Ep. 87. What a $100k Special Levy Tells You About a Building
If you're weighing up an older Sydney apartment against something newer, the strata report is where the real story lives, not the open home. In this episode, Michelle May compares 2 real strata reports for buildings she's looked at for a client, a clean looking 12 unit block in Carlton and an 18 unit block in Dulwich Hill carrying a $1.8 million special levy, to show you how to read what's actually going on behind the numbers.
As Michelle puts it, "you're swapping unknown future defects for known current remediation." A big special levy isn't automatically the red flag. Sometimes it's proof a building is finally dealing with its problems. Silence can be the bigger risk.
In This Episode
Why older buildings often get the fundamentals right, double brick construction, generous room sizes, and a bigger share of land per unit compared to higher density new builds
The 2 biggest ticket items to watch for in a strata report, balcony defects and fire orders, and the exact language that signals them, concrete cancer, waterproofing failures, balustrade compliance
The second tier of costs buyers consistently underestimate, asbestos, electrical rewiring, plumbing and rising damp
Why a proactive committee that's already commissioned an engineering report and raised a levy can be a safer bet than a building that looks clean on paper but has quietly sat on a known problem for years
7 questions to ask about any strata report before you buy, from capital works funding to insurance and the owner occupier mix
A side by side comparison of the Carlton and Dulwich Hill reports, and why the building with the $100k per unit levy scored higher than the one with none
How to sort every strata cost into 3 buckets, what's already budgeted, what's known but not yet funded, and what's still a genuine unknown, so you can negotiate on evidence rather than guesswork
The Two Buildings
Carlton is a 12 unit block with a $60k capital works fund and no special levy in sight. It looked tidy on inspection day. But the strata report told a different story, a balcony condition report had been sitting untouched for 6 years with no funding, no engineering follow up and no plan. Michelle gave it 5 out of 10.
Dulwich Hill is an 18 unit block with a $185k capital works fund. It looked rough, scaffolding up and balconies boarded off. But the committee had already priced the problem, raised a $1.8 million special levy, roughly $100k+ per unit depending on entitlement, and signed a contractor. The vendor was even covering the special levy on settlement. Michelle gave it 8 out of 10.
For more detail on reading balcony and fire order language before you go house hunting, Michelle points listeners to her earlier episode on what to check in an older Sydney apartment's strata report.
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Speakers in Today's Episode
Michelle May, Michelle May Buyers Agents
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Please note that any views or opinions presented in this podcast are solely those of the speakers, and do not necessarily represent those of any business. These views and opinions are general in nature, and do not take account of your personal objectives, financial situation and needs. Please consider whether it applies in your circumstances and seek professional advice wherever appropriate.
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I've got two Strata Reports sitting in front of me right now. One is a 12-unit block in Carlton and the other one is an 18-unit block in Dulwich Hill. They are both buildings I've looked at for a client but the kicker is that there is a 100k special levy sitting on the Dulwich Hill one and absolutely nothing on the Carlton one. But here's the bit that's probably going to sound crazy to you. If I had to choose between them, I'd pick the one with 100k special levy every single time. Now today's episode is about why and what it tells you about how to read every older building you'll ever look at. Welcome to the Buy Your Side podcast. My name is Michelle May, the principal of Michelle May Buyers Agents here in Sydney and this podcast is all about helping you make smarter property buying decision. Welcome. Now before we start, I want to say out loud, this isn't financial or legal advice. This is just about how I see it as a buyer's agent and how I look at property for my clients. So make sure you get your own Strata report, your own solicitor and your own building and pest inspector. But use this episode as questions you could ask them before you go and assign your name on the dotted line. So as you may know if you have listened to my previous episodes I love an older building but before we get into what's wrong with them let's be honest about what is right. The things I love personally is that they're real brick double brick walls in many of the 70s and 80s blocks. We have general ceiling heights and we have room sizes where you can actually swing a cat. Unlike the more modern apartments where every square meter is accounted for and paid for by you. What I like about older buildings is that many of them are in older suburbs closer to the inner ring of the CBD. So you're not just buying into a building, you're buying into a community. There are well-established local public schools. There is great forms of transport. If you're lucky, multiple forms of public transport, not just having to hop into your car every time. There is great walkability as well, local baristas hanging out, and there's a real community. So newer builds tend to be higher density further out on smaller footprints. Which brings me to your land value share. Older blocks often sits on bigger land parcels with fewer units, not so many 200 unit block towers around in the 70s. And then let's not forget the build defect comparison 53% of major defects in New South Wales new builds is nothing to be sniffed at and that was cited by the New South Wales building commissioner data so I'm not just plucking that out of thin air it's a real thing so an older building whilst it's not new and shiny it has already shown you its problems whereas a new one it's a bit of a mystery you have no idea what is going to happen. So the difference is that you're swapping unknown future defects for known current remediation which can be a fair deal if you can price in that remediation properly and you know exactly what it is that you potentially may be up for. So having said all that if we accept that older buildings are often the smarter buy we need to understand how to price the remediation property and then look at what are the big ticket items and what other aspects will influence your decision to buy. It's not just about the money. So let's talk about the biggest line items, right? Because if there's one thing I want you to take away from today is how to read balcony language in a strata report, because nine times out of 10, the big ticket item lives under balcony remediation. So we're talking about concrete cancer, otherwise known as concrete spalling. We've got waterproofing failures. We've got balustrading compliance. So those are the words that you need to look out for in a strata report. And ideally we would have an engineering report attached. There is a capital works for fund forecast, a 10-year plan. There is a special levy history or there is proposal for special levies or in the recent AGM minutes. So a building, red flag here, a building that's been talking about it for three plus years and nothing has been actioned, that's not great because that means the defects will be worse by now and so therefore the costs will be greater to fix it and the levies will be bigger. We want proactive communities as opposed to reactive ones. So both buildings that I mentioned today have balcony issues on the book. So the Dulwich Hill building has a 1.5 million contract out to build this and it is about 100k per unit depending on the size of the unit and how many balconies they have. So the 100k was in this case for two balconies per apartment. And interesting point that the vendor obviously knew that this was going to impact on the sale. And so they have already built in that they were going to pay that special levy on settlement. Now, the Carlton building has had a balcony condition report sitting on their shelves since April 2020. So an engineer came out, did the report and said, guys, you need to do something about this. And not a cent has been raised for it since. So hold that thought. So you've got balconies is the headline act here. And then you've got part of that also fire orders, another big, big potential to blindside you in terms of cost. Very different beast, of course. But those are the two big ticket items. But then there's also a second tier of things that buyers consistently underestimate and these things don't necessarily have to kill your purchase on their own but you've got to understand what what potentially is a cost so we're talking asbestos electrical rewiring we're talking plumbing we're talking rising damp those are the things that come up time and time again so search those things and don't just pop it in chat tpt i know you guys are all putting your strata reports in chat tpt but unless you have an actual skilled ai working with you you can't just leave it to ai to look at that okay so please please have a very thorough look through the report yourself so those are the things that are potentially going to cost you in an older building but remediation isn't just about a number because it is also months of scaffolding, months of drilling, months of dust. And also your building is going to look quite unsightly. So if you're thinking about potentially selling during that period of time, that can impact your desirability on the market. And like this vendor in Dolich Hill is saying, I will pay for the levies because typically he wouldn't have to, But he's saying, I'm going to take that cost so that it's not going to detract you from purchasing, I suppose. So these are the secondary things that remediation are going to cost you potentially. You've got your noise period. A typical balcony job runs about three to six months. So if you've bought to live in it, you're living in a construction site. The Dulwich Hill building looked terrible. Everything was boarded up. There was scaffolding. There was dust everywhere. But if you've bought it to rent it out, potentially, your tenant is probably going to want a rent reduction. Or if the work's going on and you need a new tenant, it's going to be maybe tricky to get a new one or they might move out. So and typically you want to model that in. So 10 to 20 percent rent discount during works is not unheard of and potentially a vacancy either end of it. Right. So think about if you're purchasing this building, how long do you want to live in it? How likely is it that there's going to be a heap of stuff happening when you want to be selling? Because you might have to think about strategically, I'm not going to sell whilst this is going on. I'm going to wait until the work is done because then the new buyer can benefit from all the works that have been done. But you might not be able to do that, right? So these are all the things that could come up. You've got your actual cost of things, but then actually living through it. If you're working from home and you're having to live through 18 months or six months or whatever the work it is they're doing, however long it's taking, that could be the real test for you. So before you then sign on the dotted line, like I always say, do your due diligence. So what do you actually need? You are going to need a current strata report, right? Ideally one that you buy yourself, but time permitting. But nowadays there's a lot of those pre-arranged ones. I have found the quality of them, let's say, less than impressive recently because they subcontracted out to people. So do not just accept that documents were not cited or unavailable. You need to understand that did the inspector actually not bother to look for them or do they not exist? Because those two are very different things, right? So in that strata report, you want at least three years of AGM and committee meeting minutes. You want to find a current up-to-date 10-year capital works fund forecast. You want annual fire safety statements. You want any engineering reports or building consulting reports referenced that are referenced in the minutes. Anything else to really get a holistic view of, okay, where is the building at? What are they doing about maintenance and upkeep? So here's some questions I would be asking. What is the current capital works on forecast balance versus the next 10 years of forecast spend? Are they underfunded? Because that will mean there will be special levies coming for sure. Has the building commissioned any engineering or remediation reports in the last five years? And where are they? Have you got them? I want a copy. Has a special levy been raised in the last three years? And for what? And how much was it per unit? Because some of these buildings are running on a wing and a prayer. And every time something needs to be done, they just whoop on a special levy. So, you know, what seemed like a great, oh, this building has got really low levies. Well, yeah, guess what? That's because they whack a 2K special levy per unit on your bottom every couple of years. So really, that's not very proactive thinking in my mind. Question number four is, are there any active of recent fire safety orders? Because once council slaps a fire order on a building, you only get a certain amount of time to rectify it. So is there anything happening in that respect? Is there any active litigation involving the owners corporation? I'm talking a builder, a neighbor, an owner, a contractor, right? Especially in like the newer buildings, you get a lot of litigation happening with the builders, obviously. What's the insurance situation? Has the building been refused or loaded? Have they got flood insurance? Because it might be that the building is in an area of potential flooding. Has that been covered? Question number seven for me would be, and you can potentially see this in the report yourself, has the strata manager changed recently or is the committee in conflict? Because that could both signal that a building isn't run tightly. There may be some conflict issues with personality whatsoever. And the last thing you want is to end up in the middle of that. And also research what the owner-occupier versus investor mix is, okay? because a higher owner-occupier ratio usually means that there is a more active strata and consequently the complex is better maintained because owner-occupiers tend to be more open to putting their hands in their pockets when it comes to maintenance versus investors. I don't want to pile on them but that tends to be the case. So what you've got to do then is basically find out where you can find out and then make it a okay pros and cons this isn't a walk away list this is a pricing it in list I guess and understanding the context of everything right because if a building has $80,000 worth of work coming and it's 20 units well that's a $4,000 special levy and that could be negotiable in the purchase price for example whereas if a building has 800k of special levies coming in and there's only eight units then that's 100k per unit and that's a whole different ball game right because that could potentially mean that they need to get a loan or they they're doing it in over three years which means that the building is going to be locked in special levies for three years or even longer right so that's a different conversation so figure out how much it is unit entitlement as well and it's all about eyes wide open right so this whole exercise is about you need to understand where you are exposed to risk here because you don't want to be the buyer that is going to like we've seen on the news and in the papers crying to the reporter because you had no idea that this was going to happen so let's talk about these two strata reports that i mentioned before so one is a unit block in carlton has 12 units 70s block and then we've got your other in Dollar Chill that had 18 units. So in Carlton, the capital works fund forecast was 60k, which sounds a lot. But what we always look at is what is that compared to the insured value? Okay, because the benchmark would be at least 1% of the insured value. And what we found was that the Owners Corporation was not levying in line with the Capital Works Fund forecast recommendation for that period of time. So look at it, what are the levies, what are they bringing in Capital Works Fund and how does that compare to what the recommendation was, right? So they had a balcony inspection commissioned in February 2020, full balcony conditional report by these really reputable consultants in April 20 in February April 2020 and they came back with there's a balcony issue there is spalling so concrete cancer there's water penetration blah blah blah now it is now August 2026 and I looked at it okay when was it maybe in June of this year so six years they've known about this issue what they did in the meantime though was reactive only so they fixed four-year water leak, they did some mold treatment, they did some copper replacement, they had fixed a stormwater grate that was blocked. So they were fixing symptoms, right, like band-aid solution, but not the actual underlying problems. So we didn't see any evidence of special levies, no approved future works, no proposed future works. And then there were the other things that were missing. There was no asbestos report, no WHMS report, no annual fire safety statement. None of that was there. Then there was a three-person committee and the last AGM was held in November and nothing was scheduled since. So we gave that building a five out of ten in terms of how interested does the owner corporation seem. But if you were to run this thing through chat GPT, for example, which is my big bugbear, this could potentially come out the clean strata because there's no special levy there's no fire orders there's no big ticket spending coming up and you go like oh well it looks fine and the truth is is that the building when you inspect it it looks huge it looks fine it looks neat and tidy i checked the bins the bins were tidy but when you scratched the surface it was a whole lot of nothing a whole lot of we're not doing nothing about it then conversely dollage hill when we inspected the property when we inspected the property my client and I together it looked dreadful and I had warned my client about this it was scaffolding there were the doors were boarded up nobody could get onto the balconies etc etc so if you were buying with your eyes you'd be like yeah no thanks very much But the Strata report was telling a very different story. They had $185,000 in the capital works fund forecast. So well over the 1% insurance mark. They were levying above the capital works fund forecast. And the engineering report that they commissioned did a defect schedule across all the 18 balconies and found concrete spalling, blistering, needed waterproofing, it needed spitter pipe drainage, all sorts of things. And so they costed three types of upgrade options and they got a special levy raised for $1.8 million, right? And then they awarded the contract in that same meeting to the builder that was going to do the work. And they agreed that subject lot chair for this particular unit was just over $100,000. And they could choose how to pay it. So some could take a loan, some could pay it in one instalment. There were options given. And then when we looked at the rest of the report, there was an annual fire safety statement. There was a combustible clutting thing. Obviously, there was none because it was an older building. But they did all the things that you would expect a well-run building to do. There was a five-person committee. They met three, four times a year. And so therefore, we gave this building an eight out of ten. Because even though the building looked scarier on paper, you've got a six-figure special levy, there's a contractor on site, et cetera, et cetera. I think that this one was proactive about it in the sense that, okay, they knew there was an issue and they jumped on it and are now in the process of getting things fixed. Because you know that a building of that era will need this work done at some point, right? There's no avoiding it. It's just the life cycle of, say, a 70s building, right? The concrete spilling, the waterproofing, the balustrade compliance, the fire safety upgrade. The only question is whether the work is in front of you, price scoped, contracted, or behind you because nobody else is talking about it, right? And you need to understand where you're actually sitting in that timeline. The Dutch Hill, the bill was defined. We knew exactly what the bill was. The vendor was paying for it on settlement. So it was baked into the negotiation, if you like. And the buyer is going to be walking into a building that's midway through being compliant for the next 30 years. Yes, it's going to be a headache whilst you're there for the time period that, you know, they're doing your bit of the building. But hey, that's a small price to pay. If that means you are going to be able to sell it without issues, you're going to be living in it. Nobody's going to sue you because your balustrading is too low and a kid falls off the balcony. God forbid. Whereas with Carlton, for example, the bill is coming. Winter is coming. Well, we just don't know when they're going to do it. Is it when a balcony drops off the building and they go, oh, sure, you know that report six years ago? I think we should have done something about it. That's just silly, right? They're putting their hands in the sand. But there was a little bit of information in that strata report. The worst strata reports are the ones where you've got no information whatsoever, right? There's no paperwork or it says not cited or unknown. That's where you really need to be very careful, tread very carefully, right? Because the special levy isn't the risk per se. It's the silence and the unknown of it, right? Because with the Carlton building, they're quiet on doing this work. Sorry, that was my alarm. It's been sitting there since 2020. Can you imagine if they had had the work done in 2020 prior to COVID? Because the cost of trades and goods have just gone through the roof since then. And actually, the balcony deterioration has gotten worse. So, all right. So I think I've made my point. But these are the things I think about before moving forward on a strata building, right? So we've got to categorize the issues. What's already budgeted for? What do they know about, but it's not funded yet, right? And what are the unknowns? What could potentially still be a ticket item? So then you've got to think about, all right, what's already budgeted is most likely baked into the levies that you're going to be paying for anyway, or paid by a vendor on settlement, or you're aware of what the cost is. but the known but not funded becomes a future special levy. And you need to take that into consideration about how much this property is worth to you. And then you've got your wild card of the unknown, right? So you either build that into a buffer. Okay, I know a fire order is going to come at some point and you're going to build that in as a buffer or you're going to walk away from that building. And then you've also got to think about, okay, how long do I want to live in it? how if you're buying to live somewhere for 10 plus years, then a 50k remediation over the next two years is going to help you live in a better building and allow it to sell for a better price. Because I can bet you this is only going to be an issue that's going to come up more and more over the next 10 years with these older buildings. And you're going to have the buildings who have done the work and the buildings who haven't done it right and so again for me it's about helping you understand the risks and helping you make that part of your your knowledge base and so that you can negotiate based on evidence right you know that these things are going to be happening you've gone through the strata report this building is on top of it they are proactive rather than reactive if they are reactive you can give that a risk factor and and and see whether that is something you want to work with right so the building the building is not just about the unit it's about the whole complex and you need to really understand that the the risks are uh the risks associated with that but they typically are the smarter by still if you can if you can look at those things in in context now what I would say is that if you if you're if you're weary about all this and it's a big decision to make listen to my other episodes where I go through in more detail the things to look out for in a strata report or the cost of older buildings all that kind of stuff now what I can also help you with is my better home buying course so if you want a more intense focused way of learning on how to buy efficiently and without navigating the risks if you like. The Better Home Buying Program is exactly for you. You also get me live in sessions. It's eight modules plus two bonus and that might help you along the way as well. If you found this episode helpful please give me a follow. Please give me a like so more people like you can help find these episodes because at the end of the day I really want to help you buy smarter. Thanks for listening. I hope that was helpful. And until next time. Sous-titrage Société Radio-Canada