- The Homeowners Association (HOC)
With security a factor that is influencing home-buying decisions in South Africa, many buyers are choosing to purchase homes within boomed-off areas or secure lifestyle estates.
Unlike a body corporate which manages a sectional title development, in a homeowners’ association, each member owns the house and the erf or plot on which the home is situated.
Usually established by the residents within a community, an HOA is formed to ensure that the infrastructure of an area is maintained. Another major role of an HOA is ensuring the safety of those who live within the community.
As a homeowner in an estate or boomed-off area, the buyer may be required to join a Homeowners’ Association (HOA), which means adhering to numerous rules and regulations stipulated by the HOA.
The rules and regulations laid out by an HOA can address numerous aspects such as the colour that a homeowner is allowed to paint their home or whether pets are allowed on the premises.
The stipulations can be restrictive, which is why those who want to buy a home within a community that is governed by an HOA should ensure that the regulations don’t conflict with their lifestyle.
Before purchasing such property, buyers need to do their research and delve into the details of the HOA regulations.
Frequently asked questions:
As an agent, it is your responsibility to have a copy of the rules and regulations on hand for any prospective buyer when they are signing an offer. You should also be familiar with the rules and regulations yourself so that you are aware of any restrictions that may help your buyer make an informed decision.
- Are members required to pay a fee?
It is not uncommon for members of an HOA to pay a monthly premium or levy towards the association. Compare how the monthly fees match up against other similar developments in the surrounding suburbs.
- How are the fees allocated?
It is important for homeowners to know where their money is being used and allocated. Most of the time, HOA fees are allocated to the maintenance of common areas and amenities, such as landscaping, the swimming pool, gym or clubhouse. Potential buyers should find out what is included in the fee and what is not.
- Have rates been hiked recently?
While doing their homework on the HOA, buyers should get the history of how much and how often the rates have increased over the last ten-year period. Looking at the past will provide a window into what to expect in the future. Another important aspect to enquire about is whether any additional fees have been charged to homeowners when the HOA lacks the reserves to cover a big project.
- What are the community’s priorities?
Reading the minutes of the last few HOA Annual General Meetings will give potential homeowners a clear idea of the community’s priorities and what issues and topics keep rearing their heads.
- Pay attention to the fine print
Don’t neglect any aspect of the document and read through all regulations, restrictions and conditions before committing to buying the home. It will take some time to read the documentation in its entirety, but it is better for a buyer to do it beforehand than to move in and find out that they are unable to park a second car outside the property or store a caravan in the garden. Rather know upfront, than be caught unaware with little recourse.
It is essential for buyers to be aware of the penalties for non-compliance.
Before purchasing any property, governed by an HOA or not, it is vital that the buyer understands all aspects of the purchase and know what they are getting themselves into. Having a clear idea of the regulations and rules an HOA has in place will provide a buyer with some insight when choosing to buy a home in a particular estate.
- The Body Corporate
What many buyers do not realise when signing an offer to purchase a sectional title unit is that in doing so they are agreeing to the conditions of buying into that scheme and they become members of a group, the body corporate, who is responsible for the day to day running and financial management of the scheme.
The body corporate is the collective name given to the owners of the units and common property within a sectional title scheme and this comes into being when the developer transfers the first unit to its new owner. The developer, in fact, needs to call a meeting within 60 days of the body corporate being formed and at this inaugural meeting, according to the Prescribed Management Rules, will hand over the sectional plan and a certificate from the local authority indicating that all the rates due by him have been paid. In addition, the body corporate should receive paperwork pertaining to the income and expenditure regarding the management of the scheme and any money received in the time between the first handover of a unit and the formation of the body corporate.
The body corporate’s function is to manage and maintain the property, which includes the common property (the driveways, common green spaces, swimming pool clubhouse, etc.) and exclusive use areas. To do this they will appoint trustees to act on their behalf and the trustees’ duties will include:
establishing a fund via levies paid by the owners for maintenance, management and administration of the common property and payment of taxes, water, electricity, insurance and other necessary services:
- Opening a bank account.
- Insuring the buildings.
- Maintaining the common property.
- Arranging repair of any damage caused once insurance has paid out or has been covered by whoever responsible.
- Informing the Registrar of Deeds and local authorities what the official address of the body corporate will be; and
- Maintaining all the instruments and machines that form part of the common property.
Initially, the key role-players in a sectional title scheme would be the developer, body corporate, trustees and management agents. The developer forms the company who has built the scheme and he (or the company) will cease to be a member once he no longer has a share in the common property. What some developers do is hold onto the ownership of some of the land and retain the right to develop at a later stage, which is what buyers should watch out for. If this is the case, buyers should ask questions as to what the developer intends to build there and whether there is a limit as to how long he can take to develop the land and height restrictions etc.
Sectional title schemes have many benefits in that expenses are shared between the owners, which allows residents many “extras” that they might not be able to afford if living in a freestanding home. Many schemes have full security, and often have amenities such as swimming pools, gyms, tennis courts, laundromats, clubhouses, and large green communal gardens, all of which cost extra to maintain.
This is why sectional title property has become so popular. Convenience and communal living often offer a higher standard of living at a lower cost. Owners, however, just need to be aware of what their responsibilities are when deciding to buy into a scheme.
- Sectional title scheme levies
They are normally higher than those of a homeowner’s association. Levies are collected from owners and put towards the maintenance of buildings, common property and insurance cover of the scheme.
Also, owners in a sectional title scheme can further own an area in the scheme, which is seen as common property, known as Exclusive Use Areas.
These areas remain common property within the scheme, but the owner has the exclusive right to use the area for the duration of their ownership. A common example of an exclusive use area would be a parking bay that forms part of the common area but is set aside for the exclusive use of one particular unit owner.
- Pro-Rata and Participation Quota
The participation quota is the formula used to calculate an owner’s levy that needs to be paid in a sectional title scheme. Dividing the number of square metres occupied by the owner’s section by the total floor area of all sections is calculated to get to the levy amount.
Payment of levies is the backbone of any sectional title scheme.
The management of levies and awareness of how levies can be charged is vital to the managers and owners of sectional title units, including what can happen if levies are not paid.
- What are levies?
Purchasing a sectional title unit in a sectional title scheme, you will be required to pay a certain monthly amount, this is called a levy, to the body corporate of the sectional title scheme. This will be used for the maintenance and day-to-day management of the scheme.
According to the Sectional Titles Act the owners have to pay levies and the body corporate is required to collect such.
- What are levies for?
- Levies can be used for a number of purposes, most prominently being:
- Repair, upkeep, management, and administration of the scheme’s common property.
- Payment of taxes (if units are not taxed separately) and other local authority charges for electricity, gas, water, etc. of the common property.
- Fulfilment of an obligation incurred by the body corporate.
- Complex security.
- Capital projects.
- Salaries of staff (cleaners, gardeners etc.) employed by the body corporate.
- Payment of contractors, etc.
The body corporate has meetings every year and at these annual general meeting determines the levies for the year based on the budgeted expenditure of the scheme for the following year. Owners may sometimes also be required to pay a special levy to cover a certain project such as the instalment of an electric gate or swimming pool for the complex or to cover unseen expenses such as essential repairs and maintenance.
- The importance of paying levies
When the owners do not pay their levies, the income required to operate the scheme is not obtained, affecting the value of each owner in the scheme due to necessary maintenance and upkeep not being done, security being compromised and the overall respectability of the complex being tarnished.
In the case of a seller selling his unit, the Act determines that if he wishes to sell his sectional unit, the transferring conveyance attorney is required to certify that the body corporate has confirmed that all monies due to it in respect of that particular unit have been paid or has been secured to the satisfaction of the body corporate.
If an owner in arrears wishes to sell his unit, he will first have to obtain a ‘levy clearance certificate’ from the managing agent or trustees before the unit can be legally transferred to the buyer.
If levy payments have fallen behind, this can become a major cash flow concern for an intending seller as the trustees or managing agent will refuse to issue such a levy clearance certificate until all arrear amounts owing to the body corporate have been paid.
The levy is based on participation quota whether it is large or small, another method of calculation, the continued payment of the levy is essential to the continued success of the scheme.
The involvement of a sectional title owner in the annual budgeting and levy allocation of the scheme is encouraged.
In this regard, the assistance of a property specialist can be obtained to help clarify any uncertainties that may arise.
- How are levies calculated?
Levies can be calculated:
- Based on measured floor area (participation quota).
- Based on an equal pro-rata basis; or
- Based on the value of each owner’s investment in the scheme.
- Equal pro-rata basis:
- The equal pro-rata payment of the said levies is where each owner pays the same amount each month. It does not matter what the size of the owner’s unit is, or which unit is responsible for the most expenses, as all units are treated exactly the same. This approach can be used for all the expenses of the scheme or only for certain specified expenses. This can be appropriate where the units are broadly similar but can also be very unfair where units differ dramatically in size and contribution to expenses.
- Each owner’s investment in scheme basis:
- In this instance, levies are calculated based on what each owner’s investment in the scheme was. This formula is not frequently used and is not very popular as the investment value can become dated and can differ from unit to unit as units are resold.