Buying into a strata property is more than just buying your dream apartment, it’s also buying into a shared financial system. While many tend to focus on the apartment itself, the financial health of the strata scheme plays a huge role in protecting the long-term value of the property.

While it may be intimidating to study your strata financial reports at first glance, they often reveal important clues about how well a building is being managed. All you need to do is to spot the red flags that can be quite revealing about the potential problems early on. 

Here are four financial red flags every strata owner should keep an eye on.

1. A sinking fund that’s too small

Sinking funds are basically the building’s long-term savings account which is used for a rainy day. When major expenses such as repainting, lift replacements, roof repairs, and structural maintenance are needed, that’s where the sinking funds come in handy. 

If a sinking fund is too small, that means when major maintenance is required, the sinking fund cannot cover it. 

And who foots the bill when that happens? You. 

To avoid paying for a surprise levy, here are a few things to look out for:

• Low reserve balances compared to the age of the building
• No long-term maintenance plan
• Frequent historical special levies raised (note that this often indicates that the building has been underfunded for years)

2. Mounting unpaid levies

Strata schemes heavily rely on levies from owners to cover maintenance, insurance and operational costs. If multiple owners fall behind their payments, this can create cash flow issues, making it harder for the strata to pay contractors, insurance or maintenance costs. 

Before you start beefing with your neighbors, here’s what you should look out for:

• Large ‘contribution in arrears’ balances in the financial report
• Long lists of overdue levies

Unpaid levies may also be a sign of poor management where not enough effort has been made to recover the levies. That’s why it’s important to pay attention to the balance sheet before you start moving in.