Property Hub - Investment Insights & Inspiration - Realty Talk: Builders Going Broke and the Options + High Offers

Episode Date: May 12, 2023

This week’s show focuses on builder’s going broke and what you can and need to do about it. Over 2 dozen major construction companies have gone under in the last year, so Money Magnet author Steve McKnight looks at what’s causing this and what this means to you. Bushy Martin explains what you can and need to do to protect yourself and minimize the pain if your builder is going bust. Kevin Turner continues our special series on the art of negotiation where he talks to Buyers Agent Cate Bakos about making high offers and whether this is the best way to get to the top of the offer pile. RealtyTalk is part of the Property Hub podcast channel, your home for property investment insights, inspiration, and stories from Australia’s top property experts, investors, leaders, and analysts. Subscribe now to get every RealtyTalk episode delivered to you each week for free, and also get full access to Get Invested, the leading podcast for Australians who want to unlock their full ‘self, health, and wealth’ potential and get inspired by the stories of investors, founders, and entrepreneurs. Subscribe to RealtyTalk on the Property Hub channel: Apple Podcasts | Spotify | Google Podcasts | Email Property Hub is a collaboration between Bushy Martin from KnowHow Property, Kevin Turner from Realty, Andrew Montesi from Apiro Marketing and Apiro Media, and Australia’s largest independent podcast network DM Media. Business and partnership enquiries: [e-mail] omnystudio.com/listener for privacy information.

Welcome to Realty Talk, the show that brings together the country's most authoritative and respected property experts. Follow us on all the socials and subscribe for updates and exclusive offers. Realty Talk is powered by realty.com.au, connecting buyers, sellers and agents differently. Welcome to this week's Realty Talk show, your property hub's go-to place for property investment insights, inspirational stories from Australia's top property experts, leaders and analysts. I'm Bushy Martin from KnowHow Property Finance, and this week's show focuses on builders going broke and what you can and need to do about it if you're building and you're unfortunately caught in the crossfire.

Money Magnet Prize author Steve McKnight kicks things off by unpacking what's causing the deluge of builders going broke, what this means to you, and what needs to change to avoid this happening in the future. I then dig into what you can and need to do to protect yourself and minimise the pain if your builder's suspected of going broke. And to round out the show, my partner in crime, Kevin Turner, continues our special series on the art of negotiation.

And this week, he talks to Buyer's Agent Kate Bacos about making high offers and whether this is actually the best way to get to the top of the offer pile. And before we get underway, make sure you hit the subscribe button now, wherever you're listening to or watching the show, to ensure that we continue to attract

the industry's best of the best so that you can enjoy leading edge information. And if you'd like a free copy of my award-winning book, Get Invested, make sure you also sign up on the realty.com.au homepage. We've got stacks to unpack, so let's get underway. Successful property investment is a game of finance. Do you have the right team and the right game plan?

Realty Talk is brought to you by Know How Property. More than mortgage brokers, Bushy Martin and his team of investment architects set you up with a sustainable strategy structured to lower your costs, tax, risk and stress while increasing your capacity for growth. Know-how has helped over 1,900 homeowners and investors secure more than $800 million in property wealth. So get set to live more, work less and live your legacy. Want to know how to invest in your freedom? Visit knowhowproperty.com.au. While the country continues to experience a growing national housing shortage,

it's fair to assume that the construction industry is in serious trouble. As the perfect storm of colliding and conflicting dynamics that are causing devastating headaches and havoc, the whole building sector as a whole continue. Now, according to a recent story in the ABC, four major construction companies have already folded this year, adding to the destruction left by at least 20 major building companies that went under last year. So to unpack what's all behind this, what it means and what you need to be doing about it,

we're joined again by Steve McKnight, the author of the current best-selling book Money Magnet and he's also a highly acclaimed and respected investor and philanthropist. So welcome back again to the show, Steve. Great to be with you, Bushy, and hi everyone. Always good to have you on the show, mate. Now, sort of digging into the guts of this subject, it feels like a week doesn't pass at the moment without hearing about another building company failure. So from your perspective, what's behind it and what's causing it? A systemic failure of law and poor business practices rolled into one is what I would say.

So builders going broke isn't anything new. Same as developers going broke. It's almost a sign of the time of the economic cycle. And typically it is a function of taking on too much work and committing the cardinal accounting sin of paying today's expenses out of tomorrow's income. So what does that mean? That means someone comes along and pays their deposit

for a new home today and you use that money to pay yesterday's building costs. so it's all fine so long as you continue to get new clients coming in the door but like a ponzi scheme the second the new money runs out and all these old bills have to be paid and and there isn't any cash flow and you can't refinance as liquidity's dried up and it's harder to get loans then you topple over and you go bust and that's what's happened builders work on the basis of paper thin margins fixed price building contracts so they were happy to sign these things up because they thought how good's this I've got a future customer I get some cash flow in the door now

but then they were squeezed when their cost of construction went up and they didn't have any way of recovering it because as I mentioned the building price was fixed and so they can run a number of projects at a loss but sooner or later they go broke and that's what appears to have happened with Porter Davis which is the the latest of a of a number of companies that have folded and that's a great pity because there's a real problem with trusting builders now someone coming in how do I know you're not going to go broke and like anything where confidence is lost it means that consumers will be wary which is another reason why homes won't be getting built which adds to the problem of a housing supply and with increased immigration and other factors

putting price or putting pressure on demand this is going to cause a bit of a problem through the building industry. Yeah I think it's a long way from coming out of the woods and you probably know more about this than I do but my understanding is that the legislation was actually changed around bankruptcy at the beginning of COVID, which has allowed a lot of contractors to actually trade while they're insolvent. Because if the pre-existing rules were in place pre-COVID, there'd be a lot more that would be in a bankrupt position

than they're currently being reported. So I think we're in some pretty interesting times there. So if we sort of fold that out in terms of its impact, Steve, who's going to be at risk? well obviously the people who've signed building contracts that don't have their houses complete and i read today that there are some poor souls that may have lost all their deposit because in porter davis's case they hadn't got around to doing insurance until they started the build so if you paid a deposit on signing of the contract but they hadn't got around to getting permits at

that stage you were effectively driving while uninsured and if you have an accident then it's on you so these people might become unsecured creditors of a defunct business which means that basically lost their deposit then of course there are people with houses at different stages of completion and even read a story of suspicious burning down of one house now why would someone do that why would someone break into a house and burn it down or break in and scratch into the doors or turn the taps on and it's because these people have acted in good faith these tradies have acted in good faith have spent their own time and spent their own money buying supplies and put an invoice to porter davis and porter davis isn't going to pay them now and they've got to feed

their families and they've got to pay their mortgages and they may go broke and so they're angry and obviously it's not the right thing to do to break into someone's half-completed house it's not necessarily their fault they're a loser in this as well but they're angry and so they get in there and do this because they need to vent or they want to vent and they've made a financial loss as well. And then that trickles down to people taking on apprentices, people being, as I said, able to afford their own mortgage and then ultimately in economic decline for the whole economy. And it also means that people will put their prices up because there's more risk. So the cost of construction is going to go up, feeds into inflation and more upwards pressure on interest

rates again. So it's not good. There's a loss of confidence in the sector, which will ultimately feed into higher prices. That's when you boil it all down. Yeah, spot on. So what can and should people be doing about it then, Steve? Well, if you are a customer of one of these places that's gone broke, you need to get some legal advice and to understand what your rights and obligations are you may be protected by some government insurance policies hopefully you are but you'll need to move ahead and lodge a claim no one's going to do it on your behalf you need to take action there and make sure you're at the front of the queue lest you be at the back of the queue or not in the queue at all and then what about people who are contractors well try and

quarantine your loss you may have lost money but you've got to look at your business viability overall and say, right, this has happened. What position am I in? How am I going to trade through this? Or if you are in some sort of financial dire situation to put your hand up and get help, go and see your accountant, call some financial counselling hotlines as needs be. You'll get through this. It'll be a tough time. Don't do anything silly or drastic because you'll be able to rely on your skills, which will continue to be in demand. It might mean you have to raise your prices to make back some of this money you've lost but you'll get through it hang in there even if you have to go and work for someone else for a time because you don't you've lost your

confidence in working for yourself that's okay a step backwards in a time like this is is understandable but don't see yourself as a failure and don't blame yourself porter davis if we're talking about porter davis was a big company that you should have been able to rely on but it's also a warning isn't it what about if you're doing some work for some other builders or you're contemplating signing a building contract with a builder and you're now wondering whether or not they're going to go broke. This is where you need to get some legal advice before going in, asking yourself how can you be protected here, making sure for instance that you were to pay the building insurance yourself if that's possible rather than relying on them doing it so you know you're at

least you're insured or if you're a subcontractor keeping very short accounts and stopping work unless you're getting paid don't allow yourself to be dragged on and don't feel that because they owe you so much already you've got to keep going in order to get paid that's what i would recommend in this instance is it's it's now time to do something not just assume that everything's going to be okay 100 agree yeah i'm gonna throw a question in uh without notice here steve given this whole context and given the importance really of future construction to the the growing housing shortage we have across the country what do you think needs to change and how long is it likely to take before consistency and certainty returns into the building industry

well like anything it's only as strong as the confidence that people have in the industry and when it comes to banking the government's come in and said that we'll guarantee people's bank accounts in certain circumstances up to 250 000 perhaps what needs to happen is instead of private insurers in some states and government in various different states having different schemes, perhaps if it's possible, the federal government comes in with some sort of global guarantee system and then charges the industry for it to bring back confidence, because I don't think confidence is going to come back on its own in the short term unless the government steps in and tries to say, you know what, we've got your back

here now is it the government's job to come in and save builders who are going to go broke probably not that's that's not who this is for but this is for the people who are going to lose their life savings because they trusted a system which is faulty and and not functioning as it should so we need we need it to be fixed is there an appetite to do it probably not at this point in time but it's probably something that government can look at i think 100 and a great idea for the government at least to underwrite the protection of people's hard-earned money. You heard it first here on Realty Talk. I think that's a brilliant suggestion, Steve. Well, the government kind of does do it a bit bushy at the moment with some state-based insurance schemes, but it's very

piecemeal and it's confusing. It needs to be across Australia with a scheme that's simple to understand. Even if people have to pay some money in it themselves, it's not just the builders to bring back this confidence so they know that if it goes belly up, at least I'm protected to a certain extent. Yeah, brilliantly suggested. But as always, I want to thank you for taking the time to give us your take on this very concerning situation.

And thanks again for your generous time on the show today. You're welcome, Bushy. Thanks, Steve. Well, if Steve's insights have resonated with you and you'd like to hear more on this and a host of other property and finance related subjects, feel free to have a listen to his array of informative podcasts on moneymagnet.au forward slash podcast and while you're there make sure you

do yourself a favor by grabbing a copy of his current best-selling book money magnet which is about to come out on audio as well so keep watching and listening to your property hubs go-to place for all things property here on realty talk property deductions can save you thousands of dollars each year to make sure you maximize deductions you need to work with the most experienced quantity surveyor in the country bmt tax depreciation is the leading specialist in the industry they've completed over 700 000 tax deduction schedules for residential investment and commercial properties australia-wide bmt guaranteed to find double your fee in the first full financial year deductions call bmt on 1-300-728-726 today for an obligation free quote

Are you currently getting your home or investment property built? How's it going? Are we experiencing any extensive delays and cost blowouts? Has the communication from your builder dropped off despite your build being way behind schedule? Are you concerned about your builder going bust or walking away from your contract before your build's completed? If you've listened to my recent interview with Steve McKnight on Builders Going Bust, and if any of what I've just mentioned sounds like you, then listen up. because I'm going to share with you what it all means

and what you can do to better protect yourself and minimise any potential pain. So let's start with the telltale signs that may give an indication that your builder is going bust or has become insolvent, because most of them are actually self-evident. If your build is badly behind schedule or is being mismanaged and communications from your builder are scant

or they refuse to get back to you when you reach out to them, you should immediately check the ASIC register to find out if the company is deregistered or insolvent. Unfortunately, many owners only find out that their builder has gone under after they've ceased operations and no one has been on site for a period of time or, in the worst case, when their phone's been disconnected. And sadly, there's often a correlation between jobs that are badly managed and badly delayed and the builder becoming insolvent.

So what are your rights when and if your builder is going or has gone bust? Well, in most states and territories, with the exception of Tasmania, it can be protected by a type of mandatory insurance, which must be taken out by the builder before the construction starts. Your builder should provide you with a copy of this insurance certificate. And if you haven't received it, you need to start asking questions. Builder's warranty insurance, which is what it's generally called, although it does have different names in different states,

is there to assist you in giving you the opportunity to cover defective works and the extra costs for incomplete works in the event that your builder does fall over. Now, the insurance rules and bodies that are responsible for handling builder insolvency actually differ in each state. So you need to find out who and what applies in your area. And here's a couple of things to remember.

If you suspect that your builder is about to become insolvent or actually is insolvent, make sure you don't make any further payments towards your build. This will ensure that your losses from the incomplete works are reduced, but you need to be very careful with this as it may actually affect the terms of your bill contract and you need to make sure you don't get yourself into trouble there. So my number one, number two, and number three advice on all of this

is to seek independent legal advice prior to doing anything or making a claim when you're building insurance policy or policies or deciding to terminate your bill contract. getting good legal advice about the termination of your building contract and making a claim under builder's warranty insurance is absolutely essential because if you don't follow the letter the law or policy and the contract stipulations on procedures and timing you may actually prejudice avoid your protection and end up with nothing so get legal and get clear before you do anything with the help of a good lawyer who specializes in this work you can obtain a defects report

which makes it very clear what if any defective works there are both structurally and non-structurally as well as how much it's going to actually cost to fix them and how to maximize your claim recovery under the terms of any relevant applicable insurance policy. So the first step is to ask your builder for a copy of the builder's warranty insurance certificate or equivalent if you haven't received it when you signed your initial bill contract. If it turns out that your builder goes bus and they actually never paid for the builder's warranty insurance, unfortunately it's highly likely that you won't be able to make a claim and won't be able to get any money back on the insurance. Fortunately, builder's warranty insurance is required for domestic building works

in most states and territories as a matter of law, but sadly it's not uncommon for builders that are experiencing financial difficulties to not pay for that insurance in order to try and save money. So you need to be watching out for this and ensure you receive certificates of insurance as required under the contract and then check that they're correct. If you're unsure, again, seek legal advice to confirm your position. Now, in the unfortunate event that your builder does go into liquidation or they walk away from your build and is actually declared bankrupt, and then you then need to engage a new builder to complete your home and you've borrowed money from a bank or a lender to finance the property, it's likely that your lender will need a mix of

the following. Firstly, a copy of the liquidation or bankruptcy letter from the builder or administrator confirming that no further monies are payable to the previous existing builder. Secondly, a fully signed, dated and executed contract from the new builder. Thirdly, copies of insurance policies or certificates of currency from the new builder in the form of contract works and public liability etc. And lastly, confirmation that your plans are remaining the same. Now, providing there are no changes and no additional funds required, your lender shouldn't need a new loan application and they're likely to proceed with the existing application.

However, given significant cost increases in recent times, you may need to access additional monies to complete the build and this may become challenging depending on a new current on completion valuation of your property, as well as if and when you're likely to receive any insurance compensation monies for uncompleted works by your original builder. And if you're likely to be experiencing financial difficulty as a result of any of this, make sure you contact your lender's hardship team to investigate your options. So it's clear that there's no easy way

out if you're unfortunately caught with your builder going under. So again, I reiterate the need to get specialist independent legal advice as soon as possible if you even suspect that your builder may be in trouble. And make sure you get copies of the building insurance policies and or builder's warranty insurance. That's more food for thought. Stay with us for more. Successful property investment is a game of finance. Do you have the right team and the right game plan? Realty Talk is brought to you by Know How Property. More than mortgage brokers, bushy martin and his team of investment architects set you up with a sustainable strategy structured to lower your costs tax risk and stress while increasing your capacity for growth know-how

has helped over 1900 homeowners and investors secure more than 800 million dollars in property well. So get set to live more, work less and live your legacy. Want to know how to invest in your freedom? Visit knowhowproperty.com.au. As one of Australia's most outstanding buyers agents, Kate Bacos has a wealth of knowledge and experience when it comes to helping families secure their dream home or maybe even the perfect property to add to your investment portfolio so who better to talk to about successful negotiation than someone who does it all the time and this time i talked to kate about high offers and if that's the only way to get to the top of that offer pile that's coming up next property depreciation is the natural wear and tear of a

building and its assets. Property investors can claim depreciation as a tax deduction each financial year. Depreciation is a non-cash deduction. This means you don't need to spend any money in order to claim it. On average, BMT tax depreciation find residential investors almost $9,000 in first full financial year deductions. Call BMT on 1300 728 726 today for an obligation-free quote. Getting to the top of the pile, it's a real skill. When you're in a very competitive market, lots of offers flying around,

you're going to be in amongst them. Is there a way to get your offer up to the top of the pile so it's not just down with all the others? Kate Bakos, is this something that you've experienced? And if so, how have you overcome it? This is a great one, Kevin, because what we're really talking about is getting the vendors attention and potentially bring the winning bidder or the buyer that's

successful with an offer that's not necessarily the highest dollar value. And the only way to do this is to ask enough questions to know what the vendors are looking for, what they need outside of price. And lots of agents will say, look, it doesn't really matter. They're flexible. In a lot of cases, it does matter. There might be a special date. So a settlement date that they want. You can say to the agent, what would the ideal settlement date for your vendor be? And it might be a sensitivity to to the terms now being prepared to go unconditional is not for the faint-hearted but if you've done all of your checks and balances chatted to your mortgage broker you've got good comparable sales to give you confidence that you're paying the right price you might find

that you can go unconditionally so you might have already done a building and pest inspection you've determined that you don't need one but when you've got an unconditional offer and you've got terms that appeal to the to the vendor you might be surprised you could find that you pick up the property for a price that's less than the highest yeah just asking that question sometimes can reveal that the sellers may be moving into state and they're probably not going to want to really move for another two or three months it suits you to give them a longer settlement maybe even a sooner settlement with a rent back so there are lots of opportunities for you to negotiate other than price kate exactly you've got to get creative with your terms if you've got that kind

of intel you've just said a lease back i've seen all kinds of things i've i've also seen movable settlements so we'll give you this settlement but we'll be prepared to honor bringing it forward or moving it back we can be flexible and it sometimes comes down to an emotional um pull of the heart strings kevin sometimes i've had um enough insight that a really nicely written letter from the buyer to the to the vendor could could go a long way and it doesn't happen every time but it certainly has happened a few times for me. Great advice, Kate. Kate, I want to ask you now for someone who,

not now, next time we come back, for someone who's looking at engaging a buyer's agent, how do they know they're getting a good one? Because when it comes down to it, it's all about how skilled they are at negotiation. So what are the traits of a good negotiator? Now I'm talking to one right now. So it's hopefully you're going to be able to write down

a few of your major attributes, Kate. When we come back, Kate Bacos, the buyer's agent, and we'll tap in and find out what makes her one of the best negotiators in the country. Thanks, Kate. Talk to you next time. Talk next time. Well, that brings us to the close of this week's show.

Another big thanks to our guests, Steve McKnight and Kate Bacos. And before we go, make sure you don't miss another episode of your trusted voice for all things property by subscribing to the Property Hub on your favourite podcast player now, where you'll also get to enjoy the Get Invested podcast delivered to you each and every week. Thanks again to realty.com.au, BMT Tax Appreciation,

Appiro Marketing, DM Media, and Southern Cross-Osterio for their ongoing support. I'm Bushy Martin from KnowHow Property Finance, and along with Kevin Turner and the entire Property Hub Realty Talk team, please remember to do something today that your future self will thank you for,

and do this by getting invested. We look forward to seeing you again next week. Miss something in this week's show or want to catch up on past shows? Do it anytime at realty.com.au where we connect buyers, sellers and agents differently.