Unit buy back bill sees frightening unintended consequences

ISSUE: If this bill passes into legislation things will change from next May - no longer will it be just the owner’s problem if a unit is hard to sell — it will now be every owner’s problem.
ISSUE: If this bill passes into legislation things will change from next May - no longer will it be just the owner’s problem if a unit is hard to sell — it will now be every owner’s problem.

In a move that could spell the death of many strata-title retirement villages in Queensland, a bill was submitted to the Queensland Parliament last month that would require operators of strata-title villages to “buy back” unsold units after 18 months. While it’s called a “buy-back”, many operators of strata-title villages never owned the units in the first place, so it would be more of a “compulsory acquisition”.

Of course, the bill is proposed with the best of intentions — to match the guarantees offered to residents of strata-title villages with those of leasehold villages. However, the unintended consequences are frightening. And once again it’s the little people who will be the worst affected.

Think about a retirement village of 100 units, built by a property developer 25 years ago. On completion of the project the developer sold all the units, and left the village to be administered by a body corporate run by the residents. Today, the average age of the residents in the village is around 80, with a number in their 90s. The body corporate runs the infrastructure, but each owner is solely responsible for their own unit — after all, they own it. And if the development is like most of its kind the quality of the homes will be a continuum: most will be fine, a few will be pristine, and a small minority will leave much to be desired.

Under the existing regulations, it is the responsibility of each owner to arrange their own sale for the best price they can get. But if this bill passes into legislation things will change from next May. No longer will it be just the owner’s problem if a unit is hard to sell — it will now be every owner’s problem. That’s right: the other 99 residents could be responsible for buying back the unsold unit.

Rachel Lane of Aged Care Gurus, spoke to the manager of a strata-title village in Brisbane’s northern suburbs. The scheme operator is a company with 104 shareholders: the residents of the village. Units in the village sell for between $290,000 and $360,000. The village manager said: “Obviously we don’t have the funds on hand to come up with that kind of money: we would need to levy the residents. Worst case scenario, say we have two or three that can’t sell, we would need to levy the residents $8000 to $9000 … many of our residents are pensioners, who simply wouldn’t be able to afford it.”

A Department of Housing and Public Works spokesperson said that operators who find themselves in financial hardship as a result of the buybacks “can seek relief”. That’s easier said than done.

What potential buyer in their right mind is going to be interested in buying a unit in a development where there is a strong chance that they will be forced to contribute to a fund to compensate an owner whose unit is unable to be sold? This lack of demand will drive prices down even further. It's the ultimate catch-22.

The bill would cause problems for commercial operators too. The developers sold the units to the residents, receiving the upfront purchase price, and entered into a management agreement with the operator to manage the village for the right to an exit fee when the units sold in the future. Under the proposed new rules, to get the exit fee the operator would potentially need to “buy back” a unit they never sold, spend the amount necessary renovating and marketing and then sell it. Only then could they get their exit fee. One thing is for sure, if the operator can afford to buy the unit, it won’t be sold next time as strata-title.

As President Reagan said, “The nine most terrifying words in the English language are: I'm from the government and I'm here to help”.

  • Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. Email noel@noelwhittaker.com.au