Why Should You Build?
By Ian Webb, Newbuild Home Finance Ltd
This might seem like an easy question to answer? But for many itís "why would you ever build?"
Given the choice between buying a used home that could be someoneís leaky legacy, or building a brand new home tailored to your personal needs, the choice seems so obvious. So why is it that most elect to buy a used home that just does not quite fit?
There are numerous reasons why purchasers elect not to build, even though the end result would be a far better solution. But overcoming the pitfalls is surprisingly simple.
Let me cover a few reasons purchasers decide not to build:
We live in a "I want it now" world. I get that, I have kids. But surely such an important and life changing decision, one that could have a very positive impact on a purchaserís financial welfare, health and lifestyle should not be rushed.
Interestingly, most of our clients are quite happy to go through a more intensive process and enjoy the reward of building, but the main reason many donít start this journey has more to do with how they can afford (or not afford) this process, given most will be paying rent or a mortgage while paying a progress payment loan. For most this process is unaffordable.
We also live in new era of overly cautious lending by banks. Thatís likely to remain for some time to come. So for many, securing finance that will get the home completed, having sufficient deposit or equity in todayís tougher credit market, or being able to service the overlap period all impact on the ability to build. So going to the bank for a construction loan often puts an end to the dream of building.
Too many will purchase existing stock because they want the immediate capital gain. What many do not appreciate is that when existing houses appreciate in value over time, they are only gaining the inflation rate (i.e., in NZ, house prices have traditionally doubled every 7-10 years. This doubling is not capital gain, but rather house inflation as the rest of the market is moving at the same pace).
Imagine inflation running at 3% and you have $100,000 to invest, but your bank manager offers you 3%. You likely would not find that acceptable, so why do many accept an inflation return on real estate? Many find that when they sell up in ten or 20 years time that they have not really gained much, if any, equity - but have just kept up with the market
The eight or so years before the global recession hit saw massive, over-inflated house prices. The markets have corrected and are
now much more subdued. Getting capital gain from real estate is likely to be much harder in future. In my opinion, thatís all the more reason that you look for real estate that provides better capital gain than used houses.
Building still holds that reputation when you build the right home in the right location at the right price.
For too many, the uncertainty of the building process turns many away from the golden opportunity to get ahead. There are nightmare stories about poor workmanship, price blow outs, delays and difficult builders. These can still happen, but with some homework can be overcome.
As a purchaser you can make your entire process run smoother and you can get the right results. Do your homework and do not take shortcuts. We often select our builder on price, and yet we choose quality as our main priority. These are often not completely compatible. I often remind my clients that "you are absolutely assured to get an honest builder...sometimes at contract, and sometimes on completion. When would you like your builder to be honest with you? "
An important decision is selecting a builder you know you can trust to build your home to your budget, on time and to your quality expectations. Letís add to that a promise by your builder to communicate regularly, even when mistakes happen.
Another key decision is one that we actually donít give a second thought to. Selecting a construction loan that will get you to a completed home, that is hassle free and well managed is critical. Purchasers often elect to use their regular bank, assuming all construction loans are alike. Untrue. In fact, poor lending decisions (even if the purchaser knows it should be approved but it is not) many prevent a purchaser from getting a loan, or it can be so poorly structured that it adds cost and stress.
Financial issues seem to be the real reason why building is so stressful. But it does not need to be. A well planned and managed construction loan can make the entire process enjoyable, or at least make it less stressful, and now you can move forward and build your dream.
In summary, building will often generate a better capital return, even if it requires a bit more effort. Do your homework and do not choose a builder solely on price. And lastly, get the right construction finance to ensure building becomes more than a dream.
Ian Webb has been instrumental in designing residential construction finance solutions for almost 20 years. Newbuild criteria and lending is through Sovereign Home Loans, part of the ASB Bank Group.