While many property investors don't usually get exposed to a strata, it has undeniably become a large portion of the property investment landscape over the years.
Smart Property Investment's Phil Tarrant describes a strata as "the rules that govern what happens within a complex of a property."
He explained further: "For example, there's 20 units, it's the rules that govern everything that happens associated with them. That means every single person has a role to play, as belonging to that strata. One of those roles will be paying your money into sinking funds and levies and stuff, so the building can operate and continue to do what it needs to do."
Strata often becomes an issue for many investors because of the multiple number of people involved—someone not behaving well can very well affect the circumstance for everyone. For a lot of investors, the more people involved, the more complicated a process could become.
Having different objectives in investing on a strata can also derail the partnership among property investors.
Despite the seemingly endless list of possible complications, lawyers Ian McKnight and James Nickless believe that strata exists to ensure a harmonious professional relationship among investors, ultimately benefiting all parties involved in the long run.
According to them, as in most cases of partnerships and co-investing, cooperation is key to success. Ian and James share some of the ways a property investor can be a better citizen of a strata:
What makes a 'good citizen' of a strata?
James Nickless: It probably starts with really strong due diligence prior to acquisition. We've got a few different varieties of strata in Queensland because the legislation's kind of evolved over time, and now, we've got a few different acts that kind of sit next to each other. When you get permutations of things, like you might have a mixed-use development, that's retailed down the bottom—that you might have some apartments that are all just holiday let and some that are owner-occupied.
How can an investor understand strata schemes better?
James Nickless: A unit looks like a unit... whether you're in Singapore, New York, Dubai or here and people can quite easily understand that, "Okay, I'm buying a unit," and they get what that means from a property perspective. But when the set of legal rights that flow with that... [things] are vastly different in New South Wales to Queensland, and [also] when you look at the overseas example.
In Queensland, we have some schemes that are operated under some legislation. Some that are under their own legislation as the integrated resort. Understanding what it is that you're buying, before you get in there, is probably the first place to start, rather than just looking at it in terms of financial return. If it stacks up, then look at it from the legal point of view and go, "Well okay, what is this unit comprised of? Is it part of a mixed-use scheme? Is it part of a layered scheme where, I'll be not only contributing to my own body corporate but also to the principal body corporate and the primary thoroughfare and secondary thoroughfare and how does that all hang together?"
Is it important that a property investor understand the scheme, or can they just add lawyers to their financial team?
James Nickless: There's a lot of regulation within a very short period of time... I'd say first point of call has got to be that thorough due diligence that’s worth, and on defect rectification as well—making sure they get an engineer to go through the scheme because ultimately, that scheme land is what they're inheriting as a buyer and they've got strict liability in relation to it. If it fails, they are responsible. Even if they've got a builder to chase, it's pay now, fight later.
Is this something a conveyancer can help them with?
James Nickless: The answer to that is probably no. Conveyancing has become a bit of a race to the bottom of fees and so, a lot of the time, you might be buying a million-dollar apartment but you'll go with the $500 conveyancer, rather than go to a solicitor and get the full sort of advice. The other thing is, when I first started my career back when I was an article clerk, I used to do a bit of residential conveyancing and you'd give them the list of all the different searches that they could do, then they just tick the usual ones and come back.
Aside from lawyers, who could help investors in terms of strata?
James Nickless: [There is] greater role for real estate agents to play in this space, to fully impart to people why these things are necessary and important. I think that if real estate agents don't either understand the product well themselves or they're just not translating that, then the problem is by the time it gets to the conveyancer, the buyers already sort of emotionally invested and they're saying, "Well, let's just go to a cheap conveyancer and get this run through." So, I guess it's a double-edged thing. Yes, it's available for them, but they'll pay more for it and they may need a specialist to give them advice in relation to some aspects of what those searches show.
What role will lawyers like yourself play in a strata?
James Nickless: We are usually the "after the fact" solution and a large part of what I do is dealing with building defects in buildings—trying to find ways other than litigation, which is the ultimate, if you must go there... We've had some poor decisions in the high court that have made life a bit difficult for (corporate bodies) in that regard, but usually... the scheme's coming to us saying, "We've got this problem. How do we now unscramble the eggs?"
Despite the possibility of getting help, would you still tell investors to be proactive?
James Nickless: Proactivity would be great to see in this industry, because I think there's a lot of people who go into it with all the best intentions in the world but because it is so complex, you can't just take your standard detached dwelling glasses and look at the strata in that way. There's just so many hidden costs and hidden risks, so we're usually dealing with the fights that come out the back end.
Tune in to Ian McKnight and James Nickless' episode in The Smart Property Investment Show to know more about the rules behind the strata, the politics involved with the owners' corporation, as well as their tips and tricks to ensuring buyers receive the right advice at the right time.