• Buying Strata Property: Is the Sinking Fund Adequate?

    10 Sep, 2014 | 369 views

    There are many benefits which can accompany buying strata property, but there may also be some drawbacks which aren’t immediately obvious. While the owners corporation does reduce the strain homeowners would face for in terms of maintenance for a single dwelling property, an improperly managed or inadequate sinking fund can still leave individual owners of a strata property in a difficult position.

    What is a Sinking Fund?

    In order to determine whether the existing sinking fund within a strata scheme is sufficient, it’s important to first understand what a sinking fund is, and how it works.

    Essentially, a sinking fund is supported by the levies paid by individual owners. While a portion of levies are often diverted into an administration fund, a percentage of those payments are also placed into what’s known as a “sinking fund,” or what may also be referred to as a “maintenance fund.” This money is earmarked for maintenance costs related to common areas, which are not the sole responsibility of any single owner. As a general rule, most strata schemes hold individual owners financially responsible for the maintenance and repairs within the airspace of their units. Necessary repairs, upgrades and routine maintenance for all of the common areas, however, are generally the responsibility of the owners corporation.

    Funding for these projects may be generated through special levies, but the sinking fund is created specifically to provide funding for long-term expenditures like exterior maintenance, painting and gutter replacement.

    Investigating a Sinking Fund

    When you decide to purchase a property, whether a single dwelling or within a strata, you know it’s important to obtain a full report from a professional building inspection company. In addition to these physical inspections, however, it’s equally important for those considering the purchase of an apartment within a strata scheme to be diligent about investigating the holdings of the owners corporation. Determining the existing balance of the sinking fund can help prospective owners to more accurately predict the likelihood of special levies in the future.

    Small sinking fund balances paired with obvious signs of work which needs to be completed can be a reliable sign of impending special levies. Even a building which clearly needs some maintenance may be a better choice for some buyers, depending upon the size of the sinking fund. An adequate fund to cover obvious repairs may be a more financially sound choice than a luxuriously kept building with a minimal sinking fund, as any unexpected and urgent repair needs will likely be accompanied by a special levy in order to fund the project.

    Depending on where the building is located, there may be existing legislation which requires the creation of a sinking fund for all strata schemes. A nonexistent or insufficient sinking fund should be cause for concern when buying a strata property, so it’s wise to survey the owners corporation holdings before making a final purchasing decision.

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