Due Diligence process for apartments is complex by dealing with Body Corporate, Body Corp management and third parties acting on apartment owners behalf. For avoiding pitfalls read more
Pitfalls on Apartments
Due diligence on Apartments and Buildings
Understand the specific of apartments
Problems with negative equity in new built apartments (commonly “off the plan” purchases), apartments which are too small or not well enough designed and issues around apartment building management (body corporate) show the lack of knowledge around apartment investments and related risks for investors.
Buying an apartment is by nature complex and a number of blog posts like “Are Apartments good investments?”, “How to lose money with apartments?”, Buying Rules and also “Buying apartments off the plan” show different aspects to be considered. Now, I would like to talk about the due diligence on apartments and buildings.
The due diligence process (DD process) is to manage buyer’s risks. The apartment buyer has to deal with the seller’s agent, the Body Corporate (owner of the building) and also to look at the building management.
Under the Unit Titles Act the apartment owner is represented by the chairperson and the committee of the Body Corporate. And that might already set you on alert because the Body Corporate’ s representation could make or break your investment. That is why I structure the DD process in three parts. By the way—townhouses and multi-unit blocks where the Unit Titles Act applies are managed similar.
Apartment—rental performance and quality
Apartments are more difficult to re-sell if poor quality, climate in the building or the location lead to a high turn-over of renters. Ultimately the wrong type of tenant has an impact on occupancy rates and net yield. Require the history of tenants at least for 12 better 24 months.
Wear and tear show the quality but also the state of repair and maintenance—that offers negotiation power and the opportunity to add value by renovation.
State of building maintenance and history of capital growth
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.
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.
Possibly you would buy in an area that has a long history of strong capital growth (close to jobs, public amenities and infrastructure). But also the size of the complex matters. Remember, land appreciates while buildings depreciate. A smaller number of units offers the highest land to asset ratio possible for getting as much valuable land under your apartment as you can.
Body Corporate (BC) and building management
Have a look and familiarize yourself with Unit Titles Act (UTA) especially read about the unit titles holder’s rights. The BC rules govern what happens in the apartment building and apply to unit title holders (apartment owners) and occupants alike. Any information you can obtain from the Body Corporate management. When obtaining a disclosure statement (see pre-contract disclosure statement) check;
· Financial reports from previous year 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?
· Enquiries about what facilities are parts of the building. Hot-water is always an issue to be checked.
· Talk to the appointed chairperson, or committee to get a feeling about management and operation.
By completing these three parts you will be confident to make the right decision. Good luck.
Property Investor’s Blog
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Klauster Blogs lead to a real person, IT professional, investor, landlord and business owner with interests in technologies, properties and trading.
His passion, making experiences available and helping people like you, comes from extensive travelling and the principles of life—how to avoid pitfalls in unfamiliar territory when investing or forming relationships.
The philosophy to treat life, partnerships and hobbies as an investment has helped people in his circle. Life is a dream with a deadline, happiness comes from making the right choices and having realistic expectations.
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