Buying ST vs freehold property

25 Feb 2013

When looking to buy a home, decisions about whether to buy a freehold property, into a sectional title complex or property in homeowners' association scheme will need to be carefully considered. 

The financial viability of the scheme is important if the buyer is applying for a bond whereas a bond on a freehold property is based mainly on the buyer’s ability to get the bond, says Bauer. Banks will ask for the financial statements of the sectional title scheme the buyer is interested in and if these are questionable, the bond will be rejected.

Michael Bauer, general manager of property management company IHFM, says that usually, buying a house or a flat in a complex seems to be more affordable than buying a freestanding house.  

"When you buy a section of a development, you get access to an undivided share of the common property (the communal green areas, parking, etc.) and all the owners collectively own everything that is not part of a specific section.   

"You also get many benefits such as added security, the management of the property is shared and sometimes there is a gymnasium or a swimming pool in the complex." 

Sectional title could be a way of owning a property in an area where you might not be able to afford a freestanding home, says Bauer. If being part of a specific community is necessary, i.e. the schools, university or sports clubs in the area, then buying into a development such as this could be the right option for the buyer.  

Sectional title, in simple terms, is joint ownership of a property. All owners must contribute in the form of monthly levies in addition to the purchase price of the home.  The levies cover monthly expenses of the sectional title scheme like municipal services, insurance and maintenance on the exterior of the building as well as the communal areas. Owning a freehold property means the owner is responsible for all of these himself.  

Joint ownership in a sectional title development means working closely with other owners to ensure the property is maintained and insured properly and that the body corporate, trustees or managing agents are handling administration and levy control properly.  

With a freestanding home, you can make decisions on changes to any part of the home without having to consult others, i.e. the facade walls or outside fence could be any colour you like but in sectional title schemes the members have to stick to the overall look of the scheme. If any changes are made they have to be approved by the body corporate and they have to be in keeping with the rules of the scheme, which can be quite restrictive, he says. 

The financial viability of the scheme is important if the buyer is applying for a bond whereas a bond on a freehold property is based mainly on the buyer’s ability to get the bond, says Bauer. Banks will ask for the financial statements of the sectional title scheme the buyer is interested in and if these are questionable, the bond will be rejected.  

This shows how important the owners, body corporate management and managing agents are in working as a team to keep the whole scheme viable, he says.  

There are rules and obligations as well in a sectional title development, the conduct rules must be read through and accepted, for example, some schemes do not allow pets.  

Buyers must also be aware of the type of scheme they are joining, says Bauer.  

“Check whether you will fit into that demographic, i.e. if you have young children and the average age of the other residents is over 50, there might be problems with complaints about noise levels, etc. Likewise, if you are a young professional, working long hours, and have young students in your complex that are noisy at night or on weekends, it might create problems for you.” 

Bauer says there are basic things to remember and to ask when investigating a purchase in a sectional title scheme. These are: 

  • to check the amount of the monthly levy and what this covers;
  • what the consequences are if you defaulted on your levy;
  • whether the current insured value on the property is sufficient;
  • whether the body corporate carries fidelity insurance in case of fund misappropriation;
  • whether the structure of the building has been changed in any way and if so, whether this was done according to the conduct rules and the scheme’s constitution;
  • whether the scheme is managed by a managing agent, an HOA or a body corporate;
  • if improvements were needed to the unit, what approvals will be needed;
  • what the body corporate members’ responsibilities are; and
  • what dispute resolution process is in place. 

“Remember you have a right to attend, vote and speak at AGMs if you are an owner in the scheme and I always encourage owners to be actively involved.  If you don’t ask, you won’t know and you cannot assume that everyone does their job property 100% of the time."  

Bauer says owners also have the right to question decisions made by the trustees if they feel that these are not in the interests of the scheme as a whole. 

When comparing freestanding homes to sectional title, it all comes to budget and what needs have to be met by the home, he says, and these will differ from person to person and what works for some does not work for others.  

“My advice is not to rush into buying but to explore all the options available properly and ask all the pertinent questions before signing an offer to purchase,” says Bauer. 

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