How to avoid a dodgy apartment

In light of the horrendous outcomes still evolving from the Mascot Towers (Sydney) incident and the similar stories coming to light, there's a timely reminder for buyers considering apartment purchases to check the property prior to purchase.

First a recap

Mascot Towers is a multi-apartment complex consisting of 132 units, located in the heart of Sydney and within 5km of Sydney airport. Completed in 2009, the apartment was sold off the plan to a keen market just prior to the onset of the GFC.

Details are fairly sketchy but it has been reported that major problems emerged as early as 2011, however many of the apartments have been sold to new buyers – some have been sold to their third buyer.

Problems with the property have now become so dangerous that all residents have been asked to leave, and may spend many months living elsewhere while remediation works are undertaken to resolve the issues which include building cracks and potential 'sinking'. Costs have been estimated at more than $5 million.

As if the situation wasn't bad enough, there's no ability for the owners to obtain compensation from the builders as the builders' warranty only covered six years (and the building is now ten years old). Even worse, insurers no longer offer insurance for buildings that are more than three to five levels in height. This means any repairs must come from the owners directly.

But . .why buy??

While the strata managers and the owners are working on resolving the issues, there's a bigger question that needs to be addressed. With the complex' issues clearly outlined in the strata documentation covering a period of more than five years, why would buyers continue to buy in at an ever increasing purchase price?

The most quoted comment from recent buyers is that they had no knowledge of the issues. Err . . . so what did they check before they purchased their apartment?? There's a number of scenarios that may have played out :

• no due diligence conducted prior to purchase
• conducted inspections but didn't read the information provided
• the vendors and selling agents hid the issues.

Unfortunately, even if the vendors and the selling agents did hide the problems there's no way the buyers can obtain compensation from the vendors after the sale. So . .what can you do to ensure you don't buy a dodgy apartment?

Critical = organise a strata report

To protect yourself from purchasing a dodgy apartment, ensure you obtain a strata report and read it. If you're too busy to read the information, ask your lawyer to summarise the key points (unless – of course – if you're a Property Frontline client we will do this for you).

What is a strata report?

A pre-purchase strata report is a document that outlines the key financial and management information about the property you're planning to purchase. This document provides an overview of how the strata scheme is managed, the history of issues and how they have been addressed, insurance cover and – critically – the capital works fund.

The capital works fund (often referred to as the sinking fund, ironically) is the amount each owner is required to contribute each year to ensure the building is maintained to a good standard.

How to obtain a report

Ideally, the strata report should be obtained prior to entering into a contract for purchase. However, the cost – usually around $600 – means that most buyers will conduct the report during the due diligence period of the purchase (after you have agreed on a price, but while you still have the ability to withdraw from the contract).

Reports can be compiled by specialist strata searchers. In some cases you may require a letter of authority from the vendor's solicitor or selling agent. The turn around time on reports varies from 24 hours through to a few days, so it's important to organise the report as soon as possible. Ideally, add a clause in your purchase contract noting the purchase is subject to a review of the report, although this is extremely difficult and often prohibitive in a hot market.

Building and pest inspection

At least the message seems to have reached buyers that building and pest (B+P) inspections must be completed when purchasing houses. Why, then, do buyers skip over this step when purchasing apartments? Usually, they just rely on the strata report and do a visual check on the property.

Relying on the strata report is not too bad an approach, but for optimum care an independent B+P should be conducted. It's also fine to use the reports supplied by vendors as long as you validate the provider of the report (the company that conducted the inspection).

If you're inspecting the property yourself key points to look at are:

• cement cracks – particularly in balconies if they're external to the main structure
• evidence of water damage or mould
• noisy or spongy flooring
• check taps and toilets
• view the switchboard to get an idea of how up to date it is.

Other checks

For apartments – check the number of owners vs renters. This number will change over time but at least get an idea of the mix prior to purchase.

In addition to the above points, remember to check the usual points required for any purchase. This includes location of transport, noise levels, future developments (other major unit complexes or infrastructure changes), vacancy rates, sale prices, and other information relevant to your purchase.

Be smart

When you're short on time it can be easy to trust the purchase will be fine and that you can skip through the due diligence. There's so many items to review and you'll often have enough to worry about in just trying to identify properties you like, let alone whether the building is about to fall apart. While it can feel like you're shelling out for a few extra reports, this is a small price to pay when you could be buying into a $1,000,000+ problem.

Of course, it would be helpful if we could have Australia-wide standards including:

• extending the standard cooling off period from five days to 10, or adopt the Queensland system across all states and territories – the Queensland system provides buyers with a higher level of protection and more flexibility to withdraw from a purchase
• vendors should have the responsibility for providing strata reports along with building and pest inspection reports – this would provide vendors with the opportunity to address problems prior to the sale and limit the amount of problem properties sold on to unwitting buyers
• include a checklist of items each buyer should review with page references for ease of access.

We may be waiting a very long time for an increase in purchaser protection, so until then remember – they don't include the warning to 'let the buyer beware' for nothing.