Building a home is certainly an exciting process, but for most of us it’s not something we do all the time and there are pitfalls for the unprepared.
When you have a mortgage for building, often the bank will involve a valuer both before construction and during the process to protect their interests. They will value the house off plans initially so the bank can weigh up cost versus value (they are not the same thing). During the build phase, they will also inspect periodically to make sure the project is advancing as intended and advise the bank how much more money they can advance by way of progress payments.
The same issues come up again and again, so here’s the main ones I’ve seen clients face with bank valuations when building...
#1 - THE BUILDING CONTRACT IS FRONT LOADED
Building contracts often require you to make progress payments to the builder at certain stages along the way...for example slab down, frames up, exterior closed in. Ideally as they build more of your house, you pay them more money. Unfortunately a lot of building contracts heavily load the early stages – whereby you can easily end up paying 80% of the total costs - but only have half a house. Banks really don’t like this. Their concern is if the builder were to go under, or run away with the money (or you do) there simply isn’t enough money left over in the mortgage facility to finish the house.
You can find yourself squeezed between the builder and your bank – on the one hand you have contracted with the builder to make certain payments – on the other hand the bank won’t give you any more money because you’re over exposed.
# 2 – RELOCATED HOUSES
A major issues arises when a house is being relocated to site, but is not yet on piles. Houses only have value for a mortgage once they are tied down onto foundations – so while a house can be relocated onto site, if it is still sitting on skids we cannot include it in a valuation. It is essentially a chattel at this point and has no mortgage value. You really need to have the bank on side with these projects as to how you are going to fund the deposit and progress payments to house moving companies – as you can really only borrow against the land value until the house is on site and tied down.
# 3 – PRE-PURCHASING MATERIALS
This follows on from the last point – any item that is on site but not yet fixed to the land does not count for a mortgage valuation. I know it’s tempting if you see a packet of GIB board on sale or a cheap kitchen deal so you buy it early and store it in the garage ready for later. All well and good – but we can’t include it in the progress payment valuation and if money is tight you could hit a stumbling block later on in the building project.
#4 – COST vs VALUE
People often mistakenly believe that cost and value are the same thing. It all comes down to whether the end user sees value in the item you are creating and your ability to negotiate well on price. So just because you bought the land for X and are spending Y on the build – do not assume that the overall value is the two added together. In a bullish market it could be worth much more; while in a quiet market or if you’ve overcapitalised, it could be worth much less.
So those are my top property valuation issues clients face when building. My advice to cover these off is:
Review the building contract thoroughly with your lawyer and bank. Ask how many progress valuations the bank will require during the build and check with your valuer whether the progress payment schedule broadly aligns with their understanding of staged added value.
If relocating a house, check that the bank will support you through to at least the point where the house is on piles – based solely on the land as security.
Do not pre-purchase materials unless you are well funded and confident you can make progress payments as they fall due. The valuer will not attribute any value to them if not secured into place.
For a traditional home in an established location, you may have a reasonably accurate understanding of your home’s value once complete. And with a fixed price build contract you are probably fairly safe from a cost / value perspective. If however you are building a ‘one off’ design home with no fixed price contract, or you keep amended the plans, or it in an outlying location where values are more uncertain – the project can quickly end up costing more than it adds in value to the site. Best to talk to a valuer once you have confirmed the design and costings to minimise these issues up front.
I hope this helps save you some of the stress and costly mistakes others have learned when building. Of course if you have any questions about the valuation process while building I would welcome your email.