Understanding a Strata Report

The single most important due diligence prior to property purchase.

If you want to avoid making a bad Apartment purchase, you must take the time to read and understand the Strata Report.

When it comes to doing due diligence prior to buying a Strata apartment, townhouse or Villa, the Strata report forms the starting point for understanding the maintenance and running of the building you’re looking to buy into. ​

These documents can often run over 600 pages, are often put together in an ad-hock manner with poorly scanned documents, pages inserted upside down and general repetition. The content pages are rarely indexed to the page numbers, making finding specific reports and documentation difficult.

Reading a strata report is not fun, it’s extremely time consuming (allow 4-6 hours for your preliminary review) and by no means forth giving.  The reader needs to take the approach of a detective with the best outcome often only crumbs of information from which you can then commence further investigations

A Strata report can be commissioned independently by a purchaser, but more commonly under the new shared economic model of strata report production, the vendor enlists the services of a reporting company to assemble the report with interested buyers paying a nominal viewing fee of $35- $50 to obtain a copy of the report. On successful property purchase, the purchaser is then invoiced a final fee to own a copy of the report (usually an additional $200 - $250). This approach has advantages and disadvantages. The advantage is time saving, these reports may take a week to research and assemble, time rarely available when searching property. The disadvantage is the vendor may choose not to include certain documents as they may reflect poorly on the building, for this reason accuracy may not always be guaranteed.

It’s very important to understand that a Strata Report is compiled by an independent Strata reporting company. The information they source for the report comes from the Strata management company – A very different entity. The Strata management company is an organisation that have been appointed by the owners in a strata building to manage the administration and the running of the residential building.

Understanding the different rolls of these two entities is very important when it comes to seeking further information or qualifying information found in the report.

If you find documents missing from the report or incomplete documents, you must contact the Strata Reporting Company first to ensure the report is complete and consistent. If something is missing they should seek to add it to the report.

Alternately if you have questions about an event, position of a financial account or notations in an Annual General Meeting (AGM) minutes then you must contact the Strata Management Company to seek further information. The Strata Management Company will be listed on the Strata Report.

Dealing with a Strata Management Company can be difficult for none owners and you may get blocked from gaining information based on privacy grounds. This should definitely be viewed as a red flag should it occur and should be seen as the trigger to put on your detectives hat and seek other channels to resolve your concerns.

Other channels to pursue in seeking clarity on information found in a strata report may include finding who the president of the Stata committee is, this will be a resident of the block. A building manager or building concierge is also a good starting point to seek contacts within the building.

What are the key items you must look for and understand in a strata report

• The financial position of the building
• Does the building have a 10 year Capital works Plan
• Minutes of the Annual General Meeting (AGM) and any Extraordinary General Meetings (EGM)
• Notations of Special Works and Special Levies
• General Building compliance reports, quotes and receipts

1. The financial position of the building
Most people completely misunderstand the function of a strata fund. In simple terms, think of a strata fund as a business with the sole purpose to look after a building and its amenity. The strata fund raises fees from the unit owners, pools the funds and pays for the running and maintenance of the building. If you owned a stand-alone house and the roof was leaking you would have to pay to have the roof repaired or replaced. In a Strata building the roof still needs to be fixed but in this case the cost is shared between the 20/50/150 apartments. Strata fees raised from the unit owners are divided into two accounts, the administration fund and capital works fund. The administration fund is exactly that, the running costs of the building, this could include garden and pool maintenance, cleaning of common areas, lift and automated door maintenance, staffing and management costs etc. The capital works fund focusses on maintaining the aging infrastructure of the building which can include 25 year lift replacement, painting of building, replacing aged roof membrane etc.

What to look for in the financial report.

In simple terms, the flow of money in and out and the accumulation of a future fund in the capital works account. You need to look at the line items and understand where funds are being spent and on what. You then need to analyse the Capital works activities and ensure the balance of this account is strong and a works plan is in place (We will come back to this later).

A well run building collects large sums of money, spends that money with care and puts away money for future works. A poorly run building raises little money, has little money put away for future works and allows a building to become run down.

2. Does the building have a 10 year Capital works Plan
I cannot emphasis enough how important a 10 year capital works plan is, and that you must read the 50 plus page report and understand the condition of the building and future maintenance required to keep the building ship shape. Regular works and plant equipment replacement prior to failure is the hallmarks of a well-run building. Remember this is a business, big money in, big money spent on maintaining the building.

Once you have read the capital works plan, which importantly includes a financial budget and 10 year collection and allocation plan, you must then go back to the financial report and ensure the plan is being implemented and followed.

3. Minutes of the Annual General Meeting (AGM) and any Extraordinary General Meetings (EGM)
Every twelve months and at various times throughout the year an elected group of unit owners who have taken on the role of management committee for the building, and under the supervision of the Strata Management Company, meet to discuss management, staff, compliance, budgets and maintenance issues affecting the building. AGM minutes include financial reports for the past twelve month period in the same manner as a business presents its financial accounts. The minutes are distributed to all owners within the building and form an important part of the Strata report purchased by a potential buyer. These reports must be carefully reviewed along with the financial accounts and account balances.

The bad news is, of late I am finding the minutes included in strata reports completely lacking in detail especial in relation to building maintenance and particularly the nature or necessity of special maintenance work and special financial levies to fund such works. This is yet another enormous failing of regulation around the building industry and stems from disastrously poor building standards of the past 25 years that have left many modern apartment buildings insolvent and requiring large and eye wateringly expensive commercial loans to commence urgent repairs. It’s a conflict of interest for the owners of apartments in these building to facilitate public knowledge of such expenses as it diminishes the value of their apartments and jeopardises the potential of a sale.

It’s a cruel world folks, and buyer beware, if you don’t get it by now then I will make it very clear, Due Diligence is everything! As mentioned earlier, your job as a potential buyer is to put on your detective hat and look for crumbs from which you will form a more complete picture of the building. I can guarantee even the most pared back AGM minutes will still contain enough crumbs for you to either feel comfortable or dig for answers. Between analysis of budget line items and the odd word like concrete sparling, water ingress or failed membrane, you’ll soon form a level of questions to put to the strata manager or committee.

4. Notations of Special Works and Special Levies
Alarm bells, sometimes! Not every time – the devil is in the detail.

Like any building infrastructure, failings can occur prematurely and for well-run buildings this may just be planned maintenance brought forward, but for others this can be an indication of a big black hole of poor build quality, remediation of mistakes or major structural issues. A good understanding of building design and construction practices goes a long way in analysing the nature of the required works. An important part of understanding special levies is knowing how many ways the expense is divided. Last week I reviewed a Strata report which highlighted an impending special levy of $1,000,000. The building had 160 apartments of various sizes which translated to $4,000 for the apartment we were looking to buy, not an unreasonable expense for a building improvement.

5. General Building compliance reports, quotes and receipts
This is the source of more crumbs that will help join the dots on your appraisal of a building. Receipts and quotes will give you an insight into any repetition of fault remediation or equipment failure and how the building goes about maintenance. Fire compliance certificates are essential, and a warning, be wary of retro-enforced fire orders. I came across a building last week that will have spent in excess of $3,500,000 complying with new orders.


It’s a lot of work, who can I get to review a strata report

Regrettably there’s no good answer to this question. Due to potential legal liability of someone reviewing a report and overlooking or misinterpreted information, the ultimate earnest is on you the buyer to conduct a thorough reading and research, gaining complete knowledge of the facts. Some conveyancers will pass the report through AI and give you a list of red flags (from which you must further investigate), recently a client’s solicitor refused to take on the responsibility. Keep in mind for a professional to properly give each report a complete read you’d be looking at $1,000’s in time charges.

The good news is the more reports you review the more attuned you become to finding the crumbs that paint the picture of a buildings health.

The reality, most buyers are naive to the sheer gravity of a Strata report and either give it a cursory scan or simply feel satisfied that they purchased it in the first place. The other side to this is the lack of knowledge and experience in reviewing a report, which can often lead to poor conclusions that can see well run building misunderstood as expensive and churning money.

Unlike most Buyers Agents our focus at MCS Buyers is on property strategy and we always do a deep dive review of Strata Reports and have extensive experience in quickly identifying poor verses well run buildings. Unlike most buyers agents our approach is to mentor our clients through the understanding of a report and ensure at the end of the day that they possess the knowledge to move forward with confidence and eyes wide open in making a strata apartment purchase.

An important final note
Returning to the example of the building mentioned above in which a complying fire order saw the necessity to raise $3,500,000 in special levies. The same building had recently seen the sale of two large apartments for $1,800,000 each. These prices matched with comparative data for similar apartments in the area, so it can be concluded they were bought at fair market valuation. In our due diligence search of the building we unearthed a multitude of other works required on the building, the programs had been running for years and involved an additional long running works program requiring an additional raise of $2,500,000. The fire compliance funding allocation for these two apartments was indicating $80,000 per unit and the additional works program unearthed will require a further $60,000 per unit. The financing of the works will stretch over five years, and will have a significant impact on property value and saleability over this term.

This raises the question, did the buyers of the two $1.8m apartments conduct adequate due diligence and strata report review before purchasing?
Evidence would suggest NO.

Buyer beware, Sydney property is some of the most expensive in the world, use a professional to ensure you cover all of the steps to mitigate risk and ensure you purchase a quality asset.

Footnote
We regularly buy quality, well run strata apartments of all ages and sizes for our clients. There are good apartments to buy!

If buying property is not your full time job, seek the services of a professional or risk the consequences of a false economy that can lead to potential capital loss or an unsaleable asset.