Our OMC has been badly managed and is in arrears, should we try to self-manage it?
The advantage is you will save on professional fees, but a good agent is a valuable asset
In an environment with high rents and low unemployment, service charges should generally be increasing in multi-unit developments. File photograph: Getty
I live in a multi-unit development of about 100 houses, apartments and duplexes on the outskirts of Dublin. Basically, due to bad management, we have got ourselves into a bad situation as regards our finances. We have just barely enough cash to get by, we are owed more than €140,000 in service charge arrears and we have contractors looking for payments who we have to put off for several months until money comes in to pay them.
We recently called a meeting of owners and looked at some options for cutting back spending. One suggestion was that we should dispense with our managing agent and move to self-management. Given our difficult situation, would this be a sensible option?
We have a number of tradesmen who live in the development who said that they would be willing to help out by doing jobs at cost price and, given our situation, it might be that every little helps.
There are a couple of issues intermingled in your query. The situation in which you find yourself is not uncommon as many owners’ management companies (OMCs) are badly managed from a financial perspective and end up in a precarious situation. This has serious risks because if the OMC is not able to meet crucial bills such as for electricity, then the common areas could have their electricity supply cut off (with health and safety implications).
Also, you would need to ensure that the block insurance premium is paid up to date at all times as otherwise this could leave the OMC exposed to potentially high claims.
It is not clear from your mail what the root causes of the financial problems are. One problem seems to be a poor system of collecting service charges. A good OMC will ensure that service charge statements go out within a few weeks of the start of the financial year (with the budget having previously been agreed at a general meeting of members). The full budget should be sent to all owners with a listing of all budget lines to show what the service charges are used to pay. (You may wish to supplement this with a newsletter providing further information on the activities of the OMC and the minutes of the previous agm.)
A variety of payment options should be provided to owners. If possible, efforts should be made to get owners to sign up to pay by direct debit, which will spread payments over the year. For those who don’t pay quickly, a system of reminders should be in place. At year end, interest should be added to accounts in arrears (as per the lease agreements people signed when they purchased their properties). A system of legal enforcement should be in place for those who make no effort.
You should also have in place a system of budget management. Normally, a good managing agent tracks spending during the year and draws the attention of the OMC board to any significant variations or unexpected expenditures. It is also important that larger expenditure items, such as refuse collection, block insurance and electricity are subject to market testing as regards costs, either through tendering or comparison with similar other blocks. Information on expenditure should then be subject to discussion each year at the agm.
In relation to self-management, that is a matter for the owners and some OMCs have gone down this route. The advantage obviously is that you will save on the professional fees that you pay the agent (which must include VAT at 23 per cent). However, I would advise caution before you would go down this route.
A professional, licensed managing agent provides a wide range of services to an OMC, many of which may not be seen by owners on a day-to-day basis. For example, there is a large amount of work involved in ensuring that the company’s accounts are audited each year and that relevant banking and Companies Registration Office administration is up to date. The importance of such work becomes clear when an owner looks to sell their property as such administration needs to be in place to allow for a clean sale.
Similarly, there is a wide range of health and safety requirements (eg for vehicle gates, emergency lights and so on) that a good managing agent will follow. Another advantage of an independent third-party agent is that property owners don’t have to get involved in disputes between different owners, eg on noise issues, which can be complex and time consuming. From the description of your service charge collection process, you may need to consider changing your managing agent.
In relation to the tradesmen living on site, this should not be mixed up with the issue of employing a managing agent. If people on site are willing to do work for good prices, then their names should be supplied to the agent and they should be considered for work. You should ensure that all contractors have the required qualifications and insurances.
While it is hard to know without reviewing your finances in more depth, a further issue may be that your service charges are being set at too low a level. Many OMCs have adopted a habit of setting charges each year to cover basic costs and not allowing headroom for people who don’t pay (or pay late) and indeed for a sinking fund contribution.
In an environment with high rents and low unemployment, service charges should generally be increasing in multi-unit developments as it is hard to achieve budget increases in the event of an economic recession. Also, as blocks get older, the amount required for general repairs and maintenance rises, as will the amounts required for redecoration and replacement projects.
Sound finances are the basis of any good company and an OMC is no exception. From experience, turning a development around financially can take up to five years. The first step is to recognise the problem(s) and to get a core group of owners together to face up to the issues.
- Finbar McDonnell, is a chartered property manager and member of the Society of Chartered Surveyors Ireland, scsi.ie