Should estates take out a loan to finance the levy deficit?

Homeowners living in estates pay a monthly levy towards their community scheme. It covers monthly expenses like management fees, maintenance, insurance and security, to name but a few.

However, if some owners fail to pay their monthly levy, community schemes can’t afford to pay these costs. They’re left with a few options: increase the levy for paying owners to cover the shortfall, decrease monthly expenditure, or turn to debtor finance.

All these options have their pros and cons. Getting paying owners to cover the shortfall could feel like a punishment and alienate those that pay. Cutting back on expenditure may not be feasible in an environment where costs are increasing, and it could mean that vital repairs are not carried out properly, if at all.

For others, debtor finance may be the only option. Here we unpack how estates can use these financial products to their advantage, and we highlight some of the pitfalls.

How does it work?  

When it comes to levy finance there are a few options to consider. ‘With debtor finance, Propell would finance 80% of the shortfall left by defaulters. The community scheme receives the monthly levies from paying owners and 80% of the levies not paid by defaulters from Propell. Paying owners are thus not burdened by the shortfall left by non-payers,’ points out Andre van Schaik, CEO of Propell.

Willie Roos, CEO of Stratafin, adds: ‘There are variations on the theme – in some instances the lender will drive the collection process, and in others, the scheme will be responsible for its own collections.

‘The monthly contributions by paying members are used for reducing the interest and the revolving loan, and then a new revolving loan would be available for the next month, which the scheme would inevitably take as the defaulters remain in default and have not paid their liability to the scheme. Unless collection takes place, the scheme will in essence remain indebted to the lender ad infinitum.’

A debt trap? 

Roos warns that the levy finance product could become a debt trap. His company offers an alternative, which they refer to as ‘debt purchase’.

He explains how it works: ‘The debt is analysed in accordance with our risk model and an offer is made to the scheme to take over the debt of the scheme at an agreed value. For example, if a scheme has an outstanding debtors’ book of R1,000,000, then we would analyse the book taking into consideration various factors such as the age of the debt, the value of the property, whether or not the property is bonded, and various other factors.

‘We would then individually analyse each debtor and debt and then make an offer per debtor on such debt. Using the example above, let’s assume our risk assessment model indicates that we offer a payout of R600,000 in exchange for the R1,000,000 of outstanding levies.

‘This would result in an overall offer on the total book, but if a scheme only requires assistance in respect of a few of such debtors, we would not have a problem with that as all debtors are analysed individually in accordance with our model.’

Roos adds: ‘The difference between the amount paid and the amount purchased is invoiced as cost (Interest and Collection fees) and as such the scheme knows beforehand what the cost of such collection and finance is.

‘We would be responsible for the collection at our risk and additional cost, if applicable, and the scheme would not be responsible for interest on the amount received for the debtors.

Interest would be recovered from the defaulting owner through the legal process at the rate determined by the Body Corporate applicable to their outstanding levies.’

Considering the cost 

These types of loans could help community schemes but it’s important to evaluate whether the interest and costs involved are worth paying. Those managing the scheme would also have to ensure that paying off the debt is achievable.

‘A crucial factor to consider is the credit policy of the financier. Incentives must be aligned, and overextended community schemes should not be unable to honour their obligations in terms of the loan agreement. Propell has a hierarchy of credit limits to protect both the community scheme and Propell.

‘The purpose of Debtor Finance is to relieve the paying owners from the burden caused by non-payers. The community scheme should not get caught up in an agreement where credit is overextended, and the scheme is left with the same (or worse) problem – where paying owners are liable for the debt of non-payers,’ adds van Schaik.