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The difference between buying a sectional title and freehold property

Buying a sectional title property has its advantages, but here are some important things you need to take into account before doing so.

Sectional Title

Article summary

  • Sectional title describes the separate ownership of a unit within a group-owned complex or development.
  • When applying for a bond on a sectional-title property, the bank will need to look at the financials of the scheme’s body corporate.
  • The bank will check what is owed by the scheme, whether loans have been taken to cover accounts where there have been shortfalls in levies paid, and whether the scheme is being managed properly and is solvent.

Owning a sectional-title unit certainly has its pleasures – you don’t have to mow the lawn or clean the swimming pool on Saturday mornings and costs such as some of the building insurance, repair and maintenance are shared between owners.

In addition, sectional-title homes are usually more affordable than freestanding properties and provide a good opportunity for young professionals to get a foothold on the property ladder.

“By doing your homework before buying a sectional-title property, you can reap all these benefits to the full,” says Rhys Dyer, CEO of ooba home loans, South Africa’s largest home loan comparison service.

Here are some of the things you should know before buying a sectional title.

What is a sectional title?

“Sectional title simply describes the separate ownership of a unit within a complex or development,” says Dyer. This is in contrast to a freehold, or ‘full title’, where you purchase full ownership rights to a property, including the building and the land upon which it’s built.

“The owner of the unit automatically becomes part of the body corporate, which is the legal entity that owns and controls the common property in the sectional-title scheme,” Dyer explains. “The body corporate lays down the rules that have to be adhered to by all the owners in the development.”

In addition, he notes, owners are obliged to pay levies, usually according to the size of their units (“those with smaller units pay lower levies”). “These levies are calculated in accordance with a budget, which is prepared annually by the trustees or agent.”

Is sectional title a good investment?

According to Dyer, the popularity of these homes has grown over the last decade, not only because they tend to be more cost-effective, but also because they offer heightened security and a more communal way of living. “In addition, sectional titles remove the responsibility of having to pay individually for certain aspects of building insurance, and for the upkeep of the communal areas within the complex,” he says.

In May 2018, data from Lightstone showed a 6% increase in the estimated price for sectional title homes. This was significantly more than the usual difference in house price inflation between sectional title and freehold. This trend is expected to persist, making sectional title a sound long-term investment.

How to apply for a sectional title bond

“When applying for a bond on a sectional-title property, banks will need to look at the financials of the body corporate, checking what is owed by the scheme, whether loans have been taken to cover
 accounts where there have been shortfalls in levies paid, and whether the scheme is
 being managed properly and is solvent,” explains Dyer.

Once the bank is satisfied with the financials, the actual purchasing process is like any other. “Your bond will be registered as a sectional-title bond, and the registration and transfer all take place in the same way,” he says.

Things to consider before purchasing a sectional title

Over and above the banks’ basic
 due diligence, Dyer advises buyers to do their own checks too in order to ensure they
 know what they are buying into, and how, specifically, these might affect their bond
 applications.

He advises prospective owners of sectional-title properties to scrutinise the budget, the financial statements of the body corporate and the minutes of the meetings held by the trustees of the body corporate for the following reasons:

1. Ensure the property is well managed

“You have to ensure that all owners are paying the levies on time. If owners fail to pay the levies the scheme soon falls into disrepair, as the body corporate will not be able to pay its creditors or maintain the building and common property. A large amount owing on arrear levies should immediately trigger a warning bell and might be an indication that the scheme is not managed properly.”

2. Investigate the insurance policy

“The trustees have to insure the buildings and keep them insured at replacement value. Sectional-title schemes are often under insured as the trustees fail to increase the insurance on a regular basis, to keep the levies down. The insurance policy has to specify the insured value of each unit. An owner can increase the insured value but will be liable for the additional premium on his or her unit.”

3. Check for special levies

“The trustees must establish a fund which is sufficient for the proper upkeep, repair and maintenance of the building and also provide for future expenses. The trustees can also claim payment of special levies to cover specific needs of the scheme. For example, the owners might have agreed to install a new swimming pool or to upgrade the security system, or it might be that the trustees did not budget properly as a result of which owners can be caught on the back foot and called to contribute an additional amount.

The special levies become payable by owners once a resolution has been taken by the trustees. You should ensure that you will not suddenly have to find the money for an unforeseen special levy. Check the minutes of the meeting of the body corporate and obtain a warranty from the owner from whom you are buying your unit that no special levies are payable, or that the seller will be liable for the payment of such a levy.”

Seeking expert advice

Buying a property is a long-term investment and all the preliminary investigations into that property must be done before a commitment is made, Dyer advises. “Check everything in the scheme that you are buying into is sound and that the conduct rules are acceptable to you before signing on the dotted line,” he says, adding that ooba home loans has experienced experts who will assist you in obtaining the best finance to purchase sectional title, and will help you to understand the obligations and requirements of such a purchase.

In addition, ooba home loans makes the home buying process easier by offering a range of home loan calculators that can help you determine exactly what you can afford. Start with the free, online prequalification tool, the ooba Bond Indicator. Then, once you’ve found a home that meets your requirements, you can apply for a home loan.

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DIY with our online prequalification tool, or speak to an expert.

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