Property Hub - Investment Insights & Inspiration - Realty Talk Vault: New build valuation challenges

Episode Date: November 23, 2022

We bring you another classic Realty Talk episode from the vault, which was originally published on June 1, 2021, but is still just as relevant today. In recent times we have seen a raft of government stimulus packages like HomeBuilder increasing demand for new build homes which is pushing up prices.  If you’re borrowing money from the banks to fund the build, quite often what you have paid is more than the banks valuation.  Here is what you can do about it. 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. Now, in recent times, we've seen a raft of stimulus measures that are really prompting increasing new build activity. We've seen HomeBuilder and a whole series of others that are pushing up activity in that new build arena. And again, this is okay, but where the challenges arise are if you are relying on bank borrowings to build a property, then we have seen, and we've seen for quite some time, some potential variations between the contract price and the bank valuation. So to discuss why this might be the case and what you can do about it, I'm joined by Kieran Clare from Bricks and Water Media, who's had been a very successful professional valuer for over two decades. So welcome back to Real Estate Talk.

Thanks, Bushy. I've had to take a break from my very successful valuations to spend time with you, but that's okay that's good to hear mate no you've uh what i love about what you do is that you're active in the industry but now and what you do from the media you actually give us much more objective and independent views of that so where that actually holds a lot more water to me mate so uh which is great but uh mate uh digging into that new build subject for a minute uh why are we seeing bank valuations on new builds uh come in below contract price yeah it's a pretty hard call this one bushy because um what's drummed into you as a valuer straight off the bat is that that cost never equals value um i mean the idea is that when someone comes to buy a finished property

and that's what the bank wants to know the valuation is based on um they don't care what you paid for it so so those two it's not simply a matter of adding land and improvements together the number one thing i i think is the problem is that um the sales events you're required to use as a property value or on new builds is that secondhand sales market. So the banks are coming along and saying, look, we're not interested in hearing about contracts on land. What we want to know is the houses just down the road who are maybe six or 12 months old that have sold from one first buyer to the next buyer, what are they trading for? And a lot of those sales don't really factor in that new house premium, that new car, new house premium that we often talk about.

because there is something about walking into a new home that you will pay a little bit more for that isn't picked up in that sales evidence. So I think that's where a lot of the gap comes in for that sector. Yeah, that's a really good description of that, mate. Given that scenario though, what sort of strategies do you think home builders

can adopt to overcome or at least mitigate that? Yeah, sure. Look, there is probably a couple of things you can do and then there's a couple of things you can accept. It sounds like some of those Irish blessings you hear about, isn't it? Like it's things you can change, which you can't accept, blah, blah, blah. In any event. So one of the things you need to accept is that perhaps it's going to be tough to find good sales evidence that's going to support your contract.

The value is going to be tied to that, which means you do have to find yourself with a bit more deposit perhaps or give yourself a bit of a financial safety net just in case that valuation isn't coming up. But the other thing you've got to try and do is avoid overcapitalisation. Maybe have a little bit of a think about what you're constructing, the degree to which you're spending on the property and whether that is going to stack up in the area. You don't want to have the gold taps at a valuation. You want the same sort of taps as everyone else has got. Another, I mean, playing into that, you know,

if you're going to put in a pool as part of your construction but could do that maybe down the track and not include it as part of the the valuation itself you might find that that pool over capitalization can be pushed down and out of the way out of the finance side of things and maybe you can take care of that in a couple of months time when um when a good friend's going to lend you thirty thousand dollars to finish off that work so uh bushy have you got no don't worry i'll ask you after i've got a swimming pool in my back pocket mate don't worry if you just bring a shovel and some concrete will be right mate so so you know have a little bit of a think about those things that

are maybe um where where the cost of putting them in is not commensurate to the value they're adding to your property and see if you can work your way around not including those in the initial valuation and you know the other thing that i think you can do have a chat with your builder i mean if you're in this situation where you get a valuation you're relying on the finance and maybe there's a little opportunity to have a talk to the builder about where can we shave things here to make to get this over the line i wouldn't be too shy at that stage about trying to work with them to to come up with a solution yeah really good thoughts i one of the analogies i heard which you you've probably heard a thousand times but uh you know if i go and buy a holden statesman i'm probably showing

my age now because i've been out of production for years uh versus buying a commodore uh when the value of rocks up he just sees a holding and uh he's going to value it as a whole whether you paid for the statesman price or the commodore price so that's exactly what you're talking about there with the potential over capitalization it's recognizing that uh it's going to it's not what you paid it's how it compares to what everything else is sold of a similar nature so that's right i mean you'll see that often as an example when people are building in uh locations which stack up uh to big spend so inner city locations small blocks and there's a lot of multi-million dollar houses around you can probably get away with spending 30k on a pool

and it adding 30k to your build do the same thing and maybe an outer suburb where people are paying four or five hundred thousand for a property won't stack up quite the same way yeah brilliant thoughts mate i always love your insights kieran uh you um uh you've given us some good thoughts on what our expectations need to be if we are going to build and why we might be seeing some of the valuations. So I really appreciate you spending some time with us today, mate. Not a problem, Bushy. Anytime, sir. Thank you, Kieran.

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