Escalating prices and critical shortages of materials have left some new home buyers without the homes they thought they had already.
Increasingly, builders citing pandemic-related material cost hikes, inflation and worker shortages are using clauses in their contracts to raise prices or even cancel contracts altogether.
Buying a new build is still a good option
First-home buyers might be scared at the thought of spiralling costs on a new build home, but there are ways to minimise the risks.
Prices for new homes are going up, but these exploding costs don’t necessarily mean you shouldn’t buy new, they just mean you need to take care to minimise those price increases and to protect yourself and your new home dreams.
Firstly, and most importantly, you should consult a financial adviser to ensure you absolutely understand the deal you’re entering into. Not all construction loans are built the same way because the building of homes differs. You also need to make sure you’ve got finance sorted before you enter into that contract.
Price increases in fixed price construction contracts
Home buyers and investors are signing up for fixed price contracts and are then being hit with price rises. So, how can you protect yourself from being halfway through a build and getting a notification that the cost of the build is increasing by 15%? Surely, if it’s a fixed price contact, they can’t increase the price, right?
Unfortunately, if the builder has the ability to increase the price in the contract, you have to pay. This is why we reiterate that it’s so important to understand the contract and what you are getting yourself into. There are steps you can take to protect yourself and top of that list is to see a lawyer.
If it looks too good to be true, it probably is
If you’ve been presented a building contract that looks good and you think you have got the best price in town, be careful. You could run the risk of the contractor going bust if circumstances arise that they are unable to deal with. If the builder goes broke and is not around to build for you, then it’s a very hollow gain. In addition, engaging a builder just because they look cheaper may mean any additional costs will be passed back to you because they have been underestimated. Read the contract.
Loaded in builders’ favour
The standard Registered Master Builders contract has a clause that allows builders to pass on increased costs. Fixed price, turnkey contracts will be loaded in favour of the builder or the developer. This is not necessarily unreasonable because they do carry the risk, but you need to feel comfortable with the amount of risk you are signing up for.
It is crucial that you see a lawyer to ensure that the contract is fair, reasonable, and balanced. They will be able to spell out what the fine print says, and let you know what you can do to amend your contract to make any clauses more reasonable.
The ability for builders or developers to pass on cost increases is limited by the specific stipulations and clauses in your contract. With a lawyer on your team, you will be fully aware of the risks you are taking on and will have a chance to change them.
Check the buffer
It is important to have an allowance for contingencies. Even though turnkey properties are bought at a fixed price, there should always be a buffer in place to take price increases into account. Your job, with the help of a financial adviser, is to understand how large that buffer is for when things go wrong is. What percentage of the overall cost of the build has the developer allowed for price hikes? Is it enough or are margins too thin? Most importantly, should the need arise will you be able to get the additional funding from the banks to cover the cost increases. Most banks assess your loan eligibility on 10-15% cost overruns so it pays to ensure the bank’s contingency matches the buffer the builder or the developer has allowed for in the contract.
Locking in prices
Usually, a developer will go unconditional a short while after you have signed your end of the deal. That means you can’t cancel the contract, but the developer can. There is the risk that the price of materials goes up during this period.
Disruption and price fluctuations make it difficult to plan and cost projects, so work with a builder who is doing their best to minimise the risk with forward orders and good planning. Ordering well in advance with prices and delivery dates already set helps. Therefore, ensure you are in continuous touch with your builder to track the progress of the build including ensuring they have ordered the materials well in advance to lock the prices, allow for supply chain disruptions, lockdowns, labour shortage etc to minimise the cost increase.
Common in off-the-plan deals, sunset clauses are intended to protect both the builder and buyer from unreasonably long delays in completing a project by allowing either party to walk away. However, they are increasingly being used by some less than scrupulous developers to cancel off-plan property contracts to get a better price from another buyer.
Unethical developers are cashing-in on sunset clauses where property prices had increased since the contract was first signed. Buyers are reporting having land deals cancelled or being asked for extra ‘contributions’ to keep a project on track. The price increases asked for can be unlimited, since the increase doesn’t come from a specific clause, it comes from cancelling the existing contract.
However, buyers of new builds can avoid being burnt by a sunset clause by ensuring developers cannot benefit from it. A lawyer can make an amendment in a contract so developers can’t re-list the new home for the sole purpose of making more money. So, make sure you see a lawyer before you sign anything.
Looking at loans
In a market where costs of building are increasing so quickly, you need to have a certain amount of room to move in your mortgage to allow for cost overruns. Our mortgage brokers will work with lenders to make sure you are not at the maximum end of what you can borrow just in case you need to go over and above that contracted price.
Know what you are borrowing on
While you can’t do much about the rising prices of building materials, you can minimise the risk with a good quality contract. Do your due diligence before signing on any dotted lines. It’s incredibly important to check what is and isn’t covered in the contract; the risks you take on are going to be specific to its wording.
Building new in Aotearoa
Get in touch with our team of mortgage brokers and make the most of our expertise and advice. We can put you in touch with the right people whose skill, integrity and quality of communication will help determine a positive new-build experience.
**These are general guidelines and are by no means a reflection of bank or lending policies