The planned changes to the Act will be phased in over time.  Some of the incentives to build it right first time to be introduced to Parliament this year include:

• explicitly stating that builders and designers are accountable for meeting Building Code requirements;
• mandatory written contracts for building work above $20,000 that set out expectations, warranties and remedies, and how any disputes will be resolved;
• requiring those doing the work to explain what, if any, financial back-up or insurance they have to remedy any faults.

The planned amendments will also see some minor, low-risk work, exempted from the need for a building consent.  Examples of such exempted work will include:

• Replacement or alteration of internal wall and floor linings and finishes in a dwelling.
• Adding lightweight stalls (eg, used at fairs and exhibitions) to the current exemption for tents and marquees.
• Fabric shade sails and associated structural supports that do not exceed 50 square metres in area (with limitations on matters such as the level on which the sails are installed and distance from a legal boundary).
• Installation, replacement or alteration of thermal insulation in existing buildings (excluding exterior walls and fire walls). This clarifies that retrofitting ceiling and underfloor insulation will not need a consent.
• Penetrations with a maximum diameter of 300mm (including associated weatherproofing, fireproofing and any other finishings) to enable the passage of pipes, cables, ducts, wires, hoses and the like through any existing building. This clarifies that for example a heat pump can be installed without needing a consent, although the wiring must be done by a registered electrician.
• Signs and associated structural supports where the sign is no more than 3 metres high and the face area of the sign does not exceed 6 square metres.
• Height restriction gantries (e.g. a vehicle height warning in a car park).
• Private playground equipment used in association with a single household where no part of the equipment extends more than 3 metres above the ground.

Mr Williamson says the Government can only make changes to the building consent process to reduce costs once it has confidence in the quality of what is being built.

The Government is proposing to introduce a ‘stepped’ approach to building consents and inspections after mid-2012 once the other improvements are in place to drive quality, including the licensing of building practitioners.

You can read the Minister’s media release and find out more on the Department of Building and Housing’s website at: www.dbh.govt.nz/buildingactreview

In light of the Leaky Homes Compensation Plan announced by the Government, and my comments in leading global newspaper, the Telegraph, I wanted to get some clarity on more of the issues surrounding leaky homes.  As a result we have the following guest blog from Ian Holyoake, answering two questions:

1. How to do the right due-diligence to prevent buying a leaky building?
2. How to fix a leaky building?

How to do the right due diligence to prevent buying a leaky building?

Let the seller provide you with what could be termed ‘proof of product’ – remember the Russell Crowe & Meg Ryan movie Proof of Life – if a seller is serious they should table openly the state of the building – why should you pay to have there building tested. What you should ask for and in this order is:

• What treatment does the framing have? Poorly treated timber is what is rots from leak events. Therefore a robust building is one with high durability protection. Regrettably treatment levels have been reducing since the late 1970’s so its hard to find well treated timber outside our old State Homes. So settle for H3 (tanalised) or highly treated boron. I have underlined ‘highly’ as this is referenced to levels like the current standard H1.2 which equate to boron concentrations of 0.4% BAE which are useful to slow down rot for around 5 years only – so if the building is more than 5 years old more information is needed. I require at least 4 samples for testing from each elevation and each floor level including studs, base plates and lintels as timber is often mix and match – timber supplies are not consistent with deliveries. Get the owner to supply these test results and if they don’t have them organize for them to be done at the owner’s expense – why should you pay for testing there home?
• Is the wood decayed? Unfortunately every building leaks so those constructed with perishable wood will already have some decay in them. The secret is finding where the damage is and then determining whether the decay warrants major cost to reconstruct. It’s not illegal to have decayed framing – but if it could collapse and cause harm then council has a duty to issue a safe and sanitary to protect the occupants. The rule is its stupid to get yourself into this situation so ask for sampling results. Samples of framing can be examined (without destruction) taken from Mdu PROBE installations under every ‘at risk location’. The at risk locations are the same places water would accumulate if the building leaked – and buildings leak where complicated details are eg decks, flashings, roof and wall connections, penetrations through claddings, internal gutters, hidden gutters, high ground lines, cracks etc so obviously the more complex the more sampling is required. An average building requires around 80 samples, so more some less. The samples should be fresh ie taken within the last year otherwise more damage could have arisen. Never never let so called experts cut or drill the cladding. If they insist get the insurer to cover the building with a leak indemnity content before they start so if it leaks in the future you are covered. After all its holes in the cladding that cause leaks. Councils often require full reclads after these holes are made. Another useful test is strength testing to establish if the framing wood is suitable for the home. One major wood supplier has been found guilty of supplying under strength timber to homes. This can result in early decay (extra sugar for fungi as wood is sapwood) and extensive cracking of claddings and sealants leading to unexpected leaks.
• Monitoring of moisture over time: Never be fooled by point in time moisture checks. No single moisture reading event is reliable – and certainly not if you are to spend your money. What we discover is summer investigations find less than 10% of winter leaks – its obvious – why would it leak in summer when its not raining. Unless the target is too good to be true (which it probably is) it’s a sucker’s deal to buy on thermal or scan results or point in time assessments. Always ask for the past 2-3 years of monitoring results – including summer and winter. It’s normally the variances that are of interest. Think of this as if you were buying a car – would you pay money if it had no dash board full of gauges. If the owner has chosen not to install monitoring it is for a very good reason – they have their head in the sand – you don’t. The simplest way to monitor is to read the permanent Mdu PROBES twice yearly. Owners who look after their buildings value will be installing monitoring – so they are available.
• Maintenance plan: This is basic sense. What you want is evidence they have conducted maintenance. This starts with a maintenance plan. If they don’t have one then the chances are they haven’t a clue on what there responsibilities are to look after the home – ie is it treated, does it have decay and what are the moisture contents. A useful maintenance plan has monitoring as its cornerstone with response actions in place should leaks occur – coupled with visual condition assessments of building products – this can be done by pre-purchase inspections – but again should be at the owners cost – why should you do their maintenance? If you are considering purchasing an apartment or unit you should request full disclosure from the bodies corporate of the maintenance plan and monitoring results. Also ask if any of the buildings have had leaks or if investigations have been carried out. Be very wary if nothing is available – it shows denial and head in the sand approach.
• Who pays to get this information? If your negotiations get bogged down and you still want to proceed I find a useful thing to do is agree with the seller before any costs are undertaken that if the tests above all come up positive you will pay but if not they will pay. That puts the onus on them to think it through. They will already be thinking – you may get a pre-purchase inspector who isn’t that good and uses point in time assessment technologies so will likely miss discovering what they fear is happening hidden behind the walls. Not every expert is trained in this and don’t have the expertise in weathertightness training – and many who claim they do want to cut holes or remove the cladding first – or apply limitations on there reports yet still charge tens of thousands.
• What is on the council file? The home may already have been repaired – or it may be listed as a damaged home or a claim under WHRS been initiated. Always seek the council property file.
• Ask the seller to disclose the history of the home. This is the representations that you are entitled to rely on. If the owner says things like ‘never leaked whilst we owned it’ then write that down as that information is useful if you do discover the building is actually a leaker after you purchase it.
• Buying at auctions is fraught with problems – you may have no recourse against the seller or the agent – and it is unlikely the seller wants disclosure of anything about their property. This is where you should think ‘buyer beware’ before you buy.

How to Fix a Leaky Building?

Fixing a leaker has become an expensive matter – mainly because the remediation industry is trying to limit there risk into the future. It’s uncertain how well leakers can be dealt with – follow the tests above – what to look for after the repairs. For example if the repair method doesn’t provide for ‘highly’ treated timber it will continue decaying. Without monitoring how can we be sure it’s been fixed – and who says so – would we trust that person or would we want some physical proof like ongoing moisture contents. All buildings leak so it’s no surprise that repaired buildings will again leak. This is one reason that repaired buildings carry the stigma even after money has been spent attempting to fix it. So the things that are important in repairing leakers are:

• Discover: Getting adequate information before you make decisions and start spending. I see too many owners agree to large capital spends after getting a WHRS report or assessments based on single point in time assessments. If your money is that easy to come by then go ahead – but investigation techniques have moved on from these old style approaches. If your building has been cut apart by one of these people we will assist you recovering costs fixing the damage they have caused. A good value assessment will include the 3 steps above – checking the treatment level, taking numerous samples (non-destructively) to examine for decay and monitoring the moisture over time. We call this the ‘discovery’ phase. Spending time on this saves money and avoids over spending. A useful thought is its better to take 100 small 1% steps than try for the single 100% improvement.
• Making a plan: By slowing the decision making down and getting the discovery phase done a professional plan with options to satisfy owners objectives can be developed to address the requirements of the Building Act (which is that occupants shall be protected from harm and the home shall be healthy) and your plans for the property. You do not have to fix leaks or remove decayed framing unless the occupant’s health and safety are under threat. What is best is to build a ‘long term maintenance plan’- we call this the ‘building lifecycle plan’ so today’s decisions can be reviewed ongoing. Where damage is minor ‘tags’ are placed on timber for future removal, or cladding improvements may be required for drying (which may involve recladding a wall – but not all walls by default) and to lessen future spend changes in design may be useful – like removing complex details that are expensive to keep in good condition.
• Involving the Council: It is always useful to involve council, so you would show them this plan. After all they have become the insurer of the defunct builder in what is called the last man standing rule. Another important aspect is it is in your interests to have that plan on council files as it becomes your disclosure document if you decide to sell in the future. Council often over step the mark and want extra things like – maybe a full reclad. If you are in time (within 10 years of build and have lodged a claim and are eligible) it’s advisable to take 2 options along. One for what is termed targeted repairs and the other a reclad. If council intimate they would not accept targeted repairs then get that in writing with councils reasons – this is useful later in the claim process. If you are being forced into spending along one option path and council has chosen to blatantly ignore reasonable consideration and process adjudicators may well award greater compensation especially for stress.
• Manager: Get an outside manager not the contractor to manage the plan. Once the plan is consented always seek an independent onsite manager to avoid the trappings of the ‘variations clauses’ that inevitably result in escalating costs. You also need an independent weathertightness expert to manage council inspections.

So what does a good plan look like? There are two types of plans emerging. Plan 1 is if you have a claim you rebuild the whole house out of the respondent’s pocket. With the new Government package we are unsure of how long this will last – and respondents are starting to wake up to this. Plan 2 is the minimum spend possible to avoid over capitalization. Most plans fall in the middle ground. Its really up to you – it’s your money. For investors the sensible plan is building the maintenance plan to its extreme so all repairs are fully tax deductible. Where not then it’s a matter of funds available. At a minimum all the building needs is for the occupants to be safe and healthy. Don’t forget that fact. Everything other than that is discretionary spending. For example a new kitchen may be more important than some minor decay in the garage that is not threatening life or limb. This is where the RotStop injection system is useful as it stops rot from getting worse. This allows you time to create an affordable and appropriate plan that you and your partner can live with.

Ian Holyoake

Managing Director – Step Up Group

I would advise all clients and readers of my blog that have leaky buildings to consider their options and to talk to experts like the Step Up Group.  They are available on www.stepupgroup.co.nz and 0800 STEP UP.

Saturday 29 May 2010

8:30am start to 6pm finish (registrations from 8am)

Parnell Jubilee Hall, 545 Parnell Road, Parnell, Auckland

The 2010 Annual Budget has just been presented and it implements the largest tax reforms New Zealand has seen in 25 years.  To arm you with the knowledge and tools to succeed in light of the Budget and in today’s market, the not-for-profit Auckland Property Investors’ Association (APIA) have a 1 day seminar BUDGET BUSTER 2010 – Strategies for Today’s Market with tickets at just $49.

The speakers include multiple best-selling Author and NZ Property Investors’ Federation Vice President Andrew King, who provides a State of the Property Investment Nation address, then sets the theme for both newer investors and more experienced investors with substantial portfolios.  APIA’s Treasurer & Chartered Accountant Ann Loudon has the all important topic of tax changes to go through, particularly in light of the depreciation changes and the taxation treatment of LAQCs to have to become aligned to Limited Liability Partnerships.  APIA’s Honorary Solicitor & Property Lawyer Tony Steindle then talks about structures, including the legal aspects of the Limited Liability Partnership, and APIA Vice President, Property Mentor & Trust Lawyer David Whitburn talks about what to buy in today’s market, how to buy it and how to analyse just what is a good deal or not.  APIA President & former NZ Mortgage Broker of the Year Sue Tierney then talks about finance in light of the turbulent global financial crisis we are in, particularly with the highly indebted European Union countries and the relevance of this to New Zealand.  ANZ Mobile Mortgage Manager Vanessa Murch then covers off financing in New Zealand, including why fixed interest rates are so high in comparison to floating loan rates and just how we get our loans approved.  In case this wasn’t enough content, we provide further value to you in relation to tenancy management with APIA Board Manager and Principal of leading boutique Property Management Firm Corinthian Limited Jan Galloway, presenting on how you should manage your property to get the best tenants and lowest vacancy rates.  This is combined with a presentation by Tenancy Practice Lawyer Scotney Williams, giving his expert advice on the Residential Tenancies Act including recent times and also proposals to reform parts of it.

So don’t delay, BOOK YOUR TICKET for Saturday 29th May at the Parnell Jubilee Hall by emailing admin@apia.org.nz now.

Williamson says the scale of the leaky homes issue is equivalent to a “natural disaster of huge proportions” and it is having a considerable impact on the wealth and health of many thousands of New Zealanders and their families:

Affected homeowners have been stuck in a complex and costly disputes process for too long with little prospect of being able to fix their leaky home”

Affected homeowners will need to make a claim under the Weathertight Homes Resolution Services Act to access the financial assistance package once it is launched.  In the meantime, homeowners can apply to the Department of Building and Housing to make a weathertight claim.  If their claim is accepted, that stops the clock on the 10-year limitation for claims.  Williamson says the financial assistance package will be voluntary and in addition to the current disputes and litigation process.

Forgo right to sue Councils

Since the Crown and their territorial authorities (councils) are contributing, leaky building owners that choose to participate in the package would “forgo the right to sue local authorities or the Crown in exchange for a combined government and local authority direct payment of 50 per cent of agreed repair costs.”  This means that leaky homeowners will still have the option to pursue other liable parties such as builders, developers and manufacturers of defective products – indeed if they are still standing, and if they have the funds to litigate.  Whilst the full details have not been working out just yet, the intention is that homeowners who currently have claims in the weathertight system yet to be resolved will still be able to apply for the financial assistance package.

Williamson’s statement concluded with “owners of leaky homes who would like more information should visit www.dbh.govt.nz or phone 0800 116 926.”

Criticism of this compensation plan

I listened to NewstalkZB yesterday before and after the Auckland Property Investors’ Association Board Meeting and noted concerns on a a few fronts.  The ones I noted were:

1. Why the Government is getting involved when it has no liability?
2. Why wasn’t there a bailout to Blue Chip, Merlot and other investors in failed finance and property development schemes as these investors clearly suffered financial loss?
3. Why wasn’t there a bailout to investors in failed finance companies?
4. Why are we socialising (making the Government responsible) for private sector losses, to increase our debt burden even further?
5. Where has the personal accountability and responsibility in New Zealand gone – why don’t people just accept blame for their mistakes, rather than blame everyone else?
6. Isn’t this an urban problem?  Why should we hard working farmers and rural communities pay for city dwellers fancy housing – we don’t have a problem with our preferred style of housing; so we should we have to pay for their indulgences!

These are mainly political questions and depend on your personal wealth, attitude and own individual circumstances.  I see some real merits in this proposal as the stress involved for many leaky home-owners is immeasurable, the health and wealth impacts are often significant, and the Government itself is only offering 25% compensation, and this is forecast by the Department of Building & Housing to be around $1 billion over the next 5 years.  The leaky home owners will be suffering the most still as they have to pay 50% and in many cases simply will have to borrow this money and pay interest to banks.  This will tidy up this late 90s and early-mid 2000s housing issue, to mean this problem goes away.  The devil is always in the details, but on balance so far, I quite like this initiative.  Lets hope it works out well for leaky building owners and our great country, New Zealand.

That phrase I hear all too often about how hard it is to drive around Auckland, buy a home, buy an investment, build a house, save money, give up smoking, {insert next random thing}.

Well as you all know great rewards are gained by those that persevere, don’t give up and say it is just too hard.  So I am putting in the hard yards on a project that I have under due diligence in West Auckland.  It is a 3 lot residential freehold subdivision and their is a creek running through it.  This creek has freaked out a number of investors and now the property has been getting stale on the market for 3 months as those that saw it thought it was too hard.

All it needs is a bridge over it to unlock the equity of two dormant sections – sleeping financial giants.  So I have learned today a lot about bridges and how cheap section + cheap section = big money.

Note that this is not the creek or bridge I am building.  In the absence of my digital camera yesterday this is a nice place filler

Whether or not the agents have in this case done the best job they could have for their vendor client is another issue and not my primary concern, however we are the best offer that they have in front of them on paper at the moment.  The thing is we are basically getting the land for the two sections for free, with our only special cost being to build a bridge over a less than one metre wide and 50cm deep creek with around a 8 metre span to avoid a 1 in 100 year flood plain.

The site is glorious in its simplicity.  It has only been made “too hard” by people lacking vision and a solution.  Remember that Section + Solution = profit and go out with a new string to your bow – be armed and dangerous.

Enjoy your weekends.

What is the Wealth Wheel?

I am wanting to shed light on the Wealth Wheel as I have been emailed about it and posted in previous blogs about it. Basically in today’s market to continue investing you need to adapt to having the correct investment strategies for the market. We have already discussed that you owe it to your to keep investing as if you don’t you will fall into old traps of making excuses as to why not invest in property or even worse at all. Most people do nothing as that is easy, but in return they get nothing.

So buying and adding value to property is key. Selling this value realises equity that I know you all want to have. Basically you trade equity for cashflow. The Wealth Wheel does this through property trading and/or development where we create equity by smart development and construction.  We take a property with land on it and create value. The Wealth Wheel is where you buy/build and sell a certain number of properties and from the profits reinvest these into a property that you buy and hold.  So you mix sprinting (trading) with marathon running (buy & hold very long-term investment).

Particularly with interest rates rising it is no secret that it is harder to get bank loans at the moment. So the traditional buy/hold strategy is not working for many people. As a result by trading 3 or so properties and putting the profits from the trades into a buy/hold, you are investing and building your portfolio in a sustainable way. This way you get a conservatively geared property with positive cashflow per tax as you have reduced the debt (loans) on it significantly.

Example

One quiet achieving client has been busy in the past 18 months. A husband and wife team, they have purchased and developed 4 properties with us in this time. All 4 properties have had minor dwellings built on them in the Auckland region by Fuzo. Whilst I need to learn how to post graphics eg Excel spreadsheet please bare with me as I try to type it without losing you in the numbers (and bad formatting). The strategy is great even if the formatting doesn’t come out right!!

Deal 1 – MD traded
Purchase price                                                      $275,500
Project expensives on MD                                 $149,212
Sale Price (less commissions)                         $485,000
Net profit                                                                $60,288
Tax to pay (as per client supplied figures)   ($17,584)
After tax profit                                                        $42,704

Deal 2 – MD traded
Purchase price                                                     $332,000
Project expensives on MD                               $158,375
Sale Price (less commissions)                        $555,000
Net profit                                                                    $64,625
Tax to pay (as per client supplied figures) ($18,660)
After tax profit                                                         $45,965

Deal 3 – traded
Purchase price                                                      $317,500
Project expenses on MD (close est.)            $152,000
Sale Price (less commissions)                        $510,000
Net profit                                                                   $40,500
Tax to pay (as per client supplied estimate) ($11,694)
After tax profit                                                        $28,806

Deal 4 – MD Keep as buy/hold long term investment
Purchase price                                                    $345,000
Project expensives on MD                             $150,000
Registered Valuation                                      $540,000
Net profit on this deal only                             $45,000

The three trades netted $117,475 in after tax profits. Not bad when both were still working! This shows the value of time and expertise leverage. The profits were then all put into reducing the loan on the buy/hold property(deal 4).

This had the desired effect of reducing the Interest costs and making the investment pre tax cashflow positive was Massive equity in it:

The resulting buy/hold property

Equity:            $261,475
Cashflow:      $10,777 per annum (pre tax positive cashflow using 9.0% interest rate)

Ie. just over $200 cashflow per week per tax positive cashflow – WOW!

Who wants to get pre tax positive cashflow now? My hands are both up! Surely we all do though. Positive cashflow is what we eventually retire on. If you think KiwiSaver is going to save you – think back to what previous governments have done to these compulsory savings regimes. You need to look after yourself and not merely be yet another person struggling to enjoy their hopefully lengthy retirement years.

The Wealth Wheel has generated Massive equity and cashflow for our investors. A property with a done up house on it, and a brand new minor dwelling. Low maintenance, great depreciation expense with the too getting loading on the new building (minor dwelling) and as with all minor dwelling projects the land is already owned so you can depreciate everything.

Conclusion

It really isn’t that hard. I think sometimes people make investing out to be a lot harder than it really is. Outsource everything you are not entirely comfortable with to experts. Tap into the knowledge of specialists and look for ways you can keep progressing. Stop looking at reasons why not to invest – change your methods and open your mind. This is the time to trade to invest.

As Robin Williams playing John Keating in the 1989 hit movie Dead Poets Society said “carpe diem, sieze the day.” Perhaps we too need to be ripping up the textbooks of buy/hold property investing as the boys in Keating class did to Dr. J. Evans Pritchard, Ph. D book on Understanding Poetry. We live in an ever changing world where the only constant is change. My question to you is – when will you make the changes you need to financially thrive?

Initial reactions to new housing rules

We are seeing a number of Interesting things lately – eg. proposals to have double glazing of windows of all homes, stricter rules on insulation and a myriad of smaller things all designed to maximise heat prevention (which is great) but sadly this will raise the cost of new houses. And when people and the media complain of higher house prices, this will just take house prices that much further. In certain areas of New Zealand (eg parts of Southland) to build the cheapest possible permitted home you will have the situation of the house costing well over $1,000 per square metre to build, when the neighbouring older houses could be worth $500 per square metre. Building new houses will be that much tougher for many home owners, and indeed investors alike.

My advice – call an architect or development specialist before embarking on ANY structural building project, then get estimates of costs from them and reliable builders to know what your project costs is going to be. Too many people are thinking that their building will be just like the last one they did 4 years ago.

Newsflash: the rules have changed. The Building Act 2004 has come in, the Building Code is far far stricter and more expensive to comply with. Materials and labour costs have risen too, council fees are Massively up in some cases quadruple what they were 4 years ago! In addition some council now have new revenue streams (eg. development contributions) that they justify under the Local Government Act. So acknowledging that it is development and some variations are going to occur – make sure that you have a pretty firm idea on the numbers, to ensure that you can finance the project, then don’t delay, just do it.

As to what strategies I believe that you need to adopt for success today – this will come in tomorrow’s blog.

Through being at the cutting edge of the property market day in day out, I have found that in today’s market to succeed, you need to be doing something a little bit different to most. You need to add value to the property you purchase – ie. create the deal. In developing where I make my profit can be in a number of steps:

1) profit at purchase (but below value)
2) profit on renovation (do-up)
3) profit on development (obtaining consents, planning)
4) profit on construction (building the plan)

The profit is realised at the sale (if you are trading) or on getting a new registered valuation (if you are keeping it). Sometimes I am happy to buy at retail as I can make enough money from the other aspects. It is always about the overall project, and your buying rules. Getting 3 of the 4 prongs has worked well for me.

Property yields are dropping all around the country a the moment. Talking with the Auckland Property Investors Association President, Andrew King last month, the average Auckland gross yield has dropped below 5%. As a result to keep actively investing you need to create the deal.

We are working with many investors at the moment who are increasingly seeing development as the way forward. Whether you are trading properties or doing a development to create equity and/or cashflow – look at the wonderful opportunities you have with land.

Basically to see my favoured strategy I recommend going to www.fuzo.co.nz, and take a look at the House Trap documentary (TV3) that I filmed last year on minor dwellings with Kevin Biggar (Trans-Atlantic Rowing race winner and he walked to the South Pole of Antartica by foot too).