Everything That Could Go Wrong When You Buy A New Build

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Laine Moger

Journalist and Property Educator for 6 Years
Introduction

There are a lot of positives to buying New Builds – but it’s not all plain sailing.

Things do go wrong.

That doesn’t mean New Builds are a bad investment. But you need to know what could go wrong so that you’re not blindsided when the (un)expected happens.

After working with 58 developers and over 1,000 New Build properties, here at Opes Partners we’ve seen it all.

That’s why in this article we’ll run through the top 8 worst-case scenarios that could happen to you, as an investor, with New Builds. (Trigger-warning for those already anxious investors).

You’ll learn about the bad things that can happen as well as what you can do to protect yourself.

Developer Cancels Contract

#1 The Developer Cancels Contract

First up, it is possible for developers to cancel your contract even after you’ve gone unconditional and construction has started.

So for investors who think a “fixed price” contract is always a done deal, you need to know about this one.

Yes, in some cases developers can cancel a contract and increase the price of your build.

For instance, the developer could use a sunset or finance clause to cancel your contract and then ask you to sign a contract for a higher price. You don’t have to say “yes”, but it can mean losing out on a deal.

There is a sliding scale of how difficult … or not difficult it is for developers to raise the price on contracts. And if you want to know more head to our article here for a more in-depth discussion on it.

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What Do I Do To Stop The Developer Increasing the Price?

This scenario isn’t one you can always avoid. After all there’s often a legitimate reason the developer might need a finance clause or pre-sale clause. This is why it's so important to understand the contract prior to signing it.

Here are the two options available to you to stop the developer increasing the price.


Work With A Good Property Lawyer

The main and most important way to minimise the risk to you, as an investor, is to work with a property lawyer, particularly someone who specialises in turnkey contracts.

Why? Because they will be able to explain what the fine print says, and let you know what you can do to amend your contract before signing, to make clauses more reasonable.

For instance, you can:

  • Ask for the sunset clause to be only available for you (the buyer) to use, and not the developer
  • Ask for a clause where the developer can’t use the sunset date to increase the price.

Be aware, these changes might not be accepted by the developer, but at least with a property lawyer you are completely aware of the risks you are taking on.

Don’t Sign The New Contract

If you don’t want to pay the new price for your property, then don’t.

Unlike Progressive Payment contracts, you can choose not to sign the new contract and walk away under a turnkey build.

You’ll then get your deposit back. But this option isn’t great, because it means you miss out on the investment you were gunning for.

Developer Goes Bust

#2 The Developer Goes Bust

So here’s the thing: developers aren’t regulated the way banks or financial advisors are.

Yes, they have legal obligations to the Building Act and the RMA regulations, but there are no special rules for selling off-the-plan properties.

This means a developer with no finance in place and no experience could set up shop and start selling properties for a 200-unit project.

So, there is a risk that you sign up to buy a property off a developer who then goes broke. In that case you’ve paid your deposit and then the property never gets built.

Sure, you’ll get your deposit back. But if house prices have gone up, you’ve then lost out.

The key message is that you need to know the developer has the money to complete the development.

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What Do I Do To Make Sure I Don’t Buy A Property Off A Broke Developer?

As part of your due diligence, you’ll investigate the developer. You’ll use this time to make sure they’re reliable and can finance the project they are pitching.

To give you some peace of mind, if your developer has good funding from a reputable lender like a bank, it’s a good “green light” for you.

Be scrupulous about your research. Just being “not bankrupt” is not a sufficient “green light”. You need to know if this developer could cope if there was a 20% increase in the overall cost of the build.

This will come hand-in-hand with a whole bunch of other good qualities, such as:

  • Previous experience
  • Good industry reputation
  • A team of support staff and industry contacts.

But at the end of the day any variations in how much, or too little, of anything on this list may come down to a judgment call from you. If you want a recommendation, here is our list of top 5 developers.

 
Build Delays

#3 Build Delays

From working with a couple of thousand investors, one of their big concerns is building delays. “What happens if construction takes longer than expected?”

While this is a common concern, it’s probably the smallest worry investors should have. After all, what’s really the issue?

As long as the developer is still locked in and isn’t delaying construction to trigger a sunset clause, there’s no real issue.

Your price will stay the same, and when the property is finished you pay the same price.

We often joke that the ideal construction time would be 15 years, because you get all the benefit of the property increasing in value without having tenants or having to take on a full mortgage.

What Do I Do To Prevent Build Delays?

There’s not a lot you can do, save picking up a hammer on a construction site (we’re kidding … don’t do that).

But, if build delays are a serious concern for you, you can opt to purchase a property that is already part-way through construction.

When you buy some New Builds there may be 6 months+ from the time you sign the contract to when construction starts. That means the property may be 18 months+ from completion.

But for others you may be able to purchase when the property is only 3 months from completion. Obviously this will decrease the risk of build delays.

 
Hard To Find A Tenant

#4 Hard To Find A Tenant

Getting your investment property tenanted is top of mind for all property investors. After all, most investors can’t afford to pay two mortgages.

But as your New Build rolls towards settlement you may find your property competing with others within the same project.

For instance, if you buy a property in a development of 9, there are potentially 8 other properties trying to find a tenant at the same time. That’s usually not a problem.

But if you buy in a development of 100 … it can be a real headache as there are 99 other investors looking for a tenant at the same time.

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What Do I Do To Find A Tenant Quickly?

The good news is rentals are often in high demand. So, this isn’t always a disaster.

On top of that larger developments are usually built in stages. So while there may be 100 properties in the development, perhaps only 30 are completed at the same time. This limits the number of fellow investors you’re competing against.

Another key consideration is buying in a development where owner-occupiers also have the option to buy.

Let’s say you buy a property in a development that has 30 properties finishing at the same time. If half of them are owned by people who will live in the property themselves, then you’re only competing with 14 investors. That’s much more manageable.

There are also two other things you can do.

#1 Differentiate Property

You can differentiate your property by choosing the right one. For instance, if you purchase one that has two car parks it will be more desirable than those in the development that only have one.

If buying a townhouse you could also purchase a property on the end of a block. That way the tenant only has a neighbour on one side rather than on both.

These small things give the tenant a reason to rent your property vs others in the project.

Another option is to add extra features. For instance, if the rental assessment suggests your property is going to attract a higher income tenant, then you could see about adding an EV charge point as a point of difference.

#2 Get Property Manager Working ASAP

The ideal situation is you settle on a Friday and the tenants move in on Saturday.

Advertising the property 2 to 3 weeks before settlement will give you a better chance of tenanting your property quickly.

So check to see if your property manager is likely to get early access to the property to take photos.

The developer does not have to allow access, so this isn’t always possible. But if your property manager and developer work well together, the developer will often allow it.

In this episode, we are joined by Celia Burbery from Auckland Property Management. Property management is so important because if you want to get the long term gains from investment property, then you need to hold the property for the long term. 

A big part of being able to do that is managing the property itself. That's where property managers come in.

Recently there have been a few law changes and judicial rulings that impact property investors. In the show, Celia details what these are, including the new Health Homes Act and walks us through what property investors need to know. 

Note: Auckland Property Management are specialists in the Auckland Property Market and do not operate outside of Auckland.

Finance Frustrations

#5 Finance Frustrations

Financially speaking, buying off-the-plans can mean committing to purchasing a property when you don’t have bank finance locked in for it.

So there is a risk (in some situations) that you sign up to buy a property, but then once it comes time to pay the money, the bank won’t lend to you.

We hear you, why would anyone sign a contract for a home they can’t get the money for?

Here’s the situation. Most of the time, when you buy a turnkey property, the construction period is longer than your finance pre-approval period.

The maximum time you can get pre-approved for is 12 months, but these days construction can easily take 18 - 24 months.

So, even if you were armed with a year-long pre-approval when you sign the contract, an investor will sometimes need to reapply for finance when it comes to settle the property 18 months later.

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What Do I Do To Save Myself From Finance Frustrations?

The first step is to work with a good mortgage broker.

First of all they will give you an indication of whether this risk is manageable for you. In other words, they’ll tell you whether you are likely to get re-approved in the future.

They’ll also tell you, in no uncertain terms, not to make your financial situation worse during the time it takes to settle your building.

That’s because the re-approval risk is generally only felt by investors who’s life circumstances are about to change.

The main culprits are: extra credit cards; having another child; buying a holiday home; and buying a car on finance.

So, don’t look at your broker sideways when they start telling you not to have a baby in the next year.

Peter Norris, a mortgage adviser from Catalyst Financial, says a good mortgage broker should check in with you regularly, if not every month. They’ll make contact with you to make sure nothing has changed and you are still be on track to get the lending sorted when the time comes.

It shouldn’t be a case of let’s get a pre-approval and then just leave you be until the house is finished, although he admits unfortunately a lot of brokers do this.

The alternative is to buy a property where the construction timeline is shorter. For example, if there is only 6 months left in construction you might feel comfortable confirming if you are pre-approved for finance for the next 12 months.

Issues With Property

#6 Issues With Property

Not being able to walk through a property before buying means you run the risk of owning something which once built is not what you were promised.

For instance, what if the materials and appliances end up being different to what was initially agreed in the contract? What if the bathroom mirror hasn’t been installed? What if the paint work is shoddy and the hot water cylinder doesn’t work?

Working with a good developer who has a proven track record of producing good quality properties will protect you from this risk to an extent … but nothing is foolproof.

 

What Do I Do To Make Sure The Property Is Good Quality

Conducting a thorough pre-settlement inspection is your best chance to find anything that is broken, not up to spec, or not quite finished with your property.

It’s so much more than just rocking up to your property, checking it’s built, and calling it a day, because this is your chance to catch anything that is not quite right.

This takes time. You should allow 30 minutes to complete a pre-settlement inspection for a 2-bed townhouse. But for a 3-bed townhouse, allow 45 minutes to test everything.

Once you’ve gone through the property you’ll have put notes or red dots all over the place. This is to tell the developer what they need to fix.

You should also send an email to the developer summarising what needs to be fixed along with any photos or videos you’ve taken.

These will be rectified and you will have the opportunity to check again before settlement.

To learn exactly how to do a pre-settlement inspection for a New Build the right way, check out the linked article.

Bought In The Wrong Area

#7 Bad Investment – Bought In The Wrong Area

The second to last point to make on this list is: what if your property isn’t the investment hit you thought it was going to be.

What if you battle through the financing, and you survive a construction delay, only to be left with a property not going up in value as you thought, or is very poorly negatively geared.

After the recent interest deductibility tax changes, some investors think they can just buy a New Build and it will be great because New Builds now have tax incentives.

That’s not the case. Check out these two properties –

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Both were available from developers in February 2022. The first is a 2-bed, 2-bath, 0-carpark townhouse in Henderson, Auckland. It’s being sold for $915,000 and is expected to rent for $535 per week.

The other is located down the road in Glen Eden. It is selling for $859,000 and has 3 bedrooms, 1 bathroom and 1 carpark. This one is expected to rent for $700.

Both are new. Both are in West Auckland. Both are in the same price range. And in this case we’ve assumed they’ll increase in value at the same rate.

But the expected Return on Investment (ROI) on the Henderson property is 252%. And the expected ROI on the Glen Eden property is 402%.

This all comes down to the poor cashflow of the first property (Henderson), and the good cashflow of the second (Glen Eden).

What Do I Do To Find The Right Investment

There are two main ways to make sure you’re buying the right investment.

#1 Run The Numbers On Your Investment Property

Investors should make decisions based on the numbers. And the best way to do that for an investment property is using our Return on Investment calculator.

You can download this free and quickly get a sense of the expected return of a property.

#2 Work With a Property Adviser

Learning about property investment is one thing, but even the most educated investor often wants help with the beast and putting that knowledge into practice.

Working with a property investment business like Opes means you get access to a team who gives you advice, organises the hard work and does all the “stressing” for you.

By this we mean they will be checking in with the mortgage broker to see where the banks are at; chatting to the accountant; making sure the site visit is organised; and aiming to ensure a developer will be there.

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Market Drops

#8 Market Drops

And finally, there is one of the biggest concerns of all – what happens if you sign up to buy a property for $800k, but the value of the property drops?

This can absolutely happen. In fact in 2008 this happened to Opes Partners Managing Director Andrew Nicol.

He signed up to buy a property in Rangiora, Canterbury in 2007. He agreed to pay $390,000. But by the time the property was built, it was only worth $370,000. He bought at the peak of the market.

What’s the issue with this? It’s not that the property was a bad investment. After all, today the property is worth $780,000.

The issue is that he had to come up with more money as the deposit.

Usually the bank would lend him 80% of the value of the property. When the property was worth $390k, they’d lend him $312,000 and he’d put in $78,000 as a deposit.

But once the property had gone down in value, they’d only lend him 80% of $370,000. That’s $296,000.

Because Andrew still had to pay the developer the full $390k, he now had to put in a deposit of $94k, rather than $78k.

That’s an extra $16k he had to find.

Now, in the end it worked out for him, and the property has made him over 24x that amount over the last 14 years. So for him the risk worked out.

While this risk doesn’t happen a lot, and only happened to Andrew because of the GFC, you still need to think about this situation, because it could happen.

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What Do I Do To Avoid This?

If the market drops the only thing you can do is hold your nerve. Generally, it’s best not to panic-sell because you will “crystallise your losses”.

A better strategy is to continue holding the property so that its price can recover.

The real question is how you come up with the extra money. The answer will be different for different people. But could include:

  • Using your own house as the deposit
  • Taking out a personal loan
  • Using any savings you have.
Conclusion

Should I Invest In New Builds?

Phew, we hear you – that’s really a lot of things that can go wrong.

And you may be thinking … “If Opes sells New Build investment properties, why are they telling me all of the issues?”

It’s because if you are going to spend a lot of money, and take on a lot of debt, to buy a property, you need to know that not everything will work out perfectly.

For you to get the gains of investment property you need to hold for the long term.

And there’s no sugar coating it, issues do happen. So you need to know about them in advance so you don’t get spooked and decide to sell when problems arise.

For a full rundown of New Build Pros And Cons read our article here.

While you can’t see into the future and stop these worst-case scenarios from happening, you can minimise the chances of them happening, or you can have a game plan ready for when they do.

It helps to have a good team behind you too.

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Laine Moger

Laine Moger has been a journalist and reporter for the last 6 years. She previously worked for Stuff, The North Shore Times and Radio NZ. She has a Bachelor of Communications (Honours) from Massey University and a Diploma of Journalism from the London School of Journalism.