Table of Contents
Overview
Building a new home can be a hugely rewarding experience. You get to stamp your personality on the project, and you also get a brand new, pristine place to live. Quite significant benefits really! Compared to purchasing an existing property, building a new home has a unique set of valuation issues. I'll briefly outline some these below.
Valuation and 'As-if-Complete Value'
Most of us don't have enough cash sitting around to pay outright for a new home. It's therefore necessary to borrow funds, via a mortgage, from a bank or other lender.
The bank will likely require a valuation of the property. This valuation will be based on an assumption of the property, "As-if-Complete". This means what the property will be worth once the new home is completed, including any site works like landscaping, fencing, decks, etc.
Progress Payments
The bank won't normally lend you all the money at once. This is to stop you from going out and buying an expensive car, or blowing it all on an overseas holiday!
The money is normally lent in stages, during the building project. These are called 'progress payments'. They protect the bank from financial loss, should your new home project not be completed.
Essentially, the bank wants to keep enough money spare, just in case something happens and they have to finish the project themselves, and then sell it to recoup their loan.
Valuation Dates
The valuation has to be set at a certain date. The property market can change over the course of a few months. Because the market can change, there needs to be a 'stake-in-the-ground' for what date the valuation applies.
If there is a delay in the building process and a change in the market during the delay, the valuation may need to be reassessed to account for the change in market conditions. See our further discussion on this, below.
The date normally adopted on the valuation report is the date the valuer visits the site.
So why does the valuer need to visit the site? There's nothing on the site yet. Can't they value the property from plans?
Why is the Site Value Important?
The valuer needs to visit the site because the site makes up a significant part of the final valuation. Is the site level and therefore easy to use for the home buyer? Or is it a steep hillside that is impossible to do anything with, other than grow shrubs?
The value of the site is made up of several considerations. The main considerations are:
ease of access to the site
contour and overall usability
the shape of the site
how easy it is to service the site
exposure to wind
any views that the site has.
The Role Of The Valuer
The valuer's role is to assess the "as-if-complete" value and to provide progress payment valuations to the bank, throughout the building process.
The valuer is basically an independent party who acts primarily for the bank's protection. But they also have a duty of care to the clients undertaking the project.
What does the valuer need from you?
The valuer will need the following for an as-if-complete valuation:
a copy of the plans and specifications for the project
the contract price for the project
an indication of the amount being spent on the kitchen
an indication of the amount being spent on bathrooms
a list of special features of the project
a list of any changes that have been made to the plans/specifications.
The valuer will analyse the plans. They look at the overall quality of construction, the size of the dwelling, the layout, and flow.
The valuer will then visit the site and assess the overall quality of the site, looking at the site attributes as we described earlier .
The valuer will also recheck the plans to see how the new house "relates" to the site. This simply means is the dwelling well positioned to gain maximum benefit from the site, or are there site/neighbourhood issues that could affect value?
How Do Progress Payments Work?
During the build process, the valuer may have to revisit the site anywhere from once, to possibly five times.
The number of visits is usually determined by when the client needs to draw down more money to pay builders and suppliers. It will also depend on how much the bank is happy to lend to you at any one time.
It is a good idea to get a schedule from your builder, showing when payments will be due. Then you know exactly when you will need a progress report and can pre-book your valuer. One very important issue to remember is that the valuer cannot include any items that you may have paid for, but are not installed. Let's say you go out and buy all your bathroom fittings at the start of the project. The valuer cannot include these if they are not installed. This is because, in a worst-case scenario, the uninstalled items could be repossessed, if payments haven't been made.
The Completion Certificate
The bank may also require a completion certificate from the valuer. This is essentially a final inspection where the valuer checks that the project is fully complete and has been completed per the plans that were originally provided.
The completion certificate will refer back to the original 'As-if-Complete' valuation, and confirm that the project has been completed to the assumptions in that valuation.
If the final project differs from the original valuation brief, these changes will be noted by the valuer. If the valuer considers that the changes have altered the final value, this will be commented on and the bank may require an update to the original 'As-if-Complete' valuation report.
It is important to note that, with a completion certificate, the valuer is not revising the As-if-Complete valuation. The valuer is simply confirming that the project is complete, per the original plans and specifications.
A tricky issue can arise if the market changes significantly between when the original valuation report was done, and when the project is complete. Some projects can take 12 months or more to complete, and the market can rise or fall in this time.
It is generally the bank's decision if they require an update to the original 'As-if-Complete' report.
If they do then the valuer will review and update the original report, using recent sales evidence that provides a reflection of the current market conditions.
A Word of Warning
The property market doesn't always go up.
Sales prices in the Wellington region during 2023 have typically been 20% - 30% below the levels when the market peaked in late 2021.
This drop has caused particular stress to anyone who purchased a new-build property off plans, at the peak of the market. The stress has been particularly bad for those who have had to wait for their new property to be completed - while the market has tracked downward.
We have noticed that some banks have been requesting a revision of the 'As-if-Complete' valuations, for these new-build projects.
These revisions have clearly been well below the original valuations due to the drop in the market. Unfortunately, this can mean that the value of the property today, now complete, is somewhat less than the original valuation when the project commenced.
Final Thoughts on Valuation Issues When Building a New Home
Our advice, for any new build or renovation project, is that you seek independent, expert legal advice, before signing any contract. A lawyer will go through the contract and inform you of your rights and responsibilities to that contract.
If your are building a new home or undertaking a renovation project, Valuewise would be happy to discuss the value and valuation aspects of the project with you. We can offer 100% independent advice to help you make the best decisions.
Feel free to contact us anytime, 04 471-0989, or via our enquire/contact form.