BUYING OFF THE PLAN: The Dangers of Buying in a New Body Corporate

BUYING OFF THE PLAN: The Dangers of Buying in a New Body Corporate

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Periodically I see a flurry of articles about buying off the plan. There seems to be two schools of thought on the subject, some people liking the idea and others advising caution.

I come down firmly on the caution side, not because I have any great expertise in property investment, but because I regularly see what plays out in the body corporate.

It’s a dangerous time for a body corporate those first few years, for a number of reasons.

Let me tell you a story that sadly encapsulates most of them.

ONCE UPON A TIME

A body corporate, a lovely, modern, low rise building in a fantastic location was completed, registered and the off the plan lots settled.

Unfortunately the GFC had recently started biting with a vengeance and the value of the lots was actually diminished from pre-GFC sales figures. New sales had tightened significantly.

Those who had settled found themselves with a choice to either sell their lots, competing with developer stock, or hold onto them in the hope that prices would eventually recover.

BUT WAIT, THERE’S MORE

Right about that time it started to rain. And it rained rather a lot.

All this rain highlighted our body corporates first major hurdle. The building leaked. Quite significantly.

Water penetration is most definitely covered by the building warranty so the matter was referred back to the builder to rectify.

In this case however the builder also happened to be the developer who was having some serious problems selling the stock. Serious enough that subsequently the builder / developer filed for bankruptcy.

This left our leaking body corporate with a defect the builder simply could not rectify. Relief was sought through the now defunct Building Services Authority who had an insurance fund to address just this sort of problem. Unfortunately relief could not be granted to buildings under seven stories.

The body corporate was left with no alternative but to address the issues themselves.

A special levy was issued to all lot owners to fund the works.

AND THEN IT GETS WORSE

Unfortunately our now bankrupt original owner was still the majority lot owner and along with being unable to fulfil warranty requirements also couldn’t pay the levies, regular or special!

Those who’d settled off the plan and any new owners subsequently did pay their levies. Unfortunately that didn’t raise enough so another round of levies was issued, which again those that couldn’t (the developer) didn’t pay, and those that could (everyone else) did.

The works, which turned out to be the first of many, were undertaken and the body corporate limped along trying to redress the issues whilst carrying massive levy debt.

Eventually the lots did sell, the levies got paid and the body corporate found itself flush with funds. But imagine how difficult it would have been, only a few of you, responsible financial for the wellbeing of a huge building predominantly owned by someone else, someone who wasn’t paying their way. Stressful and frustrating wouldn’t begin to cover it.

NEW BODY CORPORATES ARE VULNERABLE

There are a lot of factors in this story that impact what happened. The GFC, the developer being the builder and subsequent bankruptcy and so on. Admittedly the stars did not align in any way for this building or those poor lot owners.

It’s by no stretch a one-off situation though. Portions of this story play out in dozens of new buildings all over Queensland, both pre and post GFC. Developers and builders go broke, buildings have major defects, levies are kept low so funds are not available, majority lot owners dominate the body corporate’s actions and jeopardize liquidity with levy arrears.

It happens.

The reality is new body corporates are vulnerable in their first few years.

Buying off the plan is an investment strategy that comes with risk. Be aware that risk isn’t just as narrow as the value and finish of the lot.

My name is Lisa Rutland and I’m a body corporate records searcher. I’ve spent much of the last eight years learning about body corporates and what can and does go wrong. Now I’m sharing as much of that information as I can at MyBodyCorpReport.com.au