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Sect. title vs. freehold: Which is best?

10 Sep 2010

Due to a number of reasons, including heightened security, affordability and a more communal way of life, sectional title living has been growing in popularity over the last decade or so.

 

 

 

However, as popular as it may be, sectional title ownership remains highly misunderstood in terms of ownership responsibilities and legalities, says Adrian Goslett, CEO of RE/MAX of Southern Africa.

He says to fully understand the differences between sectional title and traditional freehold property ownership, it is important to define them. “Freehold or full title describes the transfer of full ownership rights when you own a property, which includes the building and the land it is built on. These kinds of properties include free-standing houses, cluster houses, residential property used for business purposes, and smallholdings.

“Sectional title, on the other hand, describes separate ownership of units or sections within a complex or development. When you buy into a sectional title complex, you purchase a section or sections and an undivided share of the common property. These are collectively known as units. Sectional title dwellings comprise mini subtype houses, semi-detached houses, townhouses, flats or apartments, and duet houses.”

Sectional title developments are governed by a BC, which is the collective name given to all the owners of units within any particular complex. “The BC is responsible for managing the scheme and taking care of its finances. A managing agent is often appointed to take care of the duties of a BC, which includes collecting monthly levies, paying the scheme’s insurance premiums, arranging meetings, ensuring compliance with the Sectional Titles Act, and ensuring that the owners and tenants comply with the BC rules.”

He says there are considerable differences with regards to investing in the two types of properties and offers the pros and cons to both forms of ownership:

The benefits of sectional title ownership

Security: Living in close proximity to your neighbours and in a more communal environment is perceived by many to be more secure than living on a freehold property. Added to this, most sectional title developments have excellent security around the perimeter and at the entrance of the development, which is all included in the monthly levies. With regards to freehold properties on the other hand, owners are entirely responsible for their own security – they need to pay to secure their own perimeter, and often for an armed response security company to patrol their area.

A fixed monthly cost: Unlike freehold properties, where the owners have to pay for their own home insurance and for the upkeep of the pavement, garden and exterior of their homes, owners of sectional title units pay a monthly levy instead. The levy includes the following costs: insurance premiums, maintenance of the common property, wages and salaries of cleaners, security and other staff involved in maintaining the common property, as well as any water and electricity required for the common property.

As a result, owners of sectional title units only need to pay for their rates and taxes, the unit’s insurance, the contents of their home, their own private gardens and for their monthly electricity and water consumption. The costs of maintaining pools, tennis courts, communal park areas and clubhouses in the development are shared, which contrasts with freehold property, where the owner is responsible for all costs.

Affordability and communal living: Generally speaking, a sectional title unit within a complex is more affordable than a freehold house. Also, on average, communities living in sectional title schemes boast close-knit communities and far greater interaction with their neighbours when compared to freehold neighbourhoods.

The disadvantages of sectional title ownership

Lack of independence: Unlike full-title ownership, where the owner is in complete control and is financially responsible for the property in its entirety, when you invest in a sectional tile scheme you will own part of a scheme, meaning that the owner has invested in and is part of a small community. As a result, they will need to comply with the management rules and conduct rules as laid out by the BC.

Majority rules: The rules and regulations of any particular complex may change and, unlike freehold property owners, sectional title investors or owners may not be happy with the changes, but won’t have the power to change them in an individual capacity.

Simplicity: The legalities of sectional title ownership elude a great portion of home owners – there are issues pertaining to participation quotas, nominated values, exclusive areas and quorums.

Lack of freedom: Owners of sectional title units do not have the freedom to make improvements to their property. Those who want to renovate, need to get approval from the BC before they can begin building.

Liable for the debt of the BC: If you are investing in a sectional title scheme, you will be liable for the debt of the BC. As such, it is important to deduce if the scheme is being well managed and that the financial statements of the BC are all in order.

Interestingly enough, Goslett says that the sectional title trend may be wavering. “According to the latest house price index (recorded until March 2010) by the property research group, Lightstone, freehold properties have outperformed their sectional title counterparts over the last year. It notes that freehold property inflation was 7,9% for January 2010, 9,0% for February and 10% for March, whereas sectional title properties have shown a decline from a flat 7,1% in January and February, to 6,8% in March.”

 

 

Lanice Steward, MD of Anne Porter Knight Frank (APKF), says anyone thinking of buying into a sectional title scheme should never do so without first seeing the BC's financial statement and house rules.

“Sectional title is the fastest growing sector of the SA housing market and because many of the units on offer are ‘affordable’, these people are sitting ducks for the sectional title seller trying to offload a unit in a scheme which could experience financial problems.”

Steward said that the year end financial results should in fact be viewed by the agent to protect himself and the seller under the new Consumer Protection Act (CPA) rules, should insist on going through the figures with the buyer.

“There have been many cases in which the buyer, shortly after taking ownership, has found himself lumped with a special levy which he simply cannot afford.

“In the last three years, we have seen some extraordinarily high special levies, particularly where a lift replacement or repair, a complete electrical rewiring or steel window frame repairs or replacements have become essential, often as a result of inadequate maintenance.”

The financial statements should, said Steward, reveal how far behind the scheme’s members are in their levy payments (if, indeed they are in arrears) and what reserves the body corporate (BC) has. The reputation of the managing agent and the insurance position on the complex should also be checked.

Looking at the house rules, Steward said that some schemes have clauses which ban pets, others are very definitely not child friendly and some limit access to communal areas.

“These and other restrictions can spoil the occupant’s enjoyment of this unit.”

Laurie Wener, MD for Pam Golding Properties (PGP) in the Western Cape (Cape Town metropolitan area), says in terms of which one of these two property types is most in demand at the moment, “there is no dominant trend overall and it's area dependent”. “However, apartments and sectional title is moving at the moment as one can obtain smaller less expensive properties. Their maintenance and insurance is low and the security is generally good.”

Wener says as a general rule of thumb, families gravitate towards houses, retirees go to apartments, while singles and newlyweds prefer sectional title. – Eugene Brink

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A fixed monthly cost: Unlike freehold properties, where the owners have to pay for their own home insurance and for the upkeep of the pavement, garden and exterior of their homes, owners of sectional title units pay a monthly levy instead. The levy includes the following costs: insurance premiums, maintenance of the common property, wages and salaries of cleaners, security and other staff involved in maintaining the common property, as well as any water and electricity required for the common property.

As a result, owners of sectional title units only need to pay for their rates and taxes, the unit’s insurance, the contents of their home, their own private gardens and for their monthly electricity and water consumption. The costs of maintaining pools, tennis courts, communal park areas and clubhouses in the development are shared, which contrasts with freehold property, where the owner is responsible for all costs. – Duplication  

 

 

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