Blog
Why build an investment property?
Building a new house for investment allows the investor to target the markets' need and exploits the greatest value possible since both potential purchasers and renters consider it highly desirable to move into a brand new dwelling.
Where the new dwelling is kept for rental this offers the investor the maximum possible depreciation allowances making the investment more desirable especially where the investor is trying to offset profits in other areas.
Although the benefits of building for investment are undeniable there are also factors which should be considered to ensure that your decision to build does not have unintended consequences.
The most obvious factor when considering building is the fact that it takes time to build. As such if the house will become your home you will need to arrange somewhere to live until building is finished. Typically this will be in the local area allowing you to be close by in case you need to go to the block to check on the progress of building.?
Another important factor that must be considered with any form of property purchase (not just building) is that there may be unexpected costs. However this is particularly important when building a home as these unexpected costs may be significant. Some examples of items often overlooked in the excitement include site preparation or attending to things overlooked in the building contract. There are many items which you may need to spend more money on to finish off your house after building. These include items such as floor coverings, air-conditioning, curtains and landscaping.?
It is important when building a house to incorporate the possibility of delays in completing the house. Delays may occur for a multitude of reasons but some of the most common include delays due to the council approval process and delays caused by bad weather.
When using an experienced Development Consultant many of the risks of building can be mitigated however it is important that you ensure that you fully understand the process before proceeding.
What you should know about building contracts
When entering into a Building Contract for construction of a new home it is very important to read the building contract thoroughly and ensure you fully understand all of the details.
The building contract may be complex document and is generally made up of 3 parts
1.Building contract (including a Schedule of Particulars, Addenda or Appendix)
2.Drawings
3.Specifications.
The law in South Australia requires that building contracts contain a cooling off period when entered into by an individual. The cooling off period allows the client to pull out of the contract without giving justification to the builder. The cooling off period is generally 5 full business days.
Laws vary between states such that a cooling off may or may not apply to your building contract. You should always enquire as to whether a cooling off period applies to your contract.
If the contract does not include a cooling off period, you cannot get out of a building contract because you have changed your mind.
The terms of the building contract outlines the general rights and responsibilities of the builder and the homeowner.?
It is important to remember that the salesperson you speak with before signing the contract is generally not the builder, so make sure any promises made by the salesperson are in the contract.
If you have any queries with any of the terms of the building contract, it is very important to you have any queries clarified before you sign it.
Contracts that allow the costs of the project to be calculated as a 'running tab' are called 'cost - plus' contracts. Such contracts must be titled 'cost-plus contract'. As it is difficult to monitor and control the ongoing costs of a building contract, it is recommended that you think very carefully before entering a cost-plus contract and seek expert advice.
For most building contracts, a figure can be calculated (including certain estimates explained under 'Payment details') for the total cost of the building project. Such contracts are called 'lump sum' contracts.
As most people have not had prior experience with building and building contracts it is important that you engage the services of a Qualified Building Consultant to ensure that you are fully informed of the contract you are signing.
What warranty do i have when building?
The building contract that the builder has with the owner promises that the builder will perform the work properly and use good materials. If the builder breaks this obligation they are in breach of contract. However there are also other warranties which apply.
The Building Work Contractors Act contains some statutory warranties which are imposed on the builder by law. The difference between these warranties and those imposed by the contract is that these apply to whoever owns the house (not just the original client) for five years from the date the work is completed. At the end of these 5 years no further claims can be made under statutory warranties.
As well as contractual and statutory warranties the builder also has a duty of care to the owner of the house they built. The duty of care is to do the work properly and to use good materials. The minimum benchmark for quality of workmanship is stipulated by the National Construction Code of Australia (NCC) which applies to all states and has been called up by legislation to be law.
Duty of Care differs from the other warranties because the owner can make a claim up to six years after the date on which it was reasonable for the owner to detect the defect. So if the owner doesnt detect the defect for 10 years then they may have another 6 years to make a claim i.e. 16 years after the work is completed.
Fortunately the builders the Development Act was amended in the 1990's to limit claims for defective building work for a period of 10 years after the completion of the work.
Although all these legal protections are in place to ensure that the builders obligations are fulfilled the difficulty with any of these options is that to seek compensation for any damages inevitably involves going to court.
Whether you are in the right or wrong when you go to court no one wins except the lawyers. Also it is probably likely that the builder will be in a much more powerful position than the client due to their experience and financial backing.
Rather than relying on warranties the safest bet is to ensure that you go with a builder who is unlikely to take shortcuts and who customer service is a priority.
What to consider before building
Before you can build the house you first must determine what type of house you want to build. They type of house you build will be determined by 3 factors:
1.Your Budget how much you have to spend
2.Your Requirements what you want i.e. 3 bedroom, 2 bathrooms, double garage
3.Councils Requirements what they are willing to approve
Ultimately there will always be compromises with any development to ensure that you get the best possible outcome taking into account these 3 factors.
It is essential that before deciding on a builder that you first have some plans drawn up to be clear exactly what it is you would like them to quote you on.
By providing the same plans to various builders you will ensure that you are comparing 'apples with apples' to ensure that you are truly getting the best value for money.
What to do during construction
During construction, it is recommended that you check that the building is proceeding according to plan. However you should ensure that you do not inconvenience or issue instructions to the tradespeople on site.
It is vitally important that you communicate only with the builder or builder's representative; this will ensure that there is common agreement and any changes can be formalised.
During the construction phase make sure you record the details of any discussions you may have with the builder about the construction of your house. This may mean keeping a diary to record all day-to-day happenings, including any discussions with the builder regarding progress of construction. Common discussion points may include how the weather has effected the construction or any other issues that may result in delays.
It is important that you diligently file all paperwork and ensure you keep copies of any letters and notices that relate to the construction of your house.
It may also be a good idea to take photographs of the construction at regular intervals. This detailed record keeping will become essential if there are any miscommunications or problems that may cause disputes at a later stage.
If you are unsure about checking that the construction is proceeding to plan, you can employ an independent building consultant to monitor the construction on your behalf.