The idea of designing a new home that would suit our lifestyle and build our dream home would have to be a dream shared by many kiwis. However building a new home differs from purchasing an existing home.
OVERRUNS:
In nearly every build we have seen cost overruns where the cost to complete the project has been more than was budgeted for. There are 2 common reasons for this. The first is that clients make modifications once the building project has started. Often these modifications will enhance the value to the client - but sometimes they do not. When making modifications it should be done with the lender knowing that this is going on. If it’s going to cost more the lender may request further information such as revised valuations - so the sooner they are involved the more time the client would have to collect that information.
The other reason for Overruns is the client often assumes that certain costs are included in the building contract when they are not. As we always say “it’s not what is in the building contract it is what is not”. For this reason we recommend that clients sit down with their builder and ask them to itemise everything that is not in the contract. We also recommend that building contracts (like sale & purchase agreements) should be run past the solicitor however most building contracts are not. It is our belief that if more contracts were run past the solicitors the issue of Overruns would be minimised. All the items not included in the contract should then have quotes BEFORE the building project is even started.
FINANCE:
When building a home there are more restrictions lenders would place on a building project. The lender needs to be assured that there is sufficient funds to complete the building and the value of the loan never exceeds the acceptable ratios (between 70 – 80%) thus reducing the risk to them. They don’t want to be in a position where they are having to approve further funds to complete the build which increases their risk by having to lend at a higher (and more unacceptable) percentage of the value of the property. The lender also doesn’t want to have to be in a position where they have to advance the loan to complete the project while placing the client at risk of them not being able to afford the increased loan payments.
It is for these reasons that lenders will insist on valuations and will ask for a valuation on the property as it is and as it will be upon completion of the building. This not only offers comfort to the lender but also safeguards the client that the value of the property is at least the comparable to the amount it cost.
We recommend that a mortgage broker be used whenever finance for building projects is required. They are able to manage the complexities of raising finance for builds and ensure sufficient funds are available at the relevant times. If issues arise they can assist in getting them sorted thus reducing the biggest stress for building projects – paying for it!
