Jimmy 00:00
Today I am so glad that we don't do this as a video podcast...
Sue 00:07
Well, Jimmy, you do look a bit frightful at the moment, I'm sorry to say.
Jimmy 00:11
Just in case anybody's wondering what I'm going on about, I had a BCC skin cancer cut out of the end of my nose the other day and a bit of plastic surgery. And now I look like a cross between WC Fields and Cyrano de Bergerac. In other words, I've got a great big nose, and I've got a black eye.
Sue 00:37
A hell of a black eye, Jimmy; I'm looking at it now. Oh, my god, it looks so sore!
Jimmy 00:42
It's not so much sore as awkward. Anyway, it gets in my vision a little bit. I'm reading everything on the internet; all contradictory advice, on what I should do. But that's not why we're here. We're going to finally wrap up all the commentary about strata managers, after the shock report on the ABC about Netstrata, that exposed a lot of issues in the strata management industry. People have been nibbling around the edges, saying "oh, we should do this and we should do that," but we're going to put it all together in one podcast. And hopefully, by the end of it, we will have worked out what could and should be done to make life better, not just for strata owners, but for strata managers as well. I'm Jimmy Thomson, I write the Flat Chat column for the Australian Financial Review.
Sue 01:35
And I'm Sue Williams. I write about property for the Sydney Morning Herald, The Age, the AFR and Domain.
Jimmy 01:41
And this is the Flat Chat Wrap.
Sue 01:56
So what are the main areas of concern with strata managers, Jimmy? I mean, we've had that big expose on the 7.30 Report, showing a number of kickbacks and commissions.
Jimmy 02:06
It's really complicated. It's one of these things where they say there's a lot of moving parts. And the problem is that people are saying oh, we should fix this. We should fix insurance commissions, we should fix embedded networks... It is time for the government and for Strata Community Australia, the professional body, to actually look at the whole big picture and pick out all the things that are wrong and fix them all individually and collectively at the same time. And then, we can all move forward with some confidence that we're getting the kind of service that we deserve, and which a lot of strata managers want to provide.
Sue 02:46
It'd be good. Defects hopefully, are on the way now, because of the Building Commissioner's office. It seems to be strata management that's the next area of real worry and anxiety and anger.
Jimmy 03:03
Well, if you're trying to get more people to live in strata, you've got to give them the confidence that they're not going to be ripped off, either by cowboy rogue strata managers, or by great big, successful companies that dominate the market. And I've got to say; I say this time and time again... I think the majority of strata managers (in New South Wales, certainly and probably in Australia), are just trying to do a good job and make an honest living. But the way it's structured, it encourages people who are unscrupulous to take advantage of their clients. And that's part of the structure of strata management and unless they fix that, they're not going to fix any of these problems.
Sue 03:45
Yes, because some strata managers might say they don't actually get very much money. They get paid per lot I think; of a scheme. It's not very much, when you consider some of the work they have to do. I think most of us believe that they should receive a fair recompense for their work.
Jimmy 04:02
And that's question one; how do you set that figure? Because always in the past, we used to say right back in the early days, before Strata Community Association, as it's now called (ISDMS it was called, back in the day; the Institute of Strata Title Management), we used to say, why don't you just set a fee and then everybody can work to that? And they said well, then we'd be operating as a cartel, which is, maybe it's not nonsense, but it's irrelevant. People need to know how much they should be paying. There should be a base level fee for all strata managers, based on the number of units that they're looking after. That would clarify so many issues, right at the beginning and one of the overriding issues is a lack of transparency.
Sue 04:47
I remember that once we were tendering our strata management services somewhere, and I was looking at three different tenders, and it was impossible to compare them, because they use completely different ways of reckoning their fees. For some you had to pay extra for photocopying. Some you had to pay extra for phone calls. Some it was all included. It just became absolutely impossible to compare them.
Jimmy 05:11
And we used to say (and probably still would, if somebody asked us which we would you go for... I'd say, if you have a strata scheme that is problematic, you've got a lot of people who are unhappy and are complaining and writing to the committee all the time, then go for an all-inclusive, but if you've got a strata scheme, where everything's calm, and it's settled down, and there's not many problems, then you'd go for one where you're getting paid per interaction. But even that is difficult.
Sue 05:41
And also, if you are problematic, then it might be a good idea to go for a more expensive strata company. You know, a more experienced one and pay a bit extra, because then you know that you're getting the kind of wisdom and experience that comes with a lot of years in strata.
Jimmy 06:01
You say that; our investment property, we went in there... I looked at the strata fees, and I advised the committee. I said "look, these strata fees are higher than normal; higher than average. But this is a big reputable company and that's what you're paying for." And guess what? It was Netstrata.
Sue 06:22
And Netstrata is the company that was the focus of the 7.30 Report, wasn't it?
Jimmy 06:26
Yes. You try to do your due diligence, but if you're getting information that's hard to access and hard to understand... I mean, how can you tell whether you're going to get value for money?
Sue 06:39
That's right, and I guess different strata companies as well... Apart from the location of them, some of them specialise in small schemes, some of them specialise in large schemes and it's quite hard from the outside to know which is which.
Jimmy 06:53
Well, the one that we're talking about, Netstrata... I mean, they're big down in the Illawarra, and in that area, but when we had our first AGM, the strata manager stood up and said "well,, we're going to elect the committee, which is part of the first AGM," but then said "look, normally from here, we just take over, and we'll consult you when you need to be consulted, but just leave it to us." And we said "well no, because there's stuff here that we're not happy with." And they were shocked; they didn't know how to handle it. That is a local office and it was interesting; I was getting dog's abuse from the head office, because they were claiming that I was gaslighting the owners and whatnot. In fact, all I was doing was saying look, this is what the law says, and this is what you're not doing, so how can we fix this? We shouldn't focus on that one company, because these problems I think, are endemic to the strata industry; it just happened to be the one that we encountered. I mean, one of the things that came out of that was the whole issue of setting up a strata scheme. The developer needs to get all the contracts and everything sorted out for the first AGM (and the bylaws and all the rest of it). And so they get a strata manager to do that. And then halfway through the first AGM, the owners are expected to sign up the same strata manager as their strata manager for the next year and then every three years after that. Now, bearing in mind that these days, the majority of people at a first AGM, who've bought off the plan, have never lived in strata before; they have no idea what's happening. So they go along, and they are told "look, this is all standard practice. Just put up your hand when we ask you to vote and it'll all be done." And then they realise that they've just signed up for contracts set up often by the strata manager, to favour the developer, who is their original employer and now they are presenting themselves as the employees of the strata scheme. I mean, Dr. Cathy Sherry, the preeminent academic in this field; she was on Amanda Farmer's podcast a couple of weeks ago, when I was in Saigon. I chipped in from there; ridiculous! She said strata managers who set up strata schemes should not be the strata managers who run the strata scheme.
Sue 09:06
It should be a different company? That's a good idea, actually.
Jimmy 09:35
You could have strata managers who could specialise in setting up and make a very nice living that way. And then another strata manager comes along and says "okay, we're going to pitch for your business. Here's what we offer." But the people who are setting it up, cannot be the people who continue from there.
Sue 09:53
That's a great idea, because then it gets rid of a lot of the things like embedded networks, because the strata manager setting it up would say "well no, you can't charge owners ridiculous fees for these kinds of services, because they're not getting any benefit from them." So therefore, it would completely remove the conflict of interest wouldn't it?
Jimmy 10:14
Absolutely. Well, you've got the strata manager who comes in, and could be looking at the embedded networks that have been slipped into the contracts by the strata manager who is setting up and say "what are you doing here?" They may stand up at the first AGM and say to the owners "if you sign this contract, you're being ripped off." Which brings us to embedded networks. It is quite a confusing situation. You need some embedded networks in your strata scheme; you need all your electrical cabling, and stormwater drains, which is the hot topic. You need them there, but normally, that is paid for by the developer. The lifts are paid for by the developer, you would assume. You would expect that if they hadn't been, that you would be told by somebody "by the way, you've bought an apartment, but you haven't bought the lifts. You have to pay for them; you're renting them." And in some ways, that would be fair. People could say well, I've saved a bit on the apartment, but blah, blah, blah. What is actually happening is, you go into a new strata scheme and they say "can you sign this maintenance contract for your stormwater drains," and you look at it (and in our case again)... Our case is not by any means unique, where we realised that in the contract, it gave the right of the stormwater drain people to raise the maintenance fee by 10% every year. They had the option to do that every year.
Sue 11:40
That's astonishing; that's a great business model, isn't it? I want to be in stormwater drains!
Jimmy 11:44
And so they said at the initial rate for a 15-year contract, it would cost you $135,000, or something like that. But if they implemented their 10%, every year accumulative, it was going to cost $300,000 by the end of the contract.
Sue 12:08
That's amazing, isn't it?
Jimmy 12:09
And it's things like that. You've got a room full of people who have never lived in strata before; who have never been to a strata meeting and probably will never go back to another one. Who is going to tell them "this isn't right. You should not be doing this; this should have been paid for by the developer and then all you have to do is pay a reasonable maintenance fee."
Sue 12:31
Because even when you tell them, they don't really believe it, because it seems so bizarre and absurd.
Jimmy 12:36
It wouldn't be allowed, they think. The government would stop it from happening.
Sue 12:41
Sadly, they don't.
Jimmy 12:43
So embedded networks; I mean, we've got a situation where the developer put solar panels on the roof, just enough solar panels to satisfy their development application. The council said "oh, you've got solar panels; great!" Those solar panels are supposedly to provide energy for the common property areas in the garage and things, but because they are owned by the energy company, the energy company has a right to charge us for the electricity that we generate. If we use any of that electricity, they charge us the going rate for the electricity.
Sue 13:23
But that's ridiculous, because you buy into a building with solar panels and you think you're going to save money and be environmentally responsible. But then you go and look and it's going to cost you extra money.
Jimmy 13:38
And then you say "right, we don't like this energy company. We think you're rip-off merchants and we're going to change to another energy company." And they say "you're going to have to pay for the electric metres, because they're ours too."
Sue 13:52
And I guess they're not going to offer them at a bargain basement price, are they?
Jimmy 13:54
They're not and no other company is going to take over that system. They're not going to come in and put in their own electric metres, so you're stuck. These are extreme examples of embedded networks, but they are common. The Strata Commissioner, I keep hearing, is looking into embedded networks. It just reminds me of the old Two Ronnie's joke. You know, the hole has appeared in the high street and police are looking into it. So they're looking into it. They're looking into the hole in embedded networks. Come on, you're smart people! You know that people are being ripped off. And the concerning thing for politicians in New South Wales is now people know they're being ripped off. People know there's a good chance, when they buy off the plan, that they're going to be ripped off. And all the work that David Chandler is doing to increase confidence in people buying off the plan is being undermined, because strata management is out of control. When we come back, we're going to talk about insurance commissions.
Sue Williams 13:56
Sometimes strata management companies say that they depend on the insurance commissions, because the fees they charge are so low. If they get commission on insurance, it means that they can do their jobs well. So what's wrong with insurance commissions, Jimmy?
Jimmy 15:24
Anything that is effectively a kickback, encourages a culture of kickbacks. We answered this question right at the beginning; how do you solve the problem with strata management firms not being able to survive without insurance commissions? Pay them more. And then you know exactly what you're getting. We'll come back to the Netstrata thing. They told their customers that they did not charge commission, so they did not receive commissions; fine. What they did have was they had their own insurance brokers, and they were getting insurance through them. So strictly speaking, they weren't making commissions. They weren't doing anything illegal, but it was as dodgy as hell, because you had to follow the trace of where was the money going. It all came out, because one strata scheme discovered that the effective commission on their insurance was 60%.
Sue 16:00
60%!
Jimmy 16:22
This is what happens when you have a culture that encourages lack of transparency... Where strata managers are told hey, you can make more money by doing this and by doing that, rather than just doing your job. Then all these things start to come through and people start making money out of their customers by other means, rather than just doing their job well and that's the essential problem in a nutshell. So strata managers in New South Wales- I think in all the major states- now are required to declare any commissions that they make from insurances or anything else. So what do they do? They find a way around it and that's the problem. Another issue is hidden charges. You touched on that earlier, where you get into correspondence with your strata manager over an issue, and then suddenly realise you're getting charged for every phone call and every letter that's written in every email, and you try to moderate that by telling owners to stop writing to the strata manager, and the owners go "well, I've got a problem; what am I supposed to do?" I was just reading today that a lot of strata management contracts have a clause in them that say 'we will charge the individual owners for the communications that we have to deal with them particularly.' That's not right and I don't think it's even legal. The strata scheme, the owners corporation, are saying oh, that's okay. We don't get charged for that. But the individual owners shouldn't be getting charged for it either.
Sue 18:02
No, because they're paying for the service. It's difficult, isn't it? Because some strata committees; only the secretary should be in touch with the strata manager. That's all very well...
Jimmy 18:14
What if you've got a problem with the secretary?
Sue 18:17
That's right, and also you might have a big problem, and you don't really want the secretary to know about it. There is privacy in apartment buildings, and that should be carefully guarded, so it is a hard thing. But I guess the difficulty is always nuisance strata owners. When they keep contacting a strata management company over something that they shouldn't be talking about.
Jimmy 18:43
The answer then is for the strata managers to say we're not going to deal with this; take it up with your committee. Then the committee's saying well, we don't want to deal with it, because of the nuisance factor. it's a person management issue, but it shouldn't be an easy way of making more money. And that's another thing that comes up... You see ads for strata management; 'people, join our strata management firm! You can make X amount a year through Schedule B fees!' This is what we're talking about; Schedule B fees.
Sue 19:21
It's kind of like lawyers, isn't it? You know, when they bill you every 15 minutes. So whenever you speak to a lawyer, you speak really quickly. You write it out first, and then just read it out, so you know that it's going to be succinct and fast and cheap and efficient. But with strata managers...
Jimmy 19:36
You don't really know what you're getting charged for, half the time. One of the issues with strata managers is there's no performance indicators. You know, if your strata manager isn't doing a good job, it's very, very hard to get rid of them. We had the case of a strata manager, who'd been sacked by three strata schemes. and had made it very difficult for them to get all their records, even though it's illegal for them to hold onto them. They just delayed and delayed and delayed and were a complete arse about the whole thing. And then they got appointed as compulsory strata manager for another scheme, by the tribunal. There's no follow through, there's no record, there's no indication. There's nothing that says that this strata manager has had X number of complaints against them. Let's put them on probation, or let's keep an eye on them. Let's certainly not make them compulsory managers of schemes where they have total power.
Sue 20:36
That should be something the SCA should be looking into, shouldn't it really? I mean, they certainly used to be very concerned about being good corporate citizens. Well, if they are still concerned about that kind of thing, they should be looking into that.
Jimmy 20:51
Well before before their President walked the plank recently, I brought up with him the issue of embedded networks. His response was something along the lines of "yes, we're not very happy with that situation and we're looking into it" and you think, are you really?
Sue 21:09
Well, his company was the one that was benefiting from it.
Jimmy 21:13
Okay, we're going to look at the overriding picture with strata managers. One other issue that tends to get glossed over quite a lot is the pursuit of levy debts. What's becoming apparent is that a lot of strata management companies have what you might call 'sweetheart deals' with lawyers. And in fact, one strata management company that we know, actually has a subsidiary that's a legal firm. So the strata manager (and this is in the contract that we just foolishly signed)... It says that we agree that we will follow their programme for recovery of strata debt, and it will cost us nothing. If you're a strata owner, you're going 'finally, something that's not going to cost me anything, and I'll get my money back.' The way it's structured legally, is that once it goes to debt collection, all costs for the debt collection of unpaid levies are carried by the person who's got the debt. So you get somebody who gets into a bit of financial bother, and they're having trouble paying the levies, and they get a mandatory 10% penalty on top of the levies... They find it harder and harder to pay. Finally, the strata management company says let's put this to our debt recovery people. It is then taken out of the strata owners' hands They're just told 'you're going to get your money back.' They're not told that that might involve the person who's in debt, being forced into bankruptcy and forced to sell their home. In the meantime, the strata manager and the strata legal firm are making a lot of money out of this. That is something that again comes down to transparency, and knowing what you're signing up for, and knowing what is being done in your name.
Sue 23:21
Because really, that's a disincentive isn't it, to a strata management company going to that property owner and saying "look, do you have any issues? Is there any way we can help you? What can we do to mediate and make sure you can do this.?" There was a lot of that going on during COVID, but of course, it's all dropped away now.
Jimmy 23:39
It's quite funny, because I highlighted this in a column recently and then the next levy notice we got had a thing at the bottom saying 'if you're having trouble paying your levies, contact these agencies for advice,' but that seemed to have appeared... It was a new thing, for me to see that. One of the other things about transparency.. I mean, this is something I go on about all the time and it just irritates me so much and there are some very lazy journalists out there, who go along with this. The SCA, Strata Community Association, does not represent owners. Every so often, they slip it into a story 'we do this, we have strata service providers, we have strata managers, we have strata lawyers, and we represent owners.' No, you don't. The SCA saying they represent owners is like Uber drivers saying they represent drunks on a Friday night. They are your clients and the test for that is you get into a dispute with your strata manager and you go to SCA as an owner; who are they going to back? If I was a strata manager, and SCA came to me and said "oh, we've got this owner who's made a complaint against you and we're taking their side," you'd go "you're supposed to be looking after me," which is what they do.
Sue 25:04
That kind of started off as an education thing, didn't it? They held free seminars, to teach owners how strata works.
Jimmy 25:13
Which is what they should be doing.
Sue 25:14
Which is great. But why don't they do it in conjunction, or in partnership with a proper owners organisation?
Jimmy 25:20
Like the Owners Corporation Network. And the reason that they started telling people that they represented owners was because the OCN was created, and they suddenly went oh my god! These people are getting educated, and they're getting organised, and they're going to make our lives more difficult. Let's have this organisation here, under our umbrella.
Sue 25:43
Also, they were asking for sponsorship from companies, saying 'we represent owners,' I think. So, you know, maybe they were attracting the sponsorship that the sponsors would give them, because they felt that they were helping owners.
Jimmy 25:58
I have heard anecdotally that a strata committee said "we're thinking of joining the OCN," and their strata manager says "don't waste your time with them. We'll look after you," which just takes away strength and revenue from OCN. So just stop. SCA, if any of you are still there and you're listening, stop saying this; it's a lie, it's not true. And finally, a siege mentality; SCA, especially SCA New South Wales... They got their professional status, which they were very pleased about and that means that they can call themselves a profession. It also means that they have a code of conduct that they are supposed to abide by, which says that they've got to look after their customers. The trouble is, with the SCA, is if you go along and say "hey, you're not following your own code of conduct and you're not following that code of conduct," they just go into lockdown. They go to the barricades, and I have found time and time again, if I criticise any strata managers, I'm accused of criticising all strata managers and that is not my position. We know strata managers who are really, really good at their jobs and really, really look after...
Sue 27:22
And are incredibly proactive.
Jimmy 27:26
These are the people who should be running the show, but it seems to me that for the past couple of years, the people running the show at SCA, have been the ones that have been causing the problems. And on that note, I should probably stop. We've sorted out strata management. It's okay; it's a freebie. You can have all that advice for free. It'd be nice if one of those things was fixed. It'd be nice to hear that our Strata Commissioner was actually doing something, rather than looking into it.
Sue 27:58
Well, hopefully he will.
Jimmy 28:01
Thanks for putting up with me and my rants. I'm probably a bit grumpier than usual, because of this plaster all over my nose. Thanks Sue, for your tolerant contributions.
Sue 28:13
Pleasure Jimmy. I look forward to hopefully next week...
Jimmy 28:16
A nicer, happier Flat Chat And thank you all for listening, if you still are! Thanks for listening to the Flat Chat Wrap podcast. You'll find links to the stories and other references on our website, flatchat.com.au And if you haven't already done so, you can subscribe to this podcast completely free on Apple podcasts, Google podcasts, Spotify, or your favourite pod catcher. Just search for Flat Chat Wrapwith a W click on subscribe, and you'll get this podcast every week without even trying. Thanks again. Talk to you again next week.