Getting the right builder is a critical success factor. If you make your selection because of price alone, then you run the risk of being disappointed. Check references. Check the contract, plans and specifications carefully, ensuring your builder is being honest with you.
All too often finance is an afterthought. If you spend most of your time finding a section and a builder, and not the right finance, building can be disastrous.
Each bank has different types of construction loans, with different rules and terms; they are NOT all the same construction loan. Their lending criteria also differ quite dramatically, so just because your bank says no, does not mean you can't build. And if they say yes, it does not mean they are providing a safe, managed path to a completed home.
Traditional construction loans leave you at risk of becoming the “meat in the sandwich” between your builder and your bank. You will sign legally binding agreements with both parties, but in most instances they will be in conflict with each other – and you will always lose. The bank always wins, but your builder has control of the project and this is an awful situation in which to find yourself. It is very stressful when your builder walks off the job because your bank has promised to pay different amounts at different times in conflict with the builder’s contract.
The key point is align the build contract and the bank’s terms before you start.
It’s easy to run out of money during construction. There are several reasons why this might happen, but they can all be overcome:
You may have to pay rent and construction loan interest at the same time. This is one of the biggest causes of stress and can be overcome using the” Turn Key” finance option.
Having too many items excluded from your contract. If you want to do some of the work yourself (driveways, retaining walls, landscape, and the list goes on) you must either hold back some of your deposit from the bank or you need to find a way to include these costs in your finance
Your builder may have omitted items that you thought were included, or the PC sums were not accurate.
While it is impossible to know for sure if everything is covered, you can take sound steps to protect yourself, ensuring that the contract price does not move drastically and that you have sufficient funding to ensure you can complete your home.
Ensuring your builder offers a fixed price contract is an important tool to ensuring you stay within your budget. Avoid or minimise PC sums (Provisional Costs). PC Sums are where you and/or your builder agree to NOT fix a part of your contract. Typical PC sums may include earthworks, kitchen, floor coverings, driveways and landscaping. Where you agree to NOT fix an item, you should at the very least be sure the price agreed as an estimate is accurate, within reasonable expectations.
This is one of those areas where a builder may reduce the perceived cost of the home, but you could end up paying more than you budgeted. We often joke that you are assured of having an honest builder…sometimes at the start of your project, and sometimes at the end. You are better to contract a builder you trust is giving you a fair and accurate price at the start – even if it appears higher than another builder – than to risk your price will increase due to blow-outs on your PC sums, or omissions to your contract, plans or specifications. PC sums should be accurately quoted in advance and should not deviate more than 10% from those estimated
We have answered most of this already, but an important part of your contract, possibly the most important, are your plans and specifications. Your contract is simply a promise to deliver what is in your plans and specifications. So before you sign your contract:
In nearly all instances your bank’s loan conditions (especially the progress payments) will conflict with your building contract. Banks have certain rules around how much they will advance against a section, or how much money they allow as deposit, to how much they are willing to pay for a progress claim. And in some instances, they can even stop making payments if they are not satisfied. So while your bank may win the battle between any conflict between your build contract and the loan contract - the client almost always loses.
At this point you have two legally binding agreements – with potential for serious conflict. To help avoid this conflict we encourages you to ensure three clauses are added to your build contract – even if you choose another bank.
Builders are more likely to negotiate with you in advance to secure the contract than they are once you have signed your contract, so take the time to get the contract that works for you. Don't be afraid to get seek appropriate legal advice.
A) For turnkey financing the main banks are all comfortable with financing new builds through this format. However for a fixed price build or labour only build give us a call and we will let you know our view on things!
A) Without a doubt definitely a turnkey build. A turnkey contract only allows for minimal ‘PC Sum’ (non-fixed) costs, meaning that the costs shouldn’t blow out once construction is underway.
This contract is exempt from RBNZ (Reserve Bank of NZ) rules. That means you don’t need a 20% deposit - a 10% deposit (20% for investment properties) is required for turn key contracts, and some banks may even stretch to allow 5% in special circumstances, making this an attractive option for those with good income but less savings.
A) Fixed price contracts help you avoid nasty financial surprises. Often a labour-only contract looks attractive at the start. But you are reliant on the builder’s estimate of time and a blowout in time results in a blowout in costs. A labour-only contract requires you to have at least 40% deposit.
We recommend a fixed price build contract (FPBC). ‘Fixed price’ contracts predetermine the total cost so you are not caught by surprise. Ensuring your builder offers a fixed price contract is an important tool to ensuring you stay within your budget.