A significant amount of VCLs work is the valuation of proposed buildings from drawings and plans.
If you wish to fund a development project such as a new residential dwelling, your lender will require you to obtain a valuation from plans.
You will need to provide the Valuer with a set of plans, elevations and outline specifications of the building to be erected. There needs to be sufficient detail included so that the Valuer can fully describe the finished project.
At this point the valuation is entirely the same as the valuation of an existing dwelling. The likely selling price of the property once as it is completed is estimated by referencing sales of similar properties.
However the valuation is entirely contingent upon the following:
Initially the only security that the lender has is the section (providing you own the title). They will only release further funds as construction progresses and there are some tangible works completed on site.
If you are having the dwelling erected as part of a ‘full contract’, you will need to agree to a progress payment schedule with your builder as part of the initial contract documentation. It is vital to ensure that the progress amounts agreed to be paid out to the builder do NOT EXCEED the value of the actual work completed.
Cost to complete
An important construction loan concept and one which is poorly understood is that of the ‘cost to complete’ figure. The cost to complete is the amount that would have to be paid out to complete the job even if the existing builder abandons the job. The importance of this figure to the lender is rooted in the concept that a partially completed dwelling will never sell for it’s true value. Any buyer would be seeking a discount. The cost to complete is the amount that would need to be spent to finish the job and thus attain ‘full market value’. Most lenders will hold this amount back from approved loan monies at various stages.
Construction loans should always be treated as HIGH RISK. You are far more likely to get burned on a construction loan than when purchasing an existing property. There are ways to minimise that risk (refer to our Progress payments section). Also you can insure the build itself by taking out Construction Insurance and a Performance Bond.
Unless you are paying in one lump sum at the end of the build, chances are you will have a clause in your contract for regular progress payments to be made to your builder.
These payments are made at agreed stages of the construction. For example, the first payment might be at the foundation complete stage and the second at completion of framing and so on.
The timing and amount of progress payments are set down and agreed in the initial contract. We cannot stress strongly enough that it is vitally important the agreed payments correctly compensate the builder for the amount of work completed. If they over-compensate, then you are setting yourself up for two problems later in the construction phase.
Golden Rule – Always seek advice from a Valuer or Quantity Surveyor BEFORE agreeing to a payment schedule.
Once as you agree to a particular payment schedule, you are legally liable for the amounts due under the contract as a debt.
If you simply don’t pay it becomes a debt that the builder can recover from you in the courts, along with legal costs.
If you disagree with the amount claimed, you must notify the builder within the time proposed in the contract documentation and show your method of calculation for the alternative amount. The form in Schedule 1 of the Construction Contracts Regulation 2003 provides for a written payment schedule where you can state the amount you think you should pay. In the schedule you’ll need to state exactly:
If you don’t pay the alternative amount described in the schedule, the builder can recover this amount, along with costs, in court.
The builder can only suspend work if this is agreed in the contract, or if it’s a commercial construction contract, i.e. if you have built the house with the intent of selling or renting it.
If you have a dispute about whether you have to make a progress payment or about the standard of work, you can take the dispute to an adjudicator under a scheme set up under the Construction Contracts Act or under the provisions of your contract with the builder for dealing with disputes. Building work (for contracts entered into from 30 November 2004) is now covered by mandatory warranties.
Get the schedule right in the first place and avoid the stress later on.
This is the final stage of the construction loan process. When the Valuer’s certificate is issued the Lender will release the remainder of your loan monies.
The Valuer is required to inspect the property and confirm to the Lender that the dwelling has been built and completed in accordance with the original plans and specifications provided. If there are deviations or changes to the original plan or specifications, these need to be noted as they may alter the final security value.
We note that three issues are poorly understood and often lead to confusion:
Progress and Completion Reports are charged out at a lower rate than the initial valuation from plans.
If the construction takes longer than the 3-6 months indicated in the initial valuation then values might have increased or decreased. The lender might insist that a revaluation takes place.
If you want an updated valuation at completion then you need to request one as it is not automatically produced. The fee for an update will generally be higher than either Progress or Completion Report.