Buying a property before it has been constructed can be a risky move, as there's no guarantee what the finished product will look like. New builds are often seen as the riskier investment, and for good reasons. Unlike established properties where what you see is what you get, with a new build, what you see in the glossy brochures may not necessarily be what you'll end up with when the builder hands you the keys to your new home.
But despite some risks, buying a new build offers a number of advantages, including potential capital gains between signing the contract and settlement. If the project is located in a growth area, you could rack up good growth within a short period of time. So how do you avoid the inherent risk of buying a new build?
CHECK THE CONTRACT CAREFULLY
1) Understand the inclusions, fittings, fixtures and build materials you will be recieving. The more items that feature in a property's inclusions list, the less you will need to arrange/fund once the property is settled. Full turnkey homes are fantastic because they leave the buyer with almost nothing to install themselves.
2) Understand the sunset clause - how long will you be waiting? This could be anything from 18 to 60 months (or more!). If the development does not proceed, how long is your money tied up? Are both the developer and the purchaser allowed to walk away at the end of the clause of just the developer?
3) Check the penalty interest for late settlement of the property.
MINIMIZE AND MANAGE DEPOSIT
4) In some cases the developer will accept a deposit bond or bank guarantee so you are not required to exchange an actual cash deposit. This allows you to have your money working elsewhere (Ex. paying down your bad debts, or sitting in an offset account against your PPOR mortgage).
5) Alternatively, if the developer has met their pre-sale requirements they may accept a 5% deposit.
6) If you do pay a cash deposit and you have a long sunset clause, check to see if the deposit monies are going to be invested. if so, are they passing on a percentage of the interest earned?
MINIMIZE ONGOING CASH INPUT
7) Some developers offer no-progress payments which can be of great benefit to the strategic investor.
8) Putting the construction finance back on the vendor greatly improves personal cash flow until you are ready to settle. Instead of chipping in progress payments towards the build (which are not tax deductable), you can have this money working in other productive areas. It also lessens your risk as there is only a deposit that has been tied up in the venture.
RESEARCH THE DEVELOPER
9) Check out the developer. Are they properly funded? Will the property definitely be built? If not, how long are you tied to the contract by way of sunset clause?
10) How long has the developer been in the industry, and is it their core interest or just their hobby?
RESEARCH THE BUILDER
11) How long have they been building? How many properties do they build each year? Check that they have the correct builder's insurance in place.
12) You may also want to check out some of their previous projects to get an idea of craftsmanship and style. The more tangible examples of the future build, the better. Things like previous developments and current under-construction jobs are very good examples of how investors can gain peace of mind over their purchase.
13) If possible, take a look at a property similar to the one you are buying, and not a flashy 'specked up' display unit. Marketing renders and pretty brochures are nice, but they are sometimes not a true reflection of what you get.
14) Ask the builder who they hire to complete the construction. If they consistently hire the same construction companies, contractors and specialists (electrical, roofing, plumbing etc.), you can expect better building quality and higher building standards. Construction companies, contractors, and specialists that repetitively work with the same builder know exactly what the builder expects of them, and it proves that they are able to demonstrate quality work. Some new build sites hire different contractors each time they build a new home (depending on time constraints and contractor availability). This means that even though each house in the subdivision is the same (or similar), they are all built by different contractors, and each house will have a different quality upon completion.
15) Ask the builder about the site supervisor. How long has the site supervisor worked for the builder? Have there been any recent changes of employment, or have they hired a new site supervisor? The site supervisor is often the person who spends the most time and has the most involvement in the construction of your new home. Site supervisors are usually more involved in the daily process of the construction than the builder. If the site supervisor is a new employee, or an inexperienced site supervisor new to the industry, this may raise a red flag.
STAGE OF CONSTRUCTION
16) Understand exactly where the building is up to at the point of purchase (ex. dirt, slab, frame, fix etc.).
17) Ideally, new build purchasers have their contract signed before the slab is poured.
18) When purchasing a new build, if possible, leave the basement unfinished upon closing for better build quality. I suggest waiting approximately 2-3 years after construction to finish a basement in a new build. Because a newly constructed home 'settles' over time, buyers who have their basement finished during the construction will often discover cracks, defects, and other damage done to the interior basement finishes as a result of the home settling.
19)Peace of mind post settlement is important, particularly when dealing with a brand new dwelling. Check the warranties and building assurances are satisfactory before signing contracts, because repairs can be expensive if the builder doesn't get things correct.
20) If your new home comes with a Tarrion Warranty, make sure to read over the Tarrion contract carefully and understand exactly what the contract covers, and for how long. Make sure you also understand what can void the Tarrion warranty (ex. DIY home improvement or renovations not done by the builder). On the final walk through, be sure to note down any defects or damages that occured prior to occupation.
Are you thinking of buying or selling? Contact me today to get started!
Coldwell Banker RMR Real Estate