Levies might be so low that the residents have to be called on repeatedly to pay special levies or much-needed maintenance might be neglected, says Mandi Hanekom, operations manager for sectional title finance company Propell.
Prospective buyers should, when viewing sectional title properties, assess the levy structure in relation to the amenities provided – and then consider what these amenities might cost them each month if they owned a freestanding home. If, for example, there is a swimming pool and clubhouse with a community garden and entertainment area, or excellent security, this will add to the monthly levy payments each month, but these amenities also contribute to the owner’s enjoyment of living in that scheme. Prospective buyers should also take into account other expenses, such as the running costs of electric fencing and the salary costs of security guards or gardeners.
If the trustees manage the scheme well, the scheme will have sufficient cash flow to meet its month to month running expenses and will have planned for the coming five to ten years’ maintenance on the building. In addition, the scheme will have enough cash in its reserve fund for major repairs (which is a legal requirement now).
If the owners’ levy payments are set too low, this could lead to the trustees running the scheme in a “survival” mode where just the necessary bills are paid each month and repairs or maintenance (such as painting or waterproofing, for example) are not attended to. This then starts a downward spiral with more funds needed for repairs and maintenance as the building’s condition deteriorates. This could, in turn, lead to a drop in value for sections and decreased popularity of the scheme.
This is particularly important in older schemes where more maintenance will probably be necessary and where high budget items such as roof or lift replacements might become necessary.
Potential buyers should check the financial statements, budget and trustee resolutions of the scheme they are interested in carefully, as these will show what amounts have been budgeted for, whether the scheme has savings put away, or not, and what the monthly levy obligation of owners are.
Hanekom’s advice is: “It’s best to check first so that there isn’t time wasted on a scheme that may only look good on the surface.”