give you a few more examples of owners I’ve encouraged to conduct some ‘due diligence’ on how their fees are being spent.
Until then…Happy Listing & Happy Selling!