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Why first-time buyers need better protection

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As our various governments, state and federal, lure us with grants and tax breaks into buying new and off-the-plan units, they really need to put more safeguards in place to protect first-time buyers.

This applies especially to purchasers of apartments, by far the first choice of most first-timers.

It’s all about the choices apartment owners have to make at their initial AGM and what those decisions lock them into for years to come.

And anyone who thinks that there must be laws to protect them from unscrupulous developers, could be in for an emotional and financial shock.

Twenty years ago, we bought our first (and last) off-the-plan apartment and went along to the initial AGM where a friendly man in a smart suit was recommended to be our chairman by the developer, who also suggested we hire their management team because “nobody knows the building better than us”.

The chairman turned out to be a defrocked bookie who had a long-standing commercial arrangement with the developer. He negotiated a one-off, no comeback deal for all defects, for $86,000.

Those defects would later cost $3 million, not counting the millions we lost in legal fees thanks to a mendacious and incompetent lawyer, who caused bitterness that lasted to this day when he lied that he had advised the committee to accept an offer on the eve of the court case he went on to lose.

Then there was a so-called defects expert who told us we needed $6 million to fix the problems then crumbled in the witness box when cross-examined by the developers’ attack-dog lawyers. We got nothing except a hefty legal bill.

The developers’ building manager was a conniving, scheming incompetent, obsessed with saving money on things like cleaning, to boost his Christmas bonus, and who allowed his security guard mates to sneak into apartments for a snooze when their owners were out at work.

The strata manager was a buffoon who put the Owners Corp seal on an amended building management contract to which they had secretly added a clause saying that if we sacked the building manager, we had to pay his wages until an equivalent job could be found for “one of their very best staff members”.

We called the developers’ bluff and their ace employee was last seen “managing” a car park.

It took about 10 years to undo all the damage that had been done to the community and, as I said, there are still some people who don’t speak after all these years.

Ironically, the one mistake the dodgy chairman made was to announce a plan to revoke the by-law that allowed pets. That brought together all the owners who had bought in on the basis that it was a pet-friendly building.

And it was once they started lifting stones to see what crawled out that the whole mess unravelled.

But nobody should have to go through all that crap. And in the past 20 years strata laws have changed a lot and education and awareness has improved immensely.

In NSW, because the government recognises that selling long-term contracts to people who don’t know what they’re doing is fundamentally flawed, strata management contracts are limited to one year after the initial AGM and three years at a time after that.

Most strata managers would prefer longer contracts but agree it works for everyone, with that initial year allowing all parties to find out who and what they’re dealing with.

Victoria is looking to follow suit with the one-plus-three model in their rolling revision of strata laws but Queensland is still wedded to the “legalised corruption” (© Flat Chat) of the pre-sale of management rights.

Meanwhile we have seen the rise of embedded networks, extended building management contracts and even the pre-sale of management rights is spreading south from Queensland.

With embedded networks, an infrastructure provider agrees to install an essential part of the building at no cost, provided the developer persuades the new owners to sign up to a long-term, inflated maintenance contract, often with outrageous annual increases.

The advantage for the developer is clear.  They have saved on a capital cost and all they have to do is persuade the naïve new owners that this is “standard practice”.

Building management contracts are another major issue. In NSW it is standard practice for building services managers to have contracts for 10 years with options to renew for five years at a time thereafter.

It’s similar in Victoria and even worse in Queensland where pre-sold caretaker contracts can start at 25 years. 

In NSW and Victoria, these contracts have to be accepted at the initial AGM but you have to wonder, if one plus three is good enough for strata managers, why wouldn’t something similar apply to building facilities contracts?

The same goes for the pre-sale of management contracts in the southern states.  Pre-sales aren’t illegal per se – but the developers have to convince the owners to ratify them at the initial AGM or they fall through.

This is just a way of putting more of your money into developers’ coffers and serves no other purpose whatsoever.

The pressure on strata managers to aid and abet these scams is huge.  If they don’t, they can forget ever getting another contract to set-up the legal logistics of a strata scheme – a major part of their business.

So what’s the solution?  If you are buying into a new building, go along to your first AGM and ask difficult questions. 

Stand up and tell the other owners not to accept excessively long-term maintenance contracts for infrastructure, especially if the developer paid nothing for it.

Don’t accept long-term building management contracts – one year plus three or five should be enough.

And, on principle, reject any management contracts that have been pre-sold. Your BS detectors should be on full-beam as soon as the words “this is standard practice” are uttered.

Right, that’s you sorted.  But what about complete newcomers to strata?  Who is going to tell them the facts of strata life?

Our governments need us to buy apartments to keep the building trade going, in turn to drive our economic recovery.

It’s only fair then that they issue clear and specific warnings about bad practices to first-time buyers.

A version of this column first appeared in the Australian Financial Review.

One Reply to “Why first-time buyers need better protection”

  1. Jimmy-T says:

    If you want to start a discussion or ask a question about this, log into the Flat Chat Forum (using the link above). More people will read it there and you can more easily keep track of responses.

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