Sad to read the news this week that one of Australia’s biggest builders, Privium, went broke.
Always sad to see a business fail. Sad for the staff, the affected clients, and in most instances the owners.
It was hard to read about the 170 Aussies who have been left with unfinished homes, amongst them one couple who had paid $80,000 only to have a slab and a partly stolen frame to show for it. It would be a very distressing time for those people.
Privium are a big builder, too. Over the last few years, they have regularly been in the top 10 to 20 builders in Australia by number of homes.
So how did it happen?
While I don’t know the particulars of Privium’s circumstances, over the past 11 years I have had the benefit of overseeing the construction of more than 2,000 houses for clients. I’ve unfortunately witnessed a handful of builders go broke in that period.
What I can tell you is that builders always go broke in a rising market.
Builders, in competing for business, tend to provide fixed-price quotes and contracts. In doing so, they lock in their sale price.
That becomes problematic in an environment where buildings costs are increasing.
The price of both materials and trades have increased. The cost of a house has gone up by 10 to 15 per cent over the past 12 months.
When you consider most builders only make a margin of 5 to 10 per cent, you can see how they can fast end up going backwards on a job in this environment.
Then how do you avoid it?
You can’t eliminate the risk of a builder going broke.
But you can manage that risk by picking the right builder and avoid buying (too far) off the plan.
When deciding on a builder, people will consider price, time, quality, reputation and financial capacity.
What often gets missed is to understand the type of builder.
There are different types of construction projects; renovations, first homes, upgrader homes, custom design, high end, investment homes, slope sensitive homes, to name a few.
My personal experience is that builders are less likely to go broke if they specialise in a few specific types of construction, rather than trying to be everything to everyone.
For instance, if I’m building an investment home, I go for a builder that specialises in building investment homes.
Then there is the off-the-plan risk.
A lot of builders today would be signing up house contracts on jobs they won’t be able to start for more than 6 months. That could be due to having so much work on their books or the fact that the land won’t be registering before then (i.e. they’re still building the roads and services).
As a rule of thumb, I try and buy land that I can start building on within 90 days. Then pick a builder that can start my house in that time. Most builders can comfortably hold their prices for 90 days. Banks will often hold their finance approvals for 90 days too (another risk to manage).
By doing those two things you significantly reduce your exposure to a builder going broke.
Even if your builder does run into trouble, because the pricing is only 90 days old, it would be much easier to replace the builder for a similar price and/or go back to the bank for a top up on your loan.
The other option is you can pay a professional to take this risk on for you.
Missing Settlement deadline
Q – I saw the Current Affair story about that couple losing $75,000 because they missed their settlement by a day. How does that happen?
A – I didn’t actually see that story but must have had more than 10 people send it to me during the week.
For those not familiar, a couple bought a house for ~$900,000 and paid a deposit of $75,000. Because of some delays with their bank, they missed settlement by a day. The vendor terminated their contract, kept the $75,000 deposit and sold the property a week later for ~$1,000,000.
Very unfortunate for the buyers.
In Queensland, those are the rules. Miss settlement by a day and the vendor can terminate. In most other states, you get a 14 day “grace period” to try and settle again.
It sounds like the property went to auction and the buyers had to go back and amend their finance – either to increase their loan amount or refresh the approval because the 90-day validity period had expired.
Either way, the best way to avoid it is to only sign an unconditional contract (or bid at auction) if you have a valid pre-approval and get approved for your maximum borrowing capacity. Even if you think you might not need the full amount. Better to be safe than sorry, as the costs of getting it wrong can be significant (case in point).
Fortunately for this couple, their bank reimbursed them $100,000 for the inconvenience.
But now they’re trying to buy into a market that’s gone up by at least $100,000 since they first bought… that’s the big cost.
Author, BULLETPROOF INVESTING