Common financial challenges in community schemes
Suze Orman states that “owning a home is a keystone of wealth – both financial affluence and emotional security.”
This security has never been more important, especially during the current financial situation we as South Africans are facing. It becomes even more evident and crucial when your home is part of a community scheme. The personal success of one owner in a community scheme might not affect the whole, but the inverse can have dire consequences for everyone, where owners who struggle financially affect the whole community scheme. This is often the source of the most common financial challenges faced by community schemes in South Africa.
When home owners struggle financially, the non-payment of levies is prevalent. A community scheme cannot survive, let alone thrive, where owners are not paying their levies. Trustees in community schemes have their work cut out for them when it comes to managing the scheme as well as having a fiduciary duty to collect the arrear levies. There is a fine balance between protecting the paying owners and having to budget for legal collection costs, as the collection process can be a drawn out and costly endeavour. This often results in community schemes dipping into cash reserves to fund the legal process, which were meant for maintenance purposes down the line.
Whilst not always possible, community schemes should consider budgeting a small amount of funds for potential legal fees. Even if not utilised, these funds will be added to reserves for future use. In the following year’s budget, the legal fees line item can then be adjusted accordingly.
Another common financial challenge in community schemes is the maintenance of common property. This includes the routine maintenance as well as any major repairs required. Maintenance is paramount in protecting each owner’s investment in the community scheme. The Sectional Title Schemes Management Act, promulgated and adopted in 2016, brought with it the requirement for community schemes to have a reserve fund. For a community scheme which is barely able to cover all its expenses every month, having to also save money in a reserve fund can be very challenging. Having a reserve fund is a legal requirement and will be a saving grace for community schemes that have that in place when life happens. The contributions to the reserve fund should be aligned with a detailed and well-structured 10-year maintenance plan.
Many community schemes however have not followed the requirement either as a result of the costs associated with setting up 10-year maintenance plans and/or the additional financial burden that this has placed on unit owners.
In instances where community schemes cannot afford to raise levies to build maintenance reserves, they should consider accessing alternative sources of funding for maintenance-related costs and projects. At the very least, community schemes should consider putting facilities in place that can be drawn down in urgent situations. They do not necessarily have to draw down, but at least have the comfort that facilities are available to them if needed.
In 2022 and 2023, we saw many community schemes whose utilities were cut off due to non-payment of their municipal accounts. Settling a major creditor, like the municipality, is a common financial challenge faced by many community schemes. It affects the owners and tenants living there and will deter future selling and buying of units in the community scheme if the accounts are heavily in arrears. When buying into a community scheme, a purchaser is effectively buying into a balance sheet. Whatever liabilities exist at the time of purchase will need to be settled one way or another and the purchaser is buying into their share of these liabilities.
When purchasing a unit in a community scheme, be sure that you know what is going on in the finances and check whether you are potentially buying into a future liability that will need to be settled. Community schemes should again consider putting facilities in place that can be drawn down in urgent situations like settling a major creditor.
In this tricky financial environment of shared living, the responsibility and contribution of each member of a community scheme is of paramount importance. Robert Kiyosaki said, “If you want to thrive in today’s economy, you must challenge the status quo and get the financial education necessary to succeed.” That is the starting point. Each member in a community scheme needs to equip themselves with the necessary education to not only succeed financially in their personal capacity, but to also make a valuable contribution, both financially and with their time, for the community scheme to thrive.