What do I do to make sure I don't buy a property from a broke developer?

As part of your due diligence, you’ll investigate the developer. You’ll use this time to make sure they’re reliable and can finance the project they are pitching.

If your developer has good funding from a reputable lender like a bank, it’s a positive sign.

Be scrupulous about your research. Being “not bankrupt” is not a sufficient “green light”. You need to know if this developer could cope if there was a 20% increase in the overall cost of the build.

You should look for someone who has:

• Previous experience
• Good industry reputation
• A team of support staff and industry contacts.

If you want a recommendation, here is our list of the top 5 developers you’ve never heard of.

But, this is also why many investors opt to use a property investment company like Opes Partners.

#3 The build takes way longer than expected (build delays)

One of the big concerns for investors is build delays. They ask themselves “What happens if construction takes longer than expected?”

While this is a common concern, it’s probably one of the smaller worries an investor should have. After all, what’s the issue?

As long as the developer isn’t delaying construction to trigger a sunset clause, there’s no real issue.

Your price stays the same (for turnkey properties). When the property finishes you generally pay the same price.

We often joke that ideally, a build would take 15 years.

This is because you get all the benefits of the property increasing in value ... without having tenants or having to take on a full mortgage.

What do I do to prevent build delays?

There’s not a lot you can do, save picking up a hammer and getting stuck in on a construction site (we’re kidding … don’t do that).

But you can opt to buy a property that is already finished or part-way through construction.

Some New Builds take 18+ months to complete.

But for others you may be able to buy it when the property is <3 months from completion.

This will decrease the risk of build delays.

#4 The bank won’t lend you the money to buy the property

Sometimes investors will buy a property off-the-plans and get a pre-approval.

But that bank approval may only last 6 months. What happens if your New Builds takes 12 months to be built?

After the first 6 months you have to reapply to the bank to get the money.

So there is a risk (in some situations) that once it comes time to pay the money, the bank won’t lend to you.

That usually happens when interest rates go up, and banks change their lending rules.

How do I make sure the bank still lends me the money?

The first step is to work with a good mortgage broker.

First, they will give you an indication of whether you can manage this risk. In other words, they’ll tell you whether you are likely to get re-approved in the future.

But you can also help yourself by keeping your financial situation the same during the build.

The bank would say yes to many investors, but New Builds buys shoot themselves in the foot when they:

- Take out extra credit cards during the build

- have a(nother) child during the build (without talking to the mortgage broker

- buy a holiday home;

- buy a car on finance.

At this point, the bank may not think you can afford the property and the extra commitments you’ve taken on.

A good mortgage broker should check in with you regularly.

They’ll be making sure nothing has changed and you are still on track to get the lending when the time comes.

The alternative is to buy a property where the construction timeline is shorter.

If there are only 6 months left in the build you might feel better going ahead with the investment.

#5 It’s hard to find a tenant once you pay for the property

Once you pay for the property, and pay for the mortgage, you want to find a tenant. Fast.

After all, most investors can’t afford to pay two mortgages.

But as you roll towards settlement, you may find your property competing with others. Especially, if there were a lot of properties in the same development.

Let's say, you buy a property in a development of 9. There are potentially 8 other properties trying to find a tenant at the same time. That’s usually not a problem.

But if you buy in a development of 100 … it can be a real headache. All of a sudden there are potentially 99 other investors looking for a tenant at the same time.

What do I do to find a tenant quickly?

The good news is rentals are often in high demand. So, this doesn’t always happen.

Larger developments are also usually built in stages.

So while there may be 100 properties in the development, perhaps only 30 look for a tenant at the same time. This limits the number of fellow investors you’re competing against.

Another key consideration is buying in a development where owner-occupiers can buy.

Let’s say you buy a property in a development that has 30 properties finishing at the same time. If half are owned by owner-occupiers, then you’re only competing with 14 other investors. That’s more manageable.

There are also two other things you can do.

1. Differentiate property 

First, you can choose a unit that has something unique about it. 

For instance, you might purchase one that has two car parks. This will be more desirable than those in the development that only have one. 

If buying a townhouse you could buy a property on the end of a block. That way the tenant only has a neighbour on one side rather than on both. 

These small things give the tenant a reason to rent your property vs others in the project. 

Another option is to add extra features like a washing machine, fridge and dryer. 

2. Budget for more vacancy 

Ideally, you would pay for a property on a Friday and the tenants move in on Saturday. 

That sometimes happens if you start advertising the property 2-3 weeks before settlement. 

But it doesn’t always happen. It depends on whether the developer is willing to give the property manager early access. 

That's why many property investors will budget for up to 4 weeks of vacancy when they first settle on a property. That's true both for new builds and existing properties.

#6 There is an issue with how the developer built the property

With a New Build, you generally can’t walk through the property before buying it. That comes with a risk.

You run the risk that the developer doesn’t build what they say they will.

What if the materials and appliances end up being a different brand? What if the bathroom mirror hasn’t been installed quite right? What if the paintwork is shoddy and the hot water cylinder doesn't work?

Working with a good developer will protect you from this risk to an extent. … but sometimes things still go wrong.

What do I do to make sure the property is good quality?

The best thing you can do is hire a building inspector. They will thoroughly check the property before you pay the money for the property.

They’ll do so much more than just rock up to your property, check it's built, and calling it a day.

They will be able to check the entire property and catch anything that is not quite right.

This costs money – generally about $700 – $1,000.

But you’re paying $550,000 – $1.1 million for an investment property. It’s worth checking to make sure it is right.

Once they’ve gone through the property they will put notes and painter's tape all over the place.

This is to tell the developer what they need to fix.

They will also send a full builders report to the developer. This will show what needs to be fixed before settlement.

#7 The price of the property drops during construction

Finally, there is one of the biggest concerns of all.

What happens if you sign up to buy a property for $800k, but the value of the property drops while it is being built? This has happened to many investors over the last 18 months.

But it has also happened before. In fact, in 2008 this happened to Opes Partners Managing Director Andrew Nicol.

He signed up to buy a property in Rangiora, Canterbury in 2007. He agreed to pay $390,000. But by the time the property was built, it was only worth $370,000. He bought at the peak of the market.

What’s the issue with this? It’s not that the property was a bad investment. After all, today the property is worth $780,000.

The issue is that he had to come up with more money as a deposit.

Usually, the bank would lend him 80% of the value of the property. When the property was worth $390k, they'd lend him $312,000 and he'd put in $78,000 as a deposit.

But once the property had gone down in value, they’d only lend him 80% of $370,000. That’s $296,000.

Because Andrew still had to pay the developer the full $390k, he now had to put in a deposit of $94k, rather than $78k.

That’s an extra $16k he had to find.

Now, in the end, it worked out for him, and the property has made him over 24x that amount over the last 14 years. So for him, the risk worked out.

What do I do to avoid this?

If the market drops the only thing you can do is hold your nerve. Generally, it’s best not to panic-sell because you will “crystallise your losses”.

A better strategy is to continue holding the property so that its price can recover.

The real question is how you come up with the extra money. The answer will be different for different people. But could include:

1. Using your own house as the deposit

2. Taking out a personal loan

3. Using any savings you have.

4. Using one of these ways to get out of a new build contract

Should I really invest in New Builds with all these risks?

Phew, we hear you – that’s really a lot of things that can go wrong.

And you may be thinking: “If Opes recommends New Build investment properties … why are they telling me all these issues and risks?”

It’s because when you buy a New Build you are going to spend a lot of money. It’s also likely that you’ll take on a lot of debt.

But it’s important to us that you not only understand the different risks – but what to do about them.

That means that you’ll have the confidence to make an informed decision.

Because then when things do go wrong, you’ll have the game plan for how to fix them.

This article is about helping you become a more informed investor.