Buying off the plans or purchasing a newly built home in New Zealand is sometimes described as “risky”. In today's difficult property market, buyers may face risks including builders and developers going bust, projects being cancelled, bank pre-approvals expiring and contractual pitfalls. With luck, none of these problems will arise, but even a single issue could overwhelm a buyer's finances and embroil them in endless disputes.
New homes do, in fact, offer many advantages, including lower deposit requirements, larger First Home Grants for first-home buyers and exemptions from interest deductibility rules for investors. For those of us in the Chinese community, buying a new home is also a particular preference.
Difficult conditions in the construction industry have made buying a new home riskier, but buyers can take steps to protect themselves if problems arise. If you are considering buying a new home, be sure to keep the following points in mind.
Do your homework
Consumer NZ investigative team leader Rebecca Styles said the extent to which buyers can protect themselves depends on how much preparation they undertake and how they go about it.
“It sounds simple, but it isn't. Buyers need to carry out thorough due diligence, find a good lawyer and be very careful when choosing a developer or builder.” This means investigating the developer as well as understanding the property and the deal on offer.
Mark Honeybone, a director at Harcourts who specialises in new homes, said buyers should closely examine the developer's or building company's track record.
“Look at their reputation, their history and their directors' histories. Find out about buildings they have completed before, learn as much as possible about their finances and establish where their funding comes from. Don't simply take someone else's word for it. If you feel uneasy about the developer after doing your research, trust your instincts.”
He said choosing a large, established brand was often worthwhile, particularly for standalone homes. “A larger company may cost a little more than a smaller one, but you can recoup that through timely completion, because these larger companies are less likely to face the same delays and pressures.”
Seek specialist legal advice
Most buyers consult a lawyer, but choosing one with expertise in the relevant area of law can make a substantial difference.
Kristine King of DK Law said new-home purchases encompass newly built homes, off-the-plan homes and full building contracts. The advice differs for each option and should be tailored to the circumstances.
For newly built homes, buyers should obtain a building inspection however new the home looks, because problems are more common than most people realise. When buying off the plans, buyers should include a pre-settlement inspection clause in the sale and purchase agreement and require the developer to remedy any defects before settlement.
“When purchasing under a full building contract, buyers need to review the contract carefully with their lawyer. It must be in writing and is very detailed.
“They need to understand what they are buying, what will happen, the terminology involved, such as ‘final payment on practical completion’, and what it means. Their lawyer can explain these things and help them negotiate.”
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She said sunset clauses in contracts are crucial, but must protect buyers as well as developers. “There are provisions in the Resource Management Act that come into play. One gives buyers a 14-day cooling-off period after signing an agreement. Another allows buyers to cancel the agreement if the developer has not made ‘reasonable progress’ on construction two years after resource consent was granted or one year after the agreement was signed, whichever is later.”
King said the “reasonable progress” requirement also prevents developers from doing nothing for years while leaving buyers exposed to risk.
Negotiate the financial terms
Mortgages Online director Hamish Patel said buyers should ask during negotiations for their deposit to be held in a solicitor's trust account until construction is complete.
“We have been pushing for this, because buyers may be at risk if their deposit is not protected. Some developers may not like the clause, but most are currently willing to negotiate.”
He said another key point to discuss was payment on completion, as developers usually wanted settlement within five days of the code compliance certificate being issued. “If you have waited two years and are then suddenly told to pay in a week, that is a little unreasonable. Developers won't budge on this, and there will be penalties if you cannot pay on time.
“So when negotiating the contract, ask for a settlement period of 10 or 15 days, because you need some time to arrange interest rates and resolve any issues. In the current market, everything is negotiable, and these requests are not unreasonable.”
Consider a fixed-price contract
Construction prices have soared in recent years, making fixed-price building contracts less common. However, some companies still offer them, providing greater price transparency without charging more during construction as costs rise.
Signature Homes is among the companies offering fixed-price home builds. Its chief executive, Paul Bull, said working with long-standing suppliers allowed the company to forecast future prices. This enabled it to lock in prices and material orders in advance, then work with buyers on that basis to give them confidence in the final price.
“We slow down the sales process to ensure everyone truly understands the building process and the expectations surrounding it. Buyers often cannot grasp how complex the process is, but they are entitled to feel confident about their site, specifications and team, and to understand the price they have agreed to.”
Invest in a building guarantee
Consumer NZ investigative team leader Rebecca Styles said that, given the scale of investment involved in a new home, consumer protection was fairly limited and there was room for improvement. One thing consumers could do, however, was obtain a building guarantee if possible.
“You may find these guarantees offer less than you expect, but having a guarantee and insurance gives you some protection if things go wrong,” she said.
Master Builders chief executive David Kelly said its 10-year guarantee, available only through Registered Master Builders, included provisions protecting buyers if their builder became insolvent. The organisation's guarantee was the longest-established in the country, and demand had risen substantially in recent years. One reason was that banks wanted borrowers to have this type of guarantee. Another was growing consumer recognition of its value.
Kelly said these guarantees had traditionally covered standalone homes. Although the organisation now also offered guarantees for multi-unit housing, the insolvency provisions did not apply to those homes because of their different risk profile.
“Under the Building Act, builders must offer consumers a guarantee, but it is up to consumers to decide whether they want one. If they do, the builder should submit an application.”
Some building companies, such as Signature Homes and Golden Homes, offer guarantees to remedy defects or complete the work, while NZ Certified Builders offers a 10-year guarantee similar to an insurance policy.
Overall, buying a new home carries some risk, but buyers can take steps to protect themselves. These include doing thorough preparation, choosing a reputable developer, obtaining specialist legal advice, negotiating financial terms, choosing a fixed-price contract and investing in a building guarantee. These steps can reduce the risks of buying a new home and ensure the investment has a degree of protection.