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PMR 31(4B): The one rule that can turn your property investment into a money sucking nightmare…

by , 02 November 2015

When you buy an investment property chances are it'll be in a sectional title scheme.

Before you bought it, you made sure to check you could get a great rental income from it, that the price was good and the levies are low.

But a single rule written into law could turn this attractive investment into a bottomless pit, sucking in all your money. Let me explain…

How your Body Corporate can suck you dry

The Sectional Titles act has a rule called PMR 31(4B), it states that:

“The trustees may from time to time, when necessary, make special levies upon the owners or call upon them to make special contributions in respect of all such expenses as are mentioned in rule 31(1) above (which are not included in any estimates as are mentioned in rule 31(2) above), and such levies and contributions may be made payable in one sum or by such instalments and at such time or times as the trustees shall think fit.”

In short, the trustees of the sectional title development you bought into can order you, and all other owners, to pay special levies.

I say order because you don’t have a say in the matter.

That’s right, even though you are an owner in a complex you don’t get to vote to approve a special levy. Trustees are allowed to approve a special levy by passing a resolution during a trustees meeting.

I’ve heard many stories of investors buying a sectional title unit just to find out three or four months down the line the Body Corporate is raising a special levy to pay for ‘security upgrades’ or a new gate house or landscaping…

It’s not out of the ordinary for complexes to ask for R10,000, R15,000 or even R20,000 in special levies.

But if you’re only getting R5,000 in rent a month, paying R4,500 of that towards your bond and the rest towards normal levies the special levy bill can really break your budget.

Three things you can do to avoid getting sucked dry by special levies

#1 Understand your rights and use them – First off, special levies have conditions
What you need to remember here is that the funds from the special levy are used to improve the sectional title scheme. So it is normally in your best interest. But if it isn’t you have recourse…

The conditions for a special levy are that it must be for a necessary and unbudgeted expense.

So your first port of call is evaluating for yourself, is this expense required? If it is just for landscaping or upgrading of a facility you can question the trustee’s decision. If however there was a storm that damaged a building for example it is necessary to immediately fix the problem and raise a special levy.

So, let’s say the special levy isn’t necessary, or you think so at least. What can you do?

Well, as an owner it is within your rights to call a special general meeting. For this you would have to get 25% of the owners in the sectional title development to sign that they support a special general meeting. You then supply the managing agent and trustees with these signatures as well as the proposed agenda for the special meeting, i.e. approving or disapproving the trustee’s decision for the special levy.

At the special meeting, the special levy decision can be approved/disapproved by the members present. You could also call for an addition to the scheme’s management rules in order to limit the amounts that Trustees can spend on repairs or maintenance without approval of members at a special meeting.

#2 Become an ‘activist’ investor

You can become a trustee on the body corporate and be part of decisions regarding your investment property.

This is something I often do. I prefer buying three or more units when I buy into a sectional title scheme. Immediately that gives you more sway in terms of voting power.

Having more units also makes it worth your time to be on the body corporate as it affects numerous investments.

Once you are a trustee you will have some measure of control on spending and be able to assert yourself regarding your investment in the complex.

It certainly takes up some of your time. But not more than two or three hours a month. And if your properties in the complex amount to R2 or R3 million then this is definitely time worth spending to protect your investment.

#3 Avoid getting into special levy trouble from the onset

Before you even buy a property in sectional title scheme ask the owner or estate agent to supply you with the last financial statements of the sectional title scheme.

You want to look at these statements for clues whether a special levy will be needed or not…

Firstly, the scheme should have at least six months’ worth of operating expenses in cash in its bank account.

Secondly, don’t invest in a scheme with excessive bad debts and non-paying members. Sure a sectional title unit can’t be sold until arrears levies are repaid. But that can take a long time. In the meantime other members will need to cover the lost income with increased levies on their part.

So you want to look for a scheme with less than 10% bad debts on its levies a year. That’s the absolute worst case scenario.

Lastly, just having a look at the complex itself can tell you whether there might be a need for special levies in the future. If the complex is badly maintained and especially when it needs to be repainted there might be an imminent need for a special levy… That’s when you need to make your call whether you want to invest there or not.

Remember, levies and special levies are a part of life once you’ve bought into a sectional title scheme. Your best bet is being an active and informed property owner.

If you’re not prepared to be, or you don’t have the time to be one I suggest you don’t touch these properties for investment purposes. Rather invest in listed property.

Here’s to unleashing real value

Francois Joubert

Editor, Resource and Scarcity Report

PMR 31(4B): The one rule that can turn your property investment into a money sucking nightmare…
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