ValGroup Bulletin

In this issue:

Autumn 2010

Property: Be Assured, Get Insured
Wellington Market Report
What's a Builder's Guarantee Worth?
New Building Process and Completion Reports
New Zealand Property Commentary

New Building Process and Completion Reports

Building contracts usually include a payment schedule that requires progress payments to be made at various stages of the project, such as when the building is closed in or when the roof is on. The question is - how much should be paid and at what stage?

If the contracted payments are too high at the start, relative to the work completed, this favours the builder and puts the owner at risk, whereas too little makes it difficult for the builder to meet his commitments.

For the owner there is often a need to obtain funding for the progress payments and the lender will want to know the project has progressed sufficiently to advance more money. When progress payments are due it is normal for the valuer to be asked to advise on the extent of the work completed. We report on the value of the work that has been put in place and the overall progress with the building (the percentage complete) based on the value of the house (rather than the construction cost).

In light of the recent decline in property prices, lenders are now asking for full valuation reports at the end of the project. For some borrowers it could mean that the value at the start of the project was higher than it will be upon completion.

When a new home owner may already be funding the best part of $200,000 for the land, funding building progress payments is important. This new trend raises an interesting point. If the value is less than expected, will the bank change the sum it contracted to lend? This would possibly increase the financial pressure on the owner, but it could also be in breach of the loan agreement.

Our suggestion to new home builders, lenders, banks and builders is that agreement by all parties is reached on when the progress payments are to be made, how they are funded and the documentation required, before the building contract is completed. This could save considerable angst in the building process and make it clear to all involved what will happen when.

Contact a ValGroup member if you need assistance with these aspects early on in the process to ensure all payments and values are appropriate for the project and agreements for loans and building contracts.