Diligence process, DD Process on apartments is complex for dealing with Body Corporate, building management and unit title share on the building. No the differences when buying off the plan, a brand new or second hand apartment.
Pitfalls on Apartments
Due diligence on Apartments and Multi-Storey-Buildings
The demand for apartments from people wanting to enter the housing market and investors buying apartments to increase cash-flow is raising. When following the trend you need to know the fundamental aspects of apartment ownership. We already talked about apartment ownership types, the Unit Titles Act (UTA) that governs body corporate’s rules and operation, and how to find apartments worth buying.
It matters if you decide to purchase a brand new or second-hand apartment in terms of building code, earthquake or fire safety and the history of the multi-unit building. That is why the due diligence process on apartments is much more complex than on stand-alone properties.
New built apartments, especially if purchased “off the plan”, turn often out to be too small and have design challenges. Usually after the first few years the owners face huge costs for resolving problems with the building when ill managed by the body corporate. That is common in blocks of apartments specifically built for investors. Pricewise apartments offer a lower entry level for the property market and glossy leaflets with fictional numbers are attractive and seductive for inexperienced people. For avoiding related pitfalls here are the key areas for due diligence on apartments and multi-unit blocks.
Due Diligence for multi-unit blocks and apartments
The due diligence process (DD process) is complex compared with stand-alone properties as the willing buyer has to deal with the seller’s agent, the Body Corporate (owner of the building) and the building management. Under the Unit Titles Act the apartment owner’s rights and share in the building are managed by the Body Corporate (BC). For the prospective purchaser are two documents essential to view—the body corporate rules and the pre-purchase disclosure statement.
In general the BC rules outline the operational part of ownership like what to do or not, while the disclosure statement contains details about fees, body corporate levies, funds for building maintenance, upcoming repairs, ongoing projects (earthquake and weather-tightness issues, etc).
In addition you would request documents, such as the Long Term Maintenance Plan (LTMP), minutes from body corporate meetings (committee and annual general meeting - AGM), information on insurance and not to forget details of financials and the budget. Checking the financials is a must, because if the body corporate has not adequate funds for maintenance and repair going forward, that would mean you, the new owner, is purchasing a liability.
To check in greater details related to the apartment:
Cost structure (BC levies, metered services like water, heating)
Utilities through providers or agents
Earthquake and fire safety (escape routes, procedures)
Building access and security
To check in greater details related to the building:
You need to inspect the entire building as you buy a share of the common property owned by the Body Corporate. If you are not sure go to the consumerbuild.org.nz website - Leaky buildings section and The Department of Building and Housing site for more information.
To check in greater details the body corporate:
Aside from the issue with weather tightness problems and the concerns about ground rent for leasehold properties, some body corporates are tangled in disagreements about long-term maintenance and repairs or financial problems. To summarize:
· Financial reports from previous years and current budget
· Enquiry into accounts for long-term maintenance plan, sinking fund and contingency fund.
· Obtain the committee meeting minutes and find out about problems
· Have a read through the building manager’s reports (state of repair, maintenance, etc)
· Does the developer still own enough units to control the body corporate?
· Talk to the appointed chairperson, or committee to get a feeling about management and operation.
Yes, due diligence on unit title properties (strata properties) is complex. Initially, it is your decision to gamble by buying off the plan, choosing a brand new building based on trust or making sure, based on your due diligence, that the chosen second hand apartment exactly fits your needs. Good luck.
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