Construction - Short cuts exposed: how some builders save money and how to spot it.

Buyer beware is the old adage - and certainly true in the building game.  So we have to be wary, it’s easy to be tricked if you don’t have the knowledge of what to look for.  Another example of knowledge being power.  This article looks to uncover one of the “tricks” used by some builders to deliver a low cost product. It looks to give you the “knowledge” you need to be wary.

We’re talking roof trusses.  Some may say that so long as the trusses are holding the roof up, then they’re doing the job.  True in part, however there are several different ways to construct roof trusses, each way produces a different result (and comes with a different price attached to it).

A prime example is where the builder uses colorbond sheeting for roofs, which is very prominent in Queensland.  These sheets are comparatively lightweight compared to concrete roof tiles.  For this reason, building regulations state that roof trusses can be placed 1200mm apart (measured from centre to centre).  In general builders love this as material and labour costs are lowered, which leads to better profit margins.   But there’s a catch, and it has nothing to do with the roof.

Ceilings are attached to the underside of the roof trusses.  Plasterboard, used for the ceilings, needs support every 600mm.  Yet the roof trusses are at 1200mm intervals - which is a problem.  What is commonly done is the insertion of Intermediate Ceiling Joists or ICJ’s midway between every truss for the plasterboard to be fixed to (See Figure below).

This practice certainly saves the builder time and money, but it doesn’t represent a good deal for the owner.  Because these ICJ’s lack the additional rigidity of trusses they sag, and the ceiling finish can end up looking like the waves of an ocean.  This tends to be most noticeable in large open areas such as a kitchen, dining room or lounge room.   And it can become progressively worse over time.  Also if a tradesperson such as a TV installer, an electrician, or a ceiling insulator should step onto an ICJ during their installation, the minor problem (up until now) may turn into a monster in the form of substantial sagging and even cracking. 

So how do you avoid it? 

Good builders will install roof trusses every 600mm despite the 1200mm minimum standard (See Figure below).  This gives the ceiling a smoother and more even finish.  And while this costs more in labour and materials, it produces a higher quality finished home and this in turn results in client satisfaction.

This is one of the many unnoticed extras that Investment House provides its clients.  Keep an eye out for the construction section of future newsletters for “short cut” information pertaining to timber frames, waterproofing, floor joists and tiling.

Investment House

Each issue we aim to focus on a topical issue.  

Clearly there are many different areas within the property industry and keeping on top of things can be taxing.  Investment House provides a “one stop shop” service to investors, so it comprises a number of specialist divisions (research, finance, construction, property management, retail sales etc).  Given this diversity, the company is well placed to keep you abreast of happenings.  If you’re interested in a specific element of the market, pick up the phone and talk to one of our researchers - it might save you some time and money and will likely be of interest to other readers.

This issue we’ll talk about what is happening in two of the company’s divisions - finance and property management.

Finance - No financials required!

Did you know that in Australia there is a type of loan called a "No Doc" loan?  It’s techno-jargon for a loan requiring "no documents"?

While this is a slight misnomer (in that you do require some documentation), the simplicity of No Doc loans can be a breath of fresh air.  Some industries are looking to perfect the “paperless society” - the banking industry in Australia appears to be doing its very best to wipe out this nasty term from its ever lengthening glossary.  So, when compared to “Full Doc” loans, these No Doc loans seem like applying for a video store card.

OK so what exactly is a No Doc loan?
A No Doc loan is identical to a standard loan that you would get from any regular lending institution in Australia except for a few small differences… and one massive difference - they are user friendly to business people.

Business people often struggle with lenders understanding their businesses.  Many times they prepare their accounts to minimise their tax exposure, and this can go against them when looking to obtain a loan.  For those people, No Doc loans are a breakthrough.

The key difference is that these loans are only available for applicants who are self-employed.  Whether the bank considers you “self employed” relies on your application characteristics.  Now this may not make sense, but depending upon the security you’re offering to support your loan, the application will be treated in one of two ways;

1. If your loan represents up to 65% of the security value (or loan-to-value ratio - LVR) you can be self-employed for 1 day (i.e. hold an ABN for 1 day) and qualify as self employed, or
2. if your loan represents more than 65% of the security value (up to 80%) the lender will require you to declare that you have been self-employed for a minimum of 2 years. Usually the lender will then check whether an Australian Business Number or ABN has been in existence for at least 2 years, however in certain circumstances this check is not required.

Another major difference with a No Doc loan is that the loan must be wholly or predominantly for business or investment purposes.  In other words up to 49% of the loan can be used for your own personal debt, such as refinancing your current home loan, but the remaining 51% must be used for investment or business purposes.  And you have to make a statement confirming this is the case.

What can you use a No Doc loan for?
Generally the loan can be used for any worthwhile purpose, such as a purchase or refinance, consolidation of personal or certain business debts or construction / renovation of a dwelling. However there are usually certain restrictions on using this type of loan for some business purposes (such as a business purchase or the repayment of a director’s loan). Often Investment House clients will use a No Doc loan to buy, refinance or construct an investment property.

What documentation do they usually want from me?
As you can see from the following table, although requiring some documentation No Doc loans are blissfully easier on the paperwork front.

OK so what’s the catch?
The bad news first…

• most main stream lenders don’t offer No Doc loans.  When they do, it will usually be at a maximum LVR of 70% to 75%.  Also,
• No Doc loans are more expensive than a standard loan, in terms of interest rates and early termination fees, and
• Typically a Lender’s Mortgage Insurance premium is payable when borrowing at greater than 60% LVR (often running into the many thousands of dollars).   

The good news… Investment House has sourced an outstanding No Doc loan.  This products provides

• a maximum 80% LVR, and
• NO mortgage insurance premium.

This really is a breakthrough product.  It means, if you have a $500,000 house, you could get a No Doc loan for up to $400,000. There are no ongoing fees on the loan and there’s a relatively cheap exit fee. Interest rates are very competitive (starting at 7.55%* per annum) which is just under a 0.25% higher than the typical “Standard Variable Rate” of most banks.  It really is user friendly!

If you are interested in buying Brisbane property below market value and using this type of loan to do so call Investment House on (07) 3369 0111.

* Interest rate is an annual indicative rate only, is subject to change without notice and may be subject to fees and charges.

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Property Management - What is a Body Corporate?

If you are one of the approximately 3.5 million people living in a strata or community title subdivision in Australia, you might have found yourself wondering about the concept of a Body Corporate.  Who are they and what do they do?

The body corporate manages the common property in a subdivision or block of units, and each owner of a unit in a strata or subdivision is automatically a member. The common areas include those areas that are for shared use or enjoyment – such as driveways, gardens, fencing, stairwells, lifts, swimming pools, and in most cases balconies and exteriors of the building façade. Essentially the Body Corporate is the comprised of a group of owners, but often in larger complexes they will employ a Body Corporate Management Company to do the day to day management.  This is not to be confused with an on-site manager.

The Committee of the Body Corporate, which is elected by the members, meets regularly to discuss various matters relating to the administration of the building (for example, maintenance and cleaning of the common property).

In order to ensure the enjoyment of all the common facilities and to ensure the building is maintained in good condition, the Body Corporate will determines (within pre-set guidelines) the “rules” under which the complex will operate. These are known as the Body Corporate by-laws. They include a range of items from noise control; to parking; to whether you can hang your washing on the balcony; or paint your front door a particular colour. It is a requirement of the law that these rules exist and that every occupant (whether property owner or tenant) has a copy of them and abides by them.

Body corporate by-laws exist for the protection of all. They are generally nothing more than a common sense approach to what is required when a group of people live in close proximity to each other.

Where a unit is rented, the Property Manager will generally interact with the body corporate on behalf of the owner.  Often Body Corporate Managers are not very “maintenance friendly”, and some Property Managers will find it more convenient to simply pass a maintenance expense to an owner for payment rather than do battle with the Body Corporate Manager.   It is important to distinguish between “owner” and “body corporate” maintenance or you may be paying for more than your share. 

If you have Brisbane property that isn’t being looked after to your satisfaction, let us take the worry from you.  To find out more about our premier service, call Wanda or Yolanda today on (07) 3369 0111

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Deal of a lifetime.., they say it comes along about once a month!

One the best deals currently available is a simple house and land development.

This property is in a terrific location just 6 km from the GPO, with an existing Development Approval (DA) for a 4 bedroom home. The block slopes upwards from the street meaning that it has an elevated position with fantastic views over the suburb.  In the present “confused” market, you could expect to purchase the site for $250,000 - which would represent excellent value.  To put that in perspective, most blocks in the area are selling for $280,000.  The block is currently on the market for $270,000 however we believe the seller is highly motivated.

Our preliminary feasibility suggests a healthy profit would be forthcoming.  A purchase at $250,000 subtends a profit of $54,000.  With the DA in place, the project has little risk, no long term holding issues (because you can build straight away) and a fantastic position.

To take advantage of this opportunity, please call Marco on (+61 7) 3369 0111

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Case Study - Last month we got a great deal, this month it was a steal!

When the price and conditions are right… buy it! Last month we discussed a property that was on the market for 2 months and we got a deal. This month our client’s got a steal. It wasn’t so much the price (which was very good to begin with) but the property’s circumstances and the contract conditions that made it a great deal. 

Firstly, let’s discuss the property’s circumstance.

The property is a large corner block 4.5km from the GPO with an old house in the middle. It was being sold with a “slider” DA.  The approval was to

• subdivide the site into two 400m2 blocks,
• move the old house across onto one block and renovate it, and
• build a new house on the other block.

The fact it came with a subdivision approval was great as most of the work had been done securing the DA. 

But there was a problem.

Based on the approved “slider” subdivision strategy, the project didn’t work.  It simply wasn’t profitable. There were two reasons for this.

• in the current market, it costs as much to move and renovate an old house as it does to build a new house - but you get a much higher price for the new home than the old renovated house, and
• the DA for the new house did not utilise the full potential of the city views. 

One of the most important things when doing a property development is “seeing the potential in a site”.  You have to know the subject backwards, and part of that is using the council’s procedures to your maximum benefit.   

The Investment House team came up with a great alternate.  Instead of walking away from the deal they recommended the client take on the project and use the existing DA to demolish the existing house and subdivide the land into the proposed two lots.  At the same time, they would submit a new application to build two new homes that took full advantage of the city views.   This represents a major windfall to the investor.

Let me explain.  Normally it takes about 6 months to subdivide a block of land, 3 months for council approval and 3 months for the actual subdivision. On the other hand, it only takes 3 months to get council approval for the new designs.  This meant that the subdivision works could be done (using the existing DA) at the same time the new designs were being approved.  This twist basically saved the new owner three months of holding costs (say $15,000) and this, coupled with the new designs, made the deal work very nicely indeed. 

And another little plus.  As part of the contract negotiations, the Investment House team was able to secure a 90 day settlement period. This really put the icing on the cake. Not only did we save 3 months of holding costs in regards to the DA (around $15,000) but we were able to undertake the initial work (including the subdivision and the new design applications) without the clients having settled on the property.  That adds up to another $10,000 saving.

 It pays to know how to use the system to make a profit.

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Disclaimer

All information in this report is general information only. Nothing in this report is meant to be specific investment advice, nor should you treat it as such. Everyone's individual circumstances will vary widely and you must seek advice from your own independent licensed investment adviser before investing into any form of investment. Investment House, its employees and representatives take no responsibility for the result of any actions taken by the readers of this report.

Investment House and its related businesses makes no representation and gives no warranty as to the accuracy of the information in this document and accepts no liability for any errors, misprints or omission herein (whether negligent or otherwise).