Guide to Buying an Apartment
Buying an apartment is a great option for many looking to get on the property ladder or downsizing to a more manageable home. However, unlike a house, it means linking your fortunes to the other owners in the development and as such, there are some additional checks that need to be carried out before completing the purchase. Engaging an experienced conveyancing solicitor is very important to make sure that all the relevant checks are done before you sign contracts for purchase of an apartment. In this article, we highlight some issues to keep in mind when buying an apartment.
Owners Management Company (OMC)
The ownership and management of multi-unit developments is governed by the MUD (Multi Unit Development) Act 2011. Developers of Multi-Unit-Developments are obliged to create an Owners Management Company (OMC) and transfer the ownership of all common areas to this company before selling any units. Buyers of units in the development automatically become members of the company. This company is then responsible for the management of the development including issues like refuse collection, landscaping, repairs and maintenance (of communal areas not individual apartments), making insurance claims etc. As a practical matter, the OMC typically engages the services of a licensed property management company, which is paid a fee to handle day to day operations in the development.
In order to pay for all of this, the OMC will collect annual fees from the owners of the units. The amount of the fee is decided each year and can vary ie just because the fee was €1000 last year, this doesn’t mean that it will remain at this level for the year ahead. That being said, barring some exceptional event that requires owners to contribute more funds than usual, the annual fees don’t tend to vary substantially from year to year. While fees vary from development to development and from county to county, a typical annual fee is in the region of €1500 per annum.
Read the Minutes of the Most Recent AGM
OMCs hold an AGM each year at which the issues facing the development are discussed. Before buying, it is definitely worth reading the minutes to get a feel for the issues in the development and how they are being dealt with. The accounts are reviewed, sinking fund discussed and any other issues of relevance such as insurance claims, building maintenance etc are all typically on the agenda. Reading the minutes of the most recent AGM gives a good feel for how things are going in the development.
While you don’t need to be an accountant, a review of the financial performance of the OMC over the previous number of years is certainly prudent. We have included below a P&L and balance sheet from an OMC for discussion.
The turnover of the company remained pretty much constant from 2017 to 2018 which would give a potential owner comfort that the management charge from year to year should stay pretty stable – the turnover is basically the sum of all of the management fees paid by all the members. It is also encouraging to see healthy operating surpluses in both years; this means that the management fees are more than sufficient to cover the day to day operations of the development.
MUDs are obliged to maintain a sinking fund which as the name suggests is a sum of money set aside to cover future unforeseen, one off expenses. A healthy balance in a sinking fund is good to see as it means that should there be any major expense incurred in the future, this fund will be on hand to cover the cost. If a sinking fund is depleted, then surprise expenses may require the OMC to quickly and substantially increase the management charge for all members to cover the cost. The fund is a cushion to protect against future shocks so the bigger it is, the better. The fact that €46k and €42k respectively were transferred to the fund over the past two years is good to see as this means that the current fees are not only enough to cover day to day expenses but furthermore allow for a meaningful contribution to the sinking fund each year.
Checking the debtors on the balance sheet and following up by reading the minutes of the most recent AGM gives a good feel as to whether owners are paying their annual management charges. A large and growing debtors balance would be a red flag. Remember that if your fellow owners don’t pay their management charges, the remaining owners may have to incur legal costs to recoup these fees. Ideally, all owners in a development will be paying their fees. If the debtors balance is large, it is generally better if this is owing to non-payment from a small number of rogue owners than if there is large scale non-payment of management charges. Pursuing a small number of late payers is less expensive than having to pursue large numbers of people. If a significant number of owners are behind in their payments, then buying into this development would be quite risky as if they do not pay, the remaining members’ fees will have to ultimately be increased to make up the shortfall. If there is a significant issue with non-payment of management charges, this will likely have been discussed at the AGM and there should be reference to it in the minutes of the meeting. In the below balance sheet, the debtors amount is substantial but is decreasing so it would appear that the management company is working on collecting outstanding balances. The €277,161 members funds can be thought of as retained earnings ie the funds that members have saved over the years between surpluses and contributions to the sinking fund. This is a solid war-chest to have on hand should any large works be required at any point in the future.
Boots on the Ground
Open viewings are a great way to view an apartment that you are considering buying. However, a typical open viewing lasts around 30 minutes. If possible, get out to the development an hour or so ahead of the viewing and have a good look around the building. If there are several floors, use the lift, walk the corridors, inspect the refuse area, walk the green areas if there are any; generally have a really good look around. You should quickly get a feel for if the building is well maintained or not. If possible, speak to some of the people already living there and ask them what their experience has been like in the development.
Once you have done all of the above, you should be in a position to make an informed decision if this is a development in which you would comfortable being a member.