When new builds go bad

When new builds go bad

Like all reputable property investment advisors, I’m sick and tired of unscrupulous operators fleecing money from decent people looking to build a real estate portfolio.

Property as an investment vehicle has so much going for it, but when an industry deals in transactions amounting to hundreds of thousands of dollars, it can, unfortunately, attract the worst type of sharks prowling for quick cash.

This is why I’m on the national board of the Property Industry Professionals of Australia (PIPA). We’re an industry group keen on bringing regulation to our industry so as to wave ‘good riddance’ to despicable practices.

My investment specialty is in the new-build space – a sector with so much wealth-building potential. Sadly, it’s also a property type that cops more than its fair share of bad reviews – and many of the problems stem from unsuspecting buyers being hoodwinked by unqualified spruikers selling lousy investment options at inflated prices.

However, sunlight is the best disinfectant. In an effort to help educate investors on what to look for in a transaction, I’m shining a light on how things can go wrong via a real-life example.

A friend in need

There are times when your professional and personal lives crossover, and you can help bring a happy result to a potentially dire situation.

A friend of mine wanted to grow her property portfolio and, after attending a seminar, found herself signed up to buy an off-the-plan, three-bedroom townhouse in a Melbourne suburb which, she was told, offered ‘excellent growth potential’.

She was fairly happy with her purchase but, knowing that new-build investment was my area of speciality, asked me to look over the deal.

It looked like a typical proposition on the surface, but once I started digging a bit deeper, the cracks began to show.

Firstly, the construction itself didn’t fill me with confidence. It was a cookie-cutter design – identical to multiple other townhouses within the complex, all of which were being made available to tenants. Not only did it mirror those within her development, there were plenty of other developments in the area set to suck up all the tenant demand with similar accommodation options.

In addition – ‘three-bedrooms’ was a loose description. With the third bedroom measuring closer to 2.5 metres x 2.5 metres, it was little more than a glorified study.

The finish was also dubious… in fact, it was a ‘house of straw’. This project definitely wasn’t under the watchful eye of a local builder with a great reputation for high-spec finishes. The development was being handled by an inexperienced small development company who was obviously minimising the specification to boost the margin.

Tell-tale signs included items such as 75-millimetre cladding, poor quality appliances, unfriendly room layout, no window furnishing, lack of security screen and bottom of the range tiles and carpets. It was the sort of fixtures and fittings list that would never stand up to the rigours of a tenancy. Repairs and maintenance were certain to kick in soon after completion and be an ongoing headache for the owner.

Next up was the position. While private street access to a townhouse is great, having frontage to a very busy road makes for a dodgy proposition. You’d be risking an accident every time you tried to leave your driveway, and safety for a family with small kids would be a real concern. Those sorts of downsides won’t appeal either to tenants or to another buyer a few years down the track when it comes time to exit from the holding.

To make matters worse – there was no double glazing. This coupled with its poorly-insulated finish would mean noise from passing vehicles would sound like a traffic jam in your lounge room.

Next were contract terms designed to screw over the buyer and protect the builder. For example, once the build had reached the ‘compliance’ stage, the buyer was obligated to settle – even if there was a dispute about completion! Forget a warranty on workmanship, or arguments about what is or isn’t finished, you were contracted to pay up as soon as the box on compliance was ticked.

Then there was the matter of pricing. I ran the comparables and can confidently say that, based on the specifications sheet and plans, the figure was an estimated at $80,000 -$100,000 above market on both build cost and end value. I spotted where the extra money was going to straight away – inflated commissions being paid to the marketing agent and the developer’s pockets.

Completion time would also have been an issue in hindsight. During signup, my friend was told the build would be finished by Christmas 2018 – but I drove past in August 2019 and it’s still wasn’t anywhere near completion.

A positive ending

This was, in short, one of the worst investment options I and my team have ever come across. Fortunately, by seeking our advice straight after contracting, we were able to apply the force of legislation and help my family friend extricate herself from the deal and get her deposit refunded.

With that in hand, we assisted her in purchasing a three-bedroom, two-and-a-half-bathroom, newly-built detached home on Queensland’s Sunshine Coast – one of the most impressive growth markets in the country. The property is designed to appeal to the local demographic and is of a spec I’d be proud to own.

For her $430,000 purchase price, she’s also receiving a five per cent gross rental return plus the tax-depreciation benefits of new construction.

The morale is this – tread warily and seek advice from people who are experienced in this type of investment. There’s a bright future for those who rely on independent professional guidance during their investment decisions. Speak with an ASPIRE Property Advisor Network Advisor that are PIPA members, licensed, qualified and insured. 1300 710 933

https://www.linkedin.com/pulse/when-new-builds-go-bad-richard-crabb/

 

Richard Crabb | MD ASPIRE Network | PIPA Board Member
Author: Richard Crabb | MD ASPIRE Network | PIPA Board Member

QPIA® - Qualified Property Investment Advisor | Licensed Real Estate Agent - VIC: 082760L - SA: RLA 292544 - QLD: 3579879 |Diploma of Financial Planning |Active Property Investor | Board member of PIPA - Property Investment Professionals of Australia. Richard is the Founder and Managing Director of the ASPIRE Advisor Network. After an extensive career in corporate finance and through his personal investing experience, Richard identified the need to create a system and framework that supports ethical, independent property investment advisors who operate in the new property market. The ASPIRE Advisor Network now supports independent property advisors across Australia by providing their business engine and acquisition process, designed around concepts of future compliance in the brand new property sector. Richard together with the ASPIRE team has also developed a complete end to end software platform, which is leading the way to deliver property investment advice in the new property space. Our goal is to work with investors to implement their goals and objectives buying investment properties across Australia, utilising a structure and information-rich end to end experience.

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