False economies: Beware the lure of low levies

It sounds too good to be true: buy an off-the-plan apartment with a heated pool, professional gym, 24-hour concierge and a residents’ sauna – and it comes with the promise of the lowest levies in the area. 

Who wouldn’t jump at that? Well, anyone who can do basic arithmetic, for a start. 

One of the less-heralded innovations in the 2016 changes to NSW strata law dealt with the grubby practice of under-quoting levies. 

You didn’t need an economics degree to realise that billboards that proclaimed a new building has resort-style facilities but low levies were missing something.   

When the true cost of all those services was properly calculated, the only real surprise would be how many people had fallen for it. 

The arithmetic is simple. Apartment blocks cost a certain amount to run, maintain and repair. The more facilities and services your building enjoys, the higher your levies are likely to be.  

There is no escape from that – you get what you pay for and you pay for what you get. 

What used to happen in NSW – and still happens elsewhere – was that the developers would underestimate the levies (or fees) to attract buyers.   

But it was the owners at their first AGM who signed all the contracts and it was also they who paid the bills when invoices were put on the table. 

Any developer who knowingly does this now in NSW could have to refund the owners the difference between the underestimated levies and the actual figures. 

Where this practice is still allowed, new apartments owners could be left holding a very expensive baby. And when they demand that “the strata” should pay the bills, they are often shocked to discover that they are “the strata”. 

In any case, the best protection against this form of fraud is common sense.  How hard is it to find an established building with similar facilities and the same number of lifts (a big expense) and pro rata the costs per unit to your proposed off-the-plan purchase. 

The other end of this issue is when the levies are kept artificially low, usually by cutting services and neglecting maintenance.  

And while no one want to pay a cent more than they have to, when your committee starts cutting corners (to save themselves money and ensure they get elected every year) it’s your investment they are damaging.   

As has been outlined in these pages before, it’s the oldest trick in the strata book and you shouldn’t fall for it as it will cost you in the end. 

The Flat Chat column has carried myriad stories of some ridiculous extremes to which tight-fisted owners will go in order to suppress levies. 

One Flatchatter couldn’t persuade the absentee landlords who dominated her committee to raise a levy to pay for a badly needed lift renovation.  The elevator was skipping some floors and opening its doors when it wasn’t level with others. 

It took threats of action at the Tribunal to get then to even look at quotes.  They were happy to collect their rents and let the building slowly crumble. 

In other blocks, we have heard of retirees who see the sinking (or ‘capital works’) fund as a savings account that they can pass on to their surviving relatives. 

The amount of damage excessive parsimony can do to the value of your investment can’t be underestimated. Just ask a local real estate agent.  

Real estate investors often recommennd buying the worst houe in the best street.  Likewise, if you own the smartest apartment in the shabbiest building in the street, you may be wasting a lot of  money. 

This column first appeared in the Australian Financial Review

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