Pitfalls and Considerations When Contemplating Use of Owners Corporation Advocates and Strata Consultants
As in real estate where we have Advocates who have a professed desire to help the consumer when selling their home, we are now seeing a move by organisations identifying Strata Management and Owners Corporation Management as a potential income source.
Real estate Advocates are not generally remunerated by the consumer under their advocacy model, but by sharing in commission proceeds with the selling agent that they nominate. Many strata / body corporate / owners corporation consultancies have now sprung up attempting to replicate the real estate sales advocacy model. I guess it could be argued that in fact the consumer is ultimately paying for the advocacy service. However all models can be manipulated. Being a former Fraud Squad Detective makes me lean to liking transparency, do you?
Scenario for Strata / Owners Corporation
Your Owners Corporation (Strata Plan / Body Corporate) wishes to change its Manager and a Strata Consultant is approached to assist you. You can be pitched different methods of paying your Strata Consultants;
- The consultant indicates they can find you a Manager (I hope they get 3 proposals) and give you an invoice for their services. Nice and clean and everyone knows the cost.
- They indicate that they will find you a Manager and that they take a commission from the Owners Corporation Manager that they recommend for appointment. You then get the impression that this is great as the Owners Corporation is not having to pay. What’s that saying – ‘Nothing is ever Free’.
The reason for pitching model 2 is very apparent, Why? Well lets look at financial planning for example – offer a supposedly great product and then tell the client you will be sending them an invoice for the advice. And what will the client do? – probably zero percent of a 100 not take up your great product. Hide or place the fee in the product or service and bingo! Success. Yes this is a rather sad indictment on society in some ways that we don’t like getting a separate accountable invoice and often open our selves up to issues and have a whinge about the hidden fee when things go South. Apply this to Strata Management when you find you have a funds deficiency or other management issue and try to be retrospective with – ‘Wish we had insisted on knowing what the Strata Consultants or Developers (or both – I kid you not) fee was that the appointed Owners Corporation Manager was paying’.
So they find the best manager and;
- The Manager refuses to pay any commission or fee. The Owners Corporation does not then get the best manager under any tender process. YOU lose.
- The consultants are very keen to push the OC into a longer 2 or 3 year management deal with the suggested ‘winner’. Why? Because the consultant can then chase a bigger commission from the OC Manager they are suggesting. This then flies in the face of the whole reason for using a consultant as even I advise Owners Corporations to never commit to more than 1 year for any first term of a new manager. This suggestion spells ‘self interest’.
Summary Regarding Who’s Paying Who
If you are told that the appointed Owners Corporation Manager will be paying the Strata Consultants fee a whole host of questions then need to be asked;
- What is the fee that the OC Manager is required to pay the Strata Consultants for the privilege of managing you? If the Owners Corporation Committee of Management does not know this then there should be questions as from my own experience things go south very quickly when probity issues arise. If I was sitting there as an OC Committee member and was told that a significant amount of the new management contract for the selected manager was going to the OC Consultant / Advocate, I would want to know how this may or was now going to affect the performance of our newly selected manager and then I would also want a performance clause placed in the management agreement. What happens when you find that you got the third best tender because the two most competent managers weren’t willing to pay any fee, or what in some circumstances may be a secret commission or interpreted as such. Is the consultant going to tell you that your OC missed out on the best Manager/s because they don’t pay commissions? The Owners Corporation Committee must find out the fee involved as indications are from managers that they are being requested to hand over up to the full value of the management agreement and often not just for 1 year. In effect, why would a manager bother with you if it costs them money to manage your OC? My view is that an OC Committee could have legal action taken against it by aggrieved lot owners if it did not know what fees were being charged by the consultant. And from my background I’d say that your Owners Corporation committees’ office bearers insurance may be found wanting.
- So you appoint the winning tenderer as proposed by your consultants and find your fees start running out of control. ‘101 in Strata Management’ – which I use from experience, is that if a manager has acquired the right to manage you at considerable cost one of two things may happen;
- They want to recover some of that money they just gave the consultant for the privilege to manage you, or
- The service level may drop (this I have seen as I get called in to clean this type of mess up).
Remember the new manager may be running at a loss whilst managing you for the first year after paying an undeclared commission to someone even if you paid the consultant as well.
- What happens when your Consultant is getting paid by the Owners Corporation in an open and transparent manner to run the tender process and then you don’t again get the winning tender on board because a secret commission is also required?
- And a final thought to complicate matters. We find now that on a more regular basis, in an attempt to maximize the return on their developments, developers seek to sell management rights to Owners Corporations. I can plainly see that under the Owners Corporation Act that this creates a conflict of interest and one can also see that crunch time is coming for these types of practices.
Lesson from This Is
You are the Owners Corporation. You are in control. You must insist on being part of the tender review process if using an Advocate or Consultant. And actually discuss the remuneration for the process in front of the parties in the same room, both the consultant and the recommended manager. You have too much to lose…
If you are proceeding with using a Strata Consultant or Advocate make sure you get an invoice addressed to the Owners Corporation for the service. Keep it transparent.
Yes, I am an OC Manager and some years ago I created theOCguide due to many queries I would get from Committees of Management, Lot Owners and professionals in this ‘Industry’ which is ironic as you and your Owners Corporation are now part of an ‘Industry’ that house one third of the population. In recent years I could easily have managed many more Owners Corporations if I was willing to pay a Secret Commission or do a ‘deal’, but Probity and Transparency are needed as demonstrated by a number of these buildings contacting me later after hitting the panic button.