What buyers need to know about residential unit costs in complexes

Buyers of residential units in complexes often make a harsh mistake when calculating the monthly charges they will pay once the property is transferred into their name. This can have a substantial impact on affordability and their ability to make ends meet monthly.

Listings on property websites aren’t at all specific about the amount being charged for levies. There is often also no indication of whether the property is freehold or a sectional title – a critical distinction.

Freehold

Freehold properties are owned outright by purchasers (you own the building and the land, or erf) and are members of a homeowners’ association (HOA).

ALSO READ: City Power disconnects power from two Midrand residential complexes over R30m debt

Building insurance is for your own account.

Here, levies are typically lower, as these only cover the costs of security (guards, electric fence) and common area utilities and services (lighting, intercom and perhaps a gardening service).

Sectional title

With sectional title schemes, agents will sometimes lowball the levies and provide only the administrative levy on listings (without specifically stating this).

And in the sectional title, things are complicated …

ALSO READ: How to navigate complex living, and avoid nightmares with the neighbours

In these schemes, you own your house or apartment exclusively but share all (or most) other areas, such as gardens and a swimming pool, with other owners. The cost of maintaining the exterior of all buildings is the responsibility of the body corporate, which comprises all the people who own units in the scheme.

The main charge in sectional title schemes is the administrative levy, which is used to fund the complex’s administrative budget. These are charged according to your unit’s participation quota (PQ), based on the floor area of your unit.

Bigger units pay proportionally more than smaller ones.

In a sectional title, utilities such as electricity, water and sewerage are connected to a single point of distribution by authorities and billed accordingly (in bulk). This means the metering of water and electricity consumption is managed internally by the scheme, and units are billed for their usage (generally referred to as ‘recoveries’ in scheme budgets and financial statements).

ALSO READ: How to protect yourself from building nightmares

You will therefore not be billed for electricity, water or sewerage/effluent on your municipal and/or Eskom bill (only property rates and refuse removal are charged). These consumptive charges will be added to your levy statement.

Not all electricity charges are recovered from the units in a scheme. Consumption by common area lighting, electric fencing, gate motors, and swimming pool pumps will need to be covered by a portion of the administrative levy (and remember that larger units will contribute a larger proportion of these than smaller houses in a scheme due to the PQ).

The administrative levy also needs to cover all other operational costs in the scheme, such as security, the intercom, and garden services, as well as repairs and maintenance.

Remember, the responsibility of maintaining the exterior of units (including roofs) is the responsibility of the scheme. Appropriate building insurance also needs to be paid by the scheme.

Reserve funds and special levies

Beyond the day-to-day running costs, body corporates also need to make a provision for reserve funds on an ongoing basis.

ALSO READ: All about interest rate hikes and how they affect your finances

Central to this is a 10-year capital expenditure maintenance plan, now a legal requirement for sectional title schemes.

This was implemented in 2016 to prevent situations where body corporates do not plan sufficiently for maintenance and are forced to suddenly raise special levies to fund this. Schemes now need to have a reserve budget to fund major maintenance.

Effectively, a reserve fund ought to be established by setting aside a portion of levies collected throughout the year. The exact amount required is a complex calculation that takes into account annual maintenance costs as well as the amount already set aside. It is uncommon for this to be less than 15% of the administrative levy.

Schemes are also legally obliged to charge levies for any exclusive use areas (EUAs). This can include garages, parking bays or gardens. Generally, this amount should cover the costs of maintaining these areas. If garages are EUAs, separate levies here could easily be R100 or more per month.

ALSO READ: Your house’s previous owner forgot to tell you about the leaky roof? Here’s what to do

Unexpected large expenditures not budgeted for by the scheme can result in the need to raise special levies.

The reserve fund requirement has made this occurrence less common, but sudden large painting projects, thatch roof repairs or replacements, major work on swimming pools – even utility billing issues where a sudden enormous water consumption charge is levied due to incorrect metering, for example – sometimes require these special levies to be charged.

The decision here lies solely with the trustees, but there are two requirements: the special levy must be necessary, and it cannot be used to pay an expense already included in the budget.

ALSO READ: Has your dream home turned out to be a dud after purchase? There is recourse

It is not exceptional for special levies to run into tens of thousands of rands.

CSOS levy

The final ‘hidden cost’ in sectional title schemes is the Community Scheme Ombud Service (CSOS) levy. The amount charged here is the lower of R40 or 2% of the levy charged to an owner when it exceeds R500 (in an instance where levies are under R500, no CSOS levy is payable). This is collected by managing agents and paid over to CSOS quarterly.

If you are considering buying a unit in a complex, make sure you ask for the latest copies of the levy statement for that unit.

This will help you understand just how much the monthly levy charge is and assist in budgeting for it. Factor in that utilities are included on this bill in the case of sectional title.

This could be the difference between the R1 500 quoted on the listing and the actual bill, including utilities, of over R5 000.

In the case of sectional title schemes, it is absolutely crucial to get copies of the most recent AGM pack, including the current budget and financial statements. This will ensure that you are able to get an objective view of the financial health of the scheme. The last thing you want to do is buy into a badly run, broke scheme!

This article was republished from Moneyweb. Read the original here