Author: Darin Hindmarsh

Owner Builder Loans: How it Works, Benefits, Things to Consider Owner builder loans are hard to get. This is because owner builders are generally thought of as high-risk borrowers by banks and loan companies. In any event, an owner builder loan can help you get much-needed funds for your project. Below are a few primers to help you understand the type of loan more and get you through the process. How An Owner Builder Loan Works Owner builder loans are not like regular mortgages. If you get approved, the fund won’t be released to you as a single lump sum. Rather, it will be given to you in increments as your project progresses. Each time a stage of your project is completed, an inspector from the firm will check the quality of the construction, your timetable, and your budget’s status. This way, they can be reassured that the money they are lending you are going to the right things. How To Apply For Owner Builder Loans Loan companies will ask for certain documents for owner builder loans to be approved. These are: If you are an owner builder without any prior experience in building, the amount you can borrow will range only from 50% to 70% of the total construction cost. You can get a bigger loan if you are a licensed builder or have the supervision of a licensed builder. Generally, licensed builders can get approved for up to 80% of the total construction cost. Benefits Getting owner builder loans for a chance to build your own house can be challenging but the troubles are all worth it. As an owner builder, you will be able to save more money because it is always easier to build something from scratch than to modify a previously existing structure. Also, as an owner builder, you will not have to settle for constructions that are below your standards. During the construction phase right up to the finishing touches, you can enforce your own standards, be hands-on with the project, and know for sure that the money you are investing in the project is going to the right things. How to Stay Focused And Finish Your Project The biggest challenge for anyone who gets approved for owner builder loans is to sustain the project. You must be careful not to overspend at any phase of your construction. From the very beginning, hire a trusted financial adviser to do the costing with you. You should have a 15% buffer just in case there is inflation during your construction period, or you would have to extend because some parts of the project did not go as planned. You must always have room for delays and you must be prepared for them. Generally, house constructions take a minimum of 25 weeks. You must be prepared to spend more time and money on the project just in case modifications are in order. You must also look into your paperwork. Read your permits well, make sure you abide by the terms and conditions and make sure you are not spending more money on unnecessary things especially if your loan approval depends on it. Keep a strict watch over your time table.

Say what you like about Banks and Bank Managers, there is one simple and inescapable fact. They are in business to make money. As a result, they assess loans on the basis of profit and risk. Banks and other financial institutions have 50 years experience worth with Owner Builders and over that time they have discovered three main issues that cause problems. These 3 issues are critical because any of them could mean that if things go wrong and the bank is forced to sell it won’t get the value back on its investment. The bank might agree for example that when it is finished the property will be worth $1million dollars but if the project isn’t finished or runs out of money, the bank’s security (the property) will be worth nothing like that amount. It is much more difficult to sell a property with wires hanging out of the wall and unfinished paneling. In addition, banks also have no guarantee that the job was performed poorly or with qualified contractors. As a consequence of these risks, banks either won’t lend or will only lend a very low LVR (Loan to Value Ratio) – traditionally 50 – 60 %. Unless you know how to present your project in a way that puts their minds at ease.

What is the Situation with Owner Builders in Queensland? In all states and territories within Australia except Queensland, you can get “Builders Warranty Insurance”. This is insurance that “is acquired by the builder and issued to the homeowner to protect them against loss due to non-completion, defects and breach of statutory warranties by the builder. It is legally required and is only triggered if a builder dies, disappears or becomes insolvent before completing the home or fixing the defects.” This insurance provides cover to the homeowner for up to seven years after the home is completed. In Queensland the situation is different. Under the PAMDA Act (Property and Motor Dealing Act) it has to be noted on the contract of purchase that the property was built or renovated under an owner builder. If you sell your property within six years of the completion of the owner builder work you must provide the prospective purchaser a written notice with the warning: Warning – The building work to which this notice relates is not covered by insurance under the “Queensland Building Services Authority Act 1991”. There is more information on this here. The other significant feature of being an Owner Builder in Queensland is that you can only receive an Owner Builder licence every six years, as opposed to every 3 years in other states.

Why are the cost savings so significant when you Owner Build? In its simplest definition, an Owner Builder assumes responsibility for the construction or renovation of a home. “Not so hard,” I hear you say? In reality, what it means is that you are in charge of every single thing to do with that house. Every nail, every windowsill and every person you need to get every nail and every windowsill installed.That means that you have to know what is needed when it will be needed and how much it is going to cost. And that is exactly where cost savings can come in. If instead of being an Owner/Builder, you enter into a Building Contract (link to def) with a registered builder, that builder will typically play the role of Project Manager. He or she will coordinate all materials, and all tradesmen to get the job done. For this service, he or she will add a margin of up to 15% onto all materials purchased and up to 30% on tradesman’s hourly rate. This margin is the builder’s profit as well as compensation for the risk he is taking on. In addition, the builder is liable for structural issues within that property for 7 years after the completion date and needs to factor in the risk.The other factor to consider is that of economies of scale. Because builders often work on many projects simultaneously, they are able to get cheaper prices on a lot of materials because they are able to buy in bulk. This price saving in materials can sometimes compensate for the additional margin. Of course, not all properties and projects are the same but as a general rule of thumb, the cost savings from being an Owner Builder really only start to be worth the effort in mid-level to upmarket budget house (in construction projects of about $300,00 – check?) There can also often be savings to be made in architectural projects as many of the elements need to be custom made and therefore not subject to bulk buying discounts.

Top Tips for Successfully Owner Building a Project At Intellichoice, we’ve been helping Owner Builders turn their dream houses into a reality for more than ten years. We’ve seen lots of people embark on the Owner Builder adventure and we’ve learned (sometimes the hard way) the most common mistakes that can trip people up and how to avoid them. Here are our Top Six Tips for getting it right: Tip Number One Tip Number Two Tip Number Three Tip Number Four Tip Number Five Tip Number Six

Why Do Banks Value Owner Builder Projects Differently? One of the key pieces of information Banks and Financial Institutions use to assess loans is the End Market Value which, as the name suggests is the value of the property once the renovation or build is completed. When valuing a standard construction home loan contract – the sums are easy. Add the value of the property to the value of the land. In the case of an owner builder valuation, however things aren’t so easy. The value of the land might be easy to determine but the value of the property may be significantly more than the owner builder is paying. If, by owner building you can reduce the hard cost of the construction (which, lets face it is often a major point of the exercise), you can run the risk of the End Market Value being reduced as well. In many cases, Banks won’t accept the fact that you are building your house for a certain amount of money but if you were to go through a builder, the same house would cost significantly more. When assessing the value of the finished owner builder project, the role of the broker becomes extremely important. It becomes his or her job to present the information in such a way that banks can easily and quickly see the value. A good broker will know the questions that banks will ask and answer them with market-based data using information such as local property values, price per square meter and similar building quotes. By using a specialist broker when obtaining finance for an owner builder project, you are more likely to present your application information in a way that banks and financial institutions are more likely to approve. Rather than doing the valuation sums by rote, banks will see that the value you are putting into your owner builder project far outweighs the actual dollar cost. A good owner builder finance specialist will also ask questions that help make the project look more appealing. Do you have experience in the area? Have you done a similar project before? Do you have a trade? Are you a project manager? Do you have significant contacts within the building industry that can help make this owner builder project a reality? If the answer to any of these questions is yes, a stronger application can be made to the banks so that you can increase your chance for your owner builder project to be approved. If you don’t have experience as an owner builder or as a tradesperson, all is not lost but specialist financial advisors can help you formulate other ways to enable your owner builder finance to be approved. Maybe you could find a builder who would be happy to work with you for a fixed fee to ensure you that you have a specialist on hand to iron out any bumps or area where you don’t have the right information. Alternatively, you could look at educating yourself so that you do have the right skills to see the project through. Another consideration is that a specialist owner builder broker may consider is what are property prices doing in the area of your project. Was your property particularly undervalued when you bought it for our owner builder project? Have you been sitting on the property for a time and the value of the land has appreciated so you now have significant equity within the property? All of these things will make it easier to successfully gain an owner builder loan.

Can I Use My Normal Home Loan to Be an Owner Builder? There are many reasons why it pays to use a qualified and experienced broker to help you get an owner builder loan. We have many examples of stories where people have been terribly disappointed because they got a loan (or tried to) using brokers who were not experts in this field. Susan and James are experienced renovators. They are currently living in their own home and have many renovations behind them. They are satisfied with their home but have decided they should use their skills and experience to buy a property, renovate it and install tenants to help pay it off so that they can start to build a series of long term investments. In the past, the couple has always used builders to manage the project, but this time they want to owner build. They found a small property they felt confident they could add value to. They thought they could use the equity they had built up in their home loan to borrow for their investment property project but when they applied for the loan at their bank, they discovered that their bank didn’t even have a product which would work for an Owner Builder Construction loan. So they tried several other banks but kept getting rejected as they weren’t aware of the right way to present documentation to allow the project to proceed. Just as they were about to give up, however, they discovered a website that gave them information about Owner Builder finance and who to present their information the right way. Not only is it vital to present the obvious information such as investments, equity, and salary when applying to banks for an owner builder loan, it is also important to present the financial details of the project in such a way that it is clear it is realistic, professional and achievable. The bank wants to be sure that you have done your budget properly and accounted for all the things you can reasonably expect to occur as well as allow a margin for things that you can’t really foresee without a crystal ball. The bank also wants to know that you have developed a sensible and realistic timeframe for the project, which allows for things like bad weather. It is important when becoming an owner builder that you have the ability to draw down the loan in stages. You also need to understand that a representative from the bank would need to physically check that each stage had been completed satisfactorily and that until all the boxes had been ticked and finalized, you won’t receive the funding. As you can imagine, without the complete amount about a project, it could very easily be derailed as there could be a situation where the tradespeople were unwilling to keep working on the project until they were paid and the bank was unwilling to pay until the final details of the stage were completed. It is also important to understand that once the project was satisfactorily completed, it would be a good idea to consolidate the loan and put it somewhere else. They could potentially add the debt into their existing home loan so they only have one consolidated debt. When people first start out investigating the possibility of managing a project themselves as owner builders, they aren’t aware that there are many elements associated with it in addition to just obtaining a license and the skills to physically manage the build. There are specific financial implications that can make the difference between a successful project that comes in on time and on budget and one that doesn’t. Many people find a skilled and experienced broker and are able to obtain the money they required through a specialized owner builder Loan. Although it is always easy, they managed to complete the project and get tenants into the first of their rental properties so they could take the first step in successfully building their investment portfolio. Many people take the road of becoming Owner Builders and with the right education and experience manage to find it a very lucrative and successful experience. There is lots of information out there and it really is just a matter of taking the time to educate yourself. Talk with people who have done it. Talk with builders. Talk with brokers and find out the answers for yourself.

What Do I Need to Know About Insurance for Owner Builders One of the most important things to consider about becoming an Owner Builder, even before you establish how and from who you are going to get Owner Builder finance, are the legal implications that come along with that decision. The legislation for owner builders changes regularly so it is important to ensure you make sure your information is current and accurate. Each state has different requirements and it pays to make sure your information In all other states except Queensland, you can get “Builder Warranty Insurance.” This insurance put simply means that as long as they have done everything properly and it cracks within 7 years, insurance will cover the repairs. This is insurance that is acquired by the builder and given to the homeowner as a protection against loss due to non-completion or defects etc. defects. This insurance provides cover to the homeowner for up to seven years after the home is completed. In Qld, under the PAMD (Property and Motor Dealing Act) if the property is sold within 7 years, it must be noted on the contract of purchase that it was an owner builder. If you sell your property within six years of the completion of the owner builder work you must provide the prospective purchaser a written notice with the warning: Warning – The building work to which this notice relates is not covered by insurance under the “Queensland Building Services Authority Act 1991“. Another other significant feature of being an Owner Builder in Queensland is that you can only receive an Owner Builder license every six years.. Take the example of Rodney Jones. He isn’t a qualified builder but he has many years experience in the building industry. As a result, he decided to buy a property and renovate it under an Owner Builder license and then sell it and make a profit on the investment. He found a property and applied for an Owner Builder loan with a major bank Within the next 12 months, he completed the project, substantially increasing the value of the property. He then put the property on the market and sold it. After paying back his construction loan, he pocketed a significant profit. This profit came despite the fact that he had to declare to all potential buyers that the home had been owner built. The project was ultimately such a success for him financially that he decided to do it again. Unfortunately, because he lives in Queensland he was unable to apply for another Owner Builder license again until 7 years had passed. This was despite the fact that he had significant experience now at managing this type of project, would have had no trouble at all in obtaining appropriate an appropriate Owner Builder loan and would like to do it again. The reason restrictions and limitations relating to owner builders are put in place is to ensure that constructions jobs are completed safely and at a high quality. Historically this is one of the reasons that banks and financial institutions consider Owner Builder loans to be higher risk than standard home loans. It is easier for Owner Builders without experience to run over budget and sometimes, not be able to complete the construction. Once a project has run out of money (without being finished) it is very difficult to find new sources of finance. As a consequence of these risks, banks and other financial institutions either won’t let or will only lend a very low LVR (loan to value ratio). The way we recommend to get around this situation is to present the financial information to banks in a way that they can see the inherent value in the project and understand that it is being managed professionally and properly. This is where the value of a good, experienced broker can really show itself and enable the project to get off the ground and become a financial success.

Is it Hard to Get Finance as an Owner Builder? It can be challenging and frustrating but can being an owner builder can also be ultimately rewarding. One of the best tools you can arm yourself with before you start is information and knowledge. Before you decide to be an owner builder, you need to source information about where to start gathering information about Owner Building, obtaining Owner Builder construction loans and ultimately saving money. Your local council should be one of your first ports of call. Most councils in Australia have information about the regulatory requirements as well as general information about Owner Building. Try the Customer Service Dept first and then speak to the department directly. They can answer also answer specific questions such as boundary fence issues. When working as an owner builder, the integrity of the tradespeople you use is vital. If possible find your tradespeople through referrals and make sure you follow up all references. Ask lots of questions and take your time making sure that this person is the right one for your owner builder project. Of course learning everything in the world about becoming an Owner Builder won’t help at all if you can’t get the finance to make the project a reality. It is very important that you are realistic about your budget. There are many free calculators on the website that enable you to calculate how much our project will cost and how long it will take. One of the issues with becoming and owner builder is the way properties are often valued. A common technique is to add the value of the land or existing property to the cost of construction. This valuation process, however can work against the Owner Builder. There are many ways you can save money on your owner builder project. Here are some common ways owner builders reduce their costs and see if they work for you. Always get as many quotes as possible and make sure you shop around. Visit building supply auctions – you can find them through the local paper. Visit seconds outlets – sometimes something with damaged packaging (that you throw away anyway) could save you hundreds of dollars. Cash and Carry shops have a surprising range of products. Insurance is an area where you can save big money when you are an owner builder if you know where to look and what questions to ask. It is of course very important that before you become an owner builder you make sure that the potential savings are worth the time and effort you will need to spend. Builders are often able to employ economies of scale to purchasing and can often get materials much cheaper than the average owner builder. This means, that even after they have put a margin on top, material costs may still be cheaper through a builder. As a general rule, Owner Builders are more likely to make significant savings on mid to higher construction values and on projects designed by an architect. There is no reason that just because you aren’t from the industry, it doesn’t mean you can’t become an Owner Builder. It just means you need to find a builder who can help you add to your skill set. Many credible builders are happy to enter an arrangement where they Project manager the job for you in return for an arranged bonus. This arrangement means you get professional expertise on site without losing the cost savings on materials and labour. It is of vital importance that when you do your research on becoming an owner builder, you make sure that all information is current. As with most industries, there are constantly innovations and changes. Subscribe to industry magazines and make sure you know what is going on. Don’t underestimate the time it will take to complete the project Weather, tradesmen’s schedules are just two of the factors than can slow your project down. Do your research, calculate how long you think it will take and then allow for extra time. If you finish earlier – great news but if running overtime can have significant financial implications.

Save a Fortune and Build your Own Home as an Owner Builder The first step in obtaining an owner builder loan is sitting down and determining exactly what your individual circumstances are. What kind of house or renovation are you looking to do? What is your income? What are your assets? How much money do you need to borrow? All that basic information is critical to determining where is the best place to go to look for a loan.There is lots of information that needs to be put into the equation when determining how best to go about being an owner builder. How big is the land? What kind of project you are going to complete? How much do you anticipate it costing? Another question we ask our clients is “Why?” Why are you looking to owner build? Is it to save money? If so, have you made sure that the project makes it worthwhile? Generally, we recommend to our customers that the costs savings to become an owner builder are really only worth all the work on a building or renovation that over is in the middle to an upper range or if it is designed by an architect. Of course, this is a generalization and doesn’t always hold true but is a yardstick to measure things by. One of the main reasons for this is because professional builders often have more than one construction project on their books at any one time and are therefore able to buy in bulk and make savings in that way. These savings can often be greater than the surcharge that the builder puts on to manage the project. In more expensive owner builder builds and houses designed by an architect there are often more elements that are custom built. This can mean savings made by bulk buying don’t work. So it is vital to the project to make sure the costs savings of Owner Building a house are worth the time and risk. We also make sure that our clients understand that an Owner Builder construction loan is not like an ordinary home loan. The banks don’t just hand you the money at the start and wish you luck. Instead, the loan needs to be paid out in installments, once certain requirements are met. For example, a stage is not considered to be completed, until all fixtures are fixed into place. This means that you may be completely on schedule with windows and doors in place but unless they are actually fixed in, the banks won’t pay the next installment. Unless you have been an Owner Builder before it is easy to get into trouble when dealing with finances. If for example, the bank is unable to pay until you have completely fixed in the windows and doors you will need to make sure your builder has done this. The builder’s invoice for work completed to date, however, may already be passed due and he or she may be unwilling to continue until he has been paid. This situation (and many others like it) can absolutely be avoided but you need to know how it all works up front and before the problems occur. There are also a number of other things that need to be put in place before they can start, things like having an owner builder license and owner builder insurance. Once our team has gathered as much information about your owner builder project (and you) as possible, they then make an assessment as to whether the loan is viable and if it is they put it all into a proposal document. This proposal outlines what we can do to help them, what kind of loan they are eligible for, why we recommend they go that way and what the costs of that loan (and using our services) are. We make time with the client to go through the proposal with them so they understand the process. We make an appointment time so we know they will be in front of the computer and then email them through the proposal. This allows us to talk through all the details at a time our client is able to focus.

Don’t Become an Owner Builder Without the Right Finance Building your own home or renovation is potentially one of the biggest projects most people undertake and becoming an owner builder can be an even bigger challenge and the decision should not be taken lightly. One of the main reasons that people become owner builders is because it is possible to save significant amounts of money. Being an Owner Builder can also provide the satisfaction of knowing you were responsible for the finished project and the knowledge that it has reached your standards of quality. It is possible to use your own project management skills, labour and time to ensure you are not paying a margin to a builder and many owner builders have saved many thousands of dollars and created beautiful homes they are proud of. Many of our clients decided to become owner builders because they have been in the industry for quite a while and have experience in managing projects. They often want to use the skills they have developed over the years to build a home they love. As an added bonus, they often also pick up new skills along the way. The decision to become an owner builder is not for the fainthearted. In its simplest definition, an Owner Builder assumes responsibility for the construction or renovation of a home. Sounds easy right? Not always and it is not always easy to get finance for such projects In reality what it means to be an owner builder is that you are in charge of every single thing to do with that house. Every nail, every windowsill and every person you need to get every nail and every windowsill installed. That means that you have to know what is needed when it will be needed and how much it is going to cost. A simple way of assessing the work and responsibility involved as an owner builder is by considering where the cost savings come from. If instead of being an owner builder, you enter into a Building Contract with a registered builder, that builder will typically play the role of Project Manager. He or she will coordinate all materials, and all tradesmen to get the job done. For this service, he or she will add a margin of up to 15% onto all materials purchased and up to 30% on tradesman’s hourly rate. This margin is the builder’s profit as well as compensation for the risk he is taking on. If, for example, a tradesman doesn’t show up when he is required to or certain materials aren’t available on time, the cost of that delay will be carried by the builder. In addition, the builder is liable for structural issues within that property for 7 years after the completion date and needs to factor in the risk. Another factor to consider when determining whether the decision to be an owner builder is the right one for you is that of economies of scale. Because builders often work on many projects simultaneously, they are able to get cheaper prices on a lot of materials because they are able to buy in bulk.. This price saving in materials can sometimes compensate for the additional margin that a builder uses. Of course, not all properties and projects are the same but as a general rule of thumb, the cost savings from being an owner builder really only start to be worth the effort in mid-level to an upmarket budget house. There can also often be savings to be made in architectural projects as many of the elements need to be custom made and therefore not subject to bulk buying discounts. Before you make the decision to owner build, you need to assess many factors. Are the potential costs savings significant? Do you have the skills (and tolerance for risk) to do the job? Do you have the time to project manage and how much pressure will that put on other parts of your life? If, after a thorough analysis, the pros of becoming an Owner Builder in your situation outweigh the cons, then you need to start educating yourself about how to best become an owner builder.

Why do you need to know about owner builder construction loans? For many people, particularly those that are new to the area of construction, owner builder construction loans can, at first glance at appearing daunting and a bit scary. Once you understand both the industry and process however, you can quickly understand that they are loans that have been created for a particular purpose and need. There are many different reasons that people undertake the process of becoming an owner builder. For some people, it is about saving money, for others, it is about being in control of the project and making sure that you get exactly what you want without compromise. There are also many different types of owner builder construction loans and it is important to understand why you want the loan and exactly what features of the loan that is important to you. One of the key features of owner builder construction loans is that you are able to borrow money in states – that is as you need it. This is usually accomplished by an inspection by a certified agent once each stage is completed. This means that the bank can be confident that an independent party has verified that the project is on track. This is an important element that often gives the bank or financial institution the confidence to invest in the project. It means they are aware pretty quickly if the project starts to go off the rails or substantially over budget. Banks and other financial institutions lend money to projects in order to make money. Those who do specialise in the area of owner builder construction loans do so because they can charge a slightly higher interest rate to compensate for the increase the risk that is often assumed to be inherent with owner builder projects. They will only take the risk of investing their money into their project if they are sure you are going to complete on time and on budget. There are lots of different ways of making sure banks and financial institutions understand that your project is not going to fall in the proportion of owner builder construction loans that default or require more money to complete. One of the first ways is to document your experience in the industry and your proven ability to see a project through from start to finish. This may be able to be shown because you are in the industry already and have already completed similar projects, either for yourself or others. If that is not the case, you may be able to document your skills in project management through proven experience in other areas. It is also important when applying for an owner builder construction loan to clearly document the project, with a particular emphasis on the final value of the project. In a standard building contract, you can add the value of the land with the value of the builders contract and come fairly close to the value of the completed property. This is not the case with an owner builder construction loan however because changes are the value you expect to pay for the building part of the project will be significantly less than its final value because of the work you have put in and the savings you have made as a result of being an owner builder. When applying for an owner builder construction loan, there are many ways of proving to a bank what the true value of your completed home will be other than adding together the cost of construction and the value of the land. One way is to assess similar properties in the area. What price have they been selling for? If you are comparing comparable properties in comparable areas, you should be able to make a strong argument for your owner builder construction loan that the value of your property will be close to those. There are also other factors to consider for example the level of quality of your finishes, the level of detail in construction, whether or not it is designed by an architect. These things all make a difference to the value of your project and may help to make it easier to get an owner builder construction loan.