Are your strata levies enough to protect your property?

The Australian property market continues to evolve, with more opportunities opening up than ever before. For many people, investing in a strata scheme is the best way to own a home. A strata scheme is a building or group of buildings that is divided into individual lots, with all common property managed collectively. The owners form the body corporate, and all body corporate members make contributions to maintain the common property. These contributions, often made quarterly, are known as body corporate levies.

While many of these schemes have a residential focus, they can also be offices, commercial lots, industrial lots, or retail units, among other applications. Residential strata schemes exist for apartments, townhouses, duplexes, and even detached houses.

Strata scheme benefits and body corporate levies

When you enter a strata scheme, you own your lot and share ownership of common property with other lot owners. When you purchase a lot, you become part of the body corporate and must make contributions to the upkeep of the common property. This fee is known as a levy.

While strata levies represent an additional and ongoing expense, they are a viable alternative to unknown, expensive, and time-consuming property maintenance costs. This form of homeownership offers a number of advantages over standard property deals, including lower costs, easier management, and lifestyle advantages.

Let's take a detailed look at strata levies to see what they are, what they cover, and how they work. Strata levy amounts can vary widely, as can your rights and obligations under the scheme. While it might seem counterintuitive, low strata costs are often more expensive in the long run. If the scheme doesn't cover necessary expenses and fails to prepare for unexpected costs, it can lead to uncertainty and increased financial and legal risks.

What is covered by body corporate fees?

It’s important to understand exactly what strata levies cover. Also known as body corporate fees, strata levies are included in a single invoice and paid each financial quarter. There are three basic components of a strata levy, with a comprehensive breakdown necessary in order to compare fee structures.

Strata levies can include the following three components:

• Administration fund fees
• Capital works fund fees
• Special levies

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While each building has different requirements, strata levy structures are fairly consistent.

The administration fund accounts for the vast majority of ongoing costs, including all building administration and strata management fees. The capital works fund, also called the sinking fund, covers larger repairs, structural works, and planned projects such as repainting the building. The strata levy is set during the annual general meeting and paid on a quarterly basis.

It's important to understand levy amounts and what they cover. Along with day-to-day building maintenance, adequate levies are necessary to ensure the viability and sustainability of the strata scheme over time. While a very low strata levy may seem enticing, it can (and often does) lead to higher and unexpected costs in the long run.

What about body corporate management fees?

Most body corporates seek the guidance and administrative support of a professional body corporate manager. Body corporate managers are often employed to manage strata schemes, from financial management and governance to the organisation of meetings and minutes. While there is no legal requirement to engage a strata manager, DIY management structures are ill-advised in many situations. Having a third-party expert available to manage the scheme reduces conflicts and makes life a lot easier for the body corporate committee and lot owners.

Body corporate managers charge a small management fee, which is listed as a portion of the overall administration levy. Management fees are generally insignificant relative to the wider administration fund and sinking fund fees, so it's always a good idea to find the best manager that you can.

How much are body corporate fees?

Body corporate fees vary widely in Australia. While fee structures are fairly consistent, differences in locations, buildings, and property lots are significant. Before you purchase an apartment or lot in a strata scheme, it's vital to compare fee amounts, coverage details, and fee structures. Like always, there is a difference between price and value.

With differences between lot prices, amenities, facilities, and locations, how do you compare strata levies? Considering the levies as a percentage of property value is a great way to set an even playing field. Firstly, it can reveal if the levies are appropriate for the building. Secondly, it can help you to define good value.

For a building with little to no facilities, the expected levy total is typically between 0.8% and 1.0% of the property value per year. While levy costs can be even smaller in some situations, ultra-low costs often come with severe compromises. On the other end of the spectrum, a building with extensive facilities will have an expected levy total between 1.0% and 1.5% per year. In order to calculate your levy amount compared to these figures, you can review and add up your last four quarterly invoices and review the annual total as a percentage of your property value

You can do the same thing to review the management fee, which should come in between 5.8% and 8.7% of the levy total for buildings with little to no facilities, and 6.4% to 11.6% of the levy total for buildings with extensive facilities. While this represents a small percentage of the overall levy amount, professional management can make a significant difference to the overall outcome.

Who determines strata levies?

Strata levies are initially determined by the developer when the body corporate is formed, and are reviewed and adjusted annually at the AGM as required. Levies are typically payable on a quarterly basis in advance. A budget is distributed prior to the AGM and tabled at the meeting. This enables voting on the levy budget motion.

Individual levies are determined by the unit entitlement and payable each quarter. In most cases, larger lots are associated with greater unit entitlement, and therefore higher levies, in comparison to smaller units in the same scheme. The entitlement is set by a valuer prior to the body corporate forming and is typically unchanged from that point on.

How to assess whether your body corporate fees are reasonable?

Not all strata schemes are created equal. Your goal as a homeowner and member of the body corporate is to protect the value of your property. Your levy should allow that to happen. Lower levies are not always better. In fact, they can often be a red flag. The same can be said for management fees, with higher fees generally associated with more comprehensive management

In order to assess your body corporate fees, it's important to ask the following questions:

• Do the administration fees cover the day-to-day running of the building?
• Is scheduled maintenance performed to minimise potential breakdowns?
• Are capital works performed regularly to maintain and/or increase the value of the building?
• Is there a history of special levies being raised (this is a red flag of budgeting in arrears)?
• What is the condition of the building, and does it align with the fee amounts?
• What is the recent history of fee increases, and what do they represent?
• Are current owners and committee members happy with existing arrangements?

Why do body corporate fees vary so widely?

The amount of money payable depends heavily on the lot value, along with the age and condition of the building, the location of the building, the number and type of facilities, the management fee, and the amount of money funneled to the capital works fund. Different schemes prioritise different things, which is why it's important to understand the specific levies of your building.

In order to analyse fee amounts properly, you need to review fee structures. As mentioned, strata levies include both administration fund fees and capital works fund fees. Special levies can also be raised in response to an event, emergency, or special project. For example, they may be necessary for an additional planned project that has not been budgeted for, or to make up a deficit in the other funds.

• Administration fees: this fund accounts for the day-to-day expenses of running and maintaining the building. If the building is unique, older, or has more facilities, larger administration fees are likely.
• Capital works fees: this fund accounts for medium and long-term expenses. Older buildings can have higher capital works fees to account for more frequent projects and repairs.
• Special levies: at times, members of the body corporate may be required to pay a special levy in response to an unforeseen cost or other events. A special levy is typically only raised if the capital works fund does not have sufficient money to cover the unexpected cost.

When are low strata levies a red flag?

Everyone likes to save money, especially when it comes to property expenses. However, low prices are often associated with greater risk and higher costs down the road. When you're comparing strata levies and trying to make the best decision for your future, your goal is simple. You want to maintain and improve the value of your property. In order to do this, you need to ensure that your body corporate is collecting enough funds to resource this goal.

A well-managed and resourced body corporate can create an amazing place to live. However, if things start falling through the cracks, it can feel like you've lost control of your home or investment.

The following issues are potential red flags:

• Poor recovery processes for unpaid levies
• Inaccurate or budgeting in arrears
• Slow recovery of fund deficits
• Allowing the reserve sinking fund to drain
• Using money from the sinking fund on administration
• Late or unpaid invoices to creditors (maintenance people, gardeners, suppliers)
• Poor relationships between owners, committee members, and managers

When reviewing strata levies, it's important that capital works funds are isolated from day-to-day operating expenses. When sinking funds are used for things like cleaning and gardening, the fund is setting itself up for failure. Likewise, if creditors are not being paid on time, the body corporate is destined for problems. If there is tension between people due to large levy arrears, the situation needs to be addressed immediately.

While everyone loves a bargain, low strata levies can lead to large and expensive problems down the road. Instead of focusing on price alone, it's important to find a sustainable fee arrangement that reduces risk and keeps you protected over time. At the end of the day, the responsible administration of strata levies requires knowledge and experience. When you work with a strata manager, you can meet your responsibilities and contribute to the future of the scheme in a way that protects your immediate and long-term interests.

For more information, please download our free guide today.