Innovative thinking and a practical approach to breaking the brutal rotation of inadequate maintenance funding can potentially rehabilitate declining sectional title and home owners’ associations.
Andrew Schaefer, MD of residential letting, insurance and property management group Trafalgar, says residential properties are frequently held to ransom by a handful of owners defaulting on their levy payments. The problem is in no way assisted by the legal system, which appears to be getting progressively less efficient, further exasperating this very real issue. “That results in cash flow problems for the body corporate and a vicious cycle in which general maintenance work falls progressively behind due to the lack of funding and accounts falling into arrears. The ripple effect is increasing resistance from owners to pay levies when their properties are not being properly maintained,” he says.
Body corporate levies cover the costs associated with the common property. This means each owner contributes towards insuring the buildings and other improvements on the land; keeping the common property in a good state of repair; ensuring the obligations under sectional title laws are met and maintaining sufficient funding to allow the body corporate to fulfil its obligations.
Consequently, arrear levies result in a visible deterioration in the property or complex as repairs and general maintenance go unattended. Municipal and creditors’ accounts fall into arrears causing a possible interruption to services. Other problems include decreasing returns on the owner’s investment; poor resale values; difficulties in selling units as bonds are declined; compounding debts that may trigger special levies; refused insurance claims – and last of all, a stressed and unhappy community of home owners.
To help resolve these problems, Trafalgar launched Levy Solutions, a hybrid levy-factoring service that guarantees a fixed monthly levy capital flow on the third business day of each month. Schaefer says this specialist rehabilitation product aims to rehabilitate sectional title and home owners’ associations (HOAs) by restoring the residential complexes’ cash flows. “On inception Trafalgar wholly settles the property levies in arrears, thereby relieving the capital flow constraints and allowing the body corporate or HOA to catch up on arrear accounts, maintenance and other priorities.
Given a predictable cash flow, the body corporate or HOA can plan and manage more effectively, ultimately enhancing the asset value of the property and residents’ lifestyles,” he says. He says a further significant attraction for bodies corporate and HOAs is that, from a cash flow perspective, Levy Solutions finances the legal fees in recouping arrears, removing this additional burden from the already-compromised cash flow. Since 2002 Levy Solutions has begun rehabilitation on more than 60 bodies corporate and HOAs, translating into more than 3 000 units.
Currently 25% of those properties have been wholly rehabilitated and effectively released as sound investments. “It is a cost-effective ‘risk transfer’ product underwriting the amount and payment timing of levies, and an immediate settlement of arrears subject to a once-off finance fee,” Schaefer says. Any body corporate or HOA qualified to access the product, subject to Trafalgar credit committee approval, with the fixed cost between five and 15% of the levy.
Bodies corporate and HOAs need only provide a 30-day cancellation to terminate the contract, given the product is envisioned as an interim solution to getting the property back into financial shape.
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