I’m looking towards retirement and would like to sell my four-bed detached home and downsize to a smaller apartment. However, I’ve recently become worried hearing frustrations from some of my friends about their endless fees from their management company for upgrades. Once I retire, I would be a bit concerned about being asked for large sums of money unexpectedly. Is there anything I should look for when choosing an apartment or budgeting for these types of fees?
As apartment-living becomes more common in Ireland, and as the number of second-hand apartments increases gradually over time, this is a query being asked more often. This is particularly the case following recent media reports of apartment owners in some developments having to face levies to remedy problems in their buildings.
It is impossible to get full certainty on this, as issues can emerge in an owners’ management company (OMC) that could not have been known about in advance. However, by doing some homework you can find out about some issues in advance of buying an apartment.
One source of good information is the OMC accounts. You should review these for the last two or three years. If you know the name of the OMC you should be able to access these via the Companies Registration Office (CRO). Before you review them, it would be good to know the age of the development and the number of properties in it, as this will help you to interpret the accounts. An estate agent for a property for sale should be able to supply this information. The date the OMC was established should also be listed on the CRO website.
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The OMC’s income and expenditure account will show if it has run a surplus in recent years. While there may be a good reason (such as a large investment project) for a deficit in a particular year, most OMCs should run surpluses in most years. This is particularly the case for OMCs under 20 years old, as they will most likely not yet have reached the age where large investment projects, such as lift replacements, are required.
Replacement of one lift currently costs in the region €85,000 (including VAT and professional fees). You should take note of how many lifts there are
The balance sheet section of the accounts will also provide useful information. In particular, the figure for the total net assets of the company, ie its total assets minus any figure for creditors at the end of the financial year. If you divide that by the number of properties in the development, you find out how much each property has put aside for the long-term projects needed. There is not a correct answer as it depends on what needs to be replaced over time and the age of the development, but the question is whether the OMC is building up an appropriate sinking fund over time.
A subpoint on this is to check if some or all of the assets of the company are tied up in service charge arrears, as poor service charge collection weakens the ability of an OMC to finance investment projects.
While the accounts will give a sense of company finances, they won’t tell you what expenditure is coming in the future. One suggestion is to visit the development and walk around, perhaps with a surveyor, as this will give you a sense of future requirements. For example, replacement of one lift currently costs in the region €85,000 (including VAT and professional fees). You should take note of how many lifts there are and the kind of roofs in place. Look at the fixtures and fittings; will a new carpet or repainting throughout be required?
As you move closer to a sale and engage via your estate agent with the existing property owner and perhaps the managing agent, you can raise some further questions. Does the vendor/agent feel the OMC is well prepared for future investments? Has a building investment fund (BIF) report been commissioned and could key points be shared? This is a report on investment needs over perhaps the next 20 years and is normally prepared by an independent professional such as a chartered surveyor or an architect. You will be able to compare any such report with the current cash reserves.
Underfunded
Note that if the BIF report is a few years old, you would need to take account of construction inflation. If you can find out who built the development, that may also be useful information as you could look up information on the builder/developers reputation and check if they are still in business.
From my experience, I would say that most Irish multi-unit developments (MUDs) are underfunded compared with future investment needs. This is partly due to a lack of understanding of how much projects cost (especially with inflation in recent years and when VAT, professional fees and contingencies are added). It is also due to the normal human tendency to say, “let’s cross that bridge when we come to it”. This is comparable to the attitude of many people, for example, to pension provision where although most of us will need a pension, there is consistent underprovision as we prioritise other matters.
If you buy an apartment, you will have the right to go to annual general meetings of the OMC and you could put yourself forward for election as a director of the company, which would give you an influence over potential levies
Also, in hindsight, the figure of €200 per apartment per year to be put aside, as mentioned in the 2011 MUD Act, has probably not been helpful as most developments require a considerably higher sum than this. As such, the lesson for existing developments is that most need to increase their annual contributions towards their sinking fund.
The above points do not relate to the instance of an MUD discovering historic defects, such as fire safety defects or a faulty roof. You can ask if the OMC has undertaken any investigations around historic defects. Many OMCs have not had any reason to do so to date. As regards such defects and consequent investment required, there is likely to be a national scheme to support apartment owners on this but details are as yet unclear.
I would also note that, if you buy an apartment, you will have the right to go to annual general meetings of the OMC and you could put yourself forward for election as a director of the company, which would give you an influence over potential levies.
While the above may seem somewhat negative, there are also positives in living in an MUD, in particular the fact that maintenance of the common areas will not be your responsibility, as is likely the case in your four-bed detached house. Also, your current home will likely require future investment, so there will be expenditure either way, although it would admittedly be more within your own control in a house. And, hopefully, your “right-sizing” move would also free up capital for other uses in the years ahead.
Finbar McDonnell is a chartered property manager and a member of the Society of Chartered Surveyors Ireland
