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    Default Avoiding high risks of high-rise investments

    Hi Guys

    Article in this morning's Sunday Times about avoiding risks of buying into high rise apartments.

    Avoiding high risks of high-rise investments

    SUNDAY , 14 MARCH 2004

    By ROB STOCK
    Knowing your rights can save a lot of hassle when buying apartments off the page.

    The contracts buyers sign contain clauses that, while not uncommon, are heavily tipped in favour of the developer and not the unwary investor or those putting their first foot on the property ladder.

    These include so-called "sunset" clauses, which allow lengthy delays in the construction of apartment blocks, while giving the buyer an end date by which construction must be completed.

    The practice is tied up with the way apartment buildings are being raised in Auckland and other metropolitan areas.

    The finance that developers need to build their concrete towers is often dependent on pre-sales of 65 per cent or higher.

    But the pre-sales take place in an atmosphere of uncertainty.

    Plans can change, extra floors can be added, apartments made smaller, and building materials changed.

    Local authorities can order changes, and strikes can delay construction.

    Freak weather conditions can even push back the date at which construction begins.

    For those buying somewhere to live that can mean months and even years of having to pay rent, when they could be paying off their mortgage.

    That can set them back thousands of dollars.

    But they aren't "out of the market" because the value of their apartment can rise or fall during that time.

    Sunday Star-Times sub-editor Mat Ward's story illustrates the problems buyers can face.

    In March 2003 he put down a 10 per cent deposit on a $99,000 apartment at the planned Zest Apartments complex in Nelson St, Auckland.

    He was told his apartment would be built by April 2004 and he could move in, meaning an end to his days paying rent.

    But construction hadn't started by October and, becoming concerned, Ward called Brick Securities Property Development, which had sold him the apartment.

    He was told there would be delays - big delays.

    Referred on to Conrad Properties, the developers headed up by multi-millionaire Robert Holden, Ward was told by letter that building would start mid-November 2003.

    "We will advise you in due course as to progress in completion of the development which is anticipated to take approximately 22 months to build," read the letter.

    Horrified, Ward tried to get his money back so he could find somewhere else to live.

    But he couldn't.

    The contract he had signed stated the vendor - Brick Securities - could not be held responsible for delays to building for any reason beyond its "reasonable control".

    Though the developer could pull the plug on the development, Ward had no way out.

    According to David Gilbert of law firm MinterEllisonRuddWatts, sunset clauses do put a maximum time limit on developers to deliver on their promises, which is good for buyers.

    But it is natural buyers are not given an easy way out.

    Would a bank lend to a developer whose buyers could cash up their deposits and walk?

    That would add risks a bank would be unwilling to stomach, making it harder to raise new towers in the increasingly high-rise Auckland central city.

    The story for Ward ended happily.

    He did get his money back, and is now the happy owner of a flat in the North Shore's Birkenhead. This happened after he revealed he was a journalist.

    He was released in February from the contract and received back his $9900 together with net interest earned from funds held on deposit amounting to $203.97.

    An accompanying letter from Keegan Alexander, lawyer for the developer, reads: "We confirm that our client has agreed to release you from the Agreement for Sale and Purchase strictly as a gratuitous gesture."

    Holden says Ward was released from his contract because in his case a "genuine error" had been made. There has been no delay to the construction, he claims, but he says Ward was told the wrong date during the sales process.

    "There was a genuine mistake from my understanding of the incident, therefore we let him out," says Holden.

    "He was quite categoric of the date being 2004. It has always been 2005."

    His being released from the contract was nothing to do with him being a journalist, says Holden.

    Construction has now begun on the 400 apartments in the block.

    Understanding that delays - sometimes lengthy - can occur and apartment plans can change, means spending the necessary time to understand just what you are signing up to.

    When you are considering an investment as large as that of an apartment, getting a lawyer to read the contract and point out all the risks and how favourable it is, is essential, says Gilbert.

    "Make sure you get a good lawyer, perhaps one that a friend can vouch for," says Ward.

    It is as important to understand how capital growth and rental income projections of salesmen have been calculated, and what other similar apartments have sold for.

    Gilbert says points to look for include:

    * Understanding the sunset clause and what it could mean for you. If you could be left facing long delays hitting you in the pocket, perhaps you should think again.

    It might be useful to understand the track record of the developer which could give you a guide to whether they have kept buyers waiting before.

    * Check what the contract says about how much the final apartment delivered to you can vary from the plan off which you bought.

    It should state by what size your unit can be reduced and guarantee the value of the apartment can't be reduced because of any changes.

    * Buyers also need to cross-check very carefully between the contract and what they are being told they will get.

    * They need to be aware of how long the developers guarantee to fix minor and major problems.

    If a tap breaks on day 31, will you be covered? Gilbert says 90 days is a reasonable period.

    * Buyers should also know how long the developer guarantees its work in areas like roofing and structural integrity.

    * If you are buying a flat with a car park be careful that you are promised the kind of space you need. Check you won't have to sell your BMW and buy a bubble car.


    Also check how long you have to settle and how much the penalty interest is for late settlement. Anything over 15 per cent is way too high.

    The contract should be explicit, including the deposit amount, where the money will be held, who can access it and how.

    Also, who signs off the apartments as completed? If it is the developer there is no guarantee of impartiality.
    So does this leave all the power in the hands of the developers? Maybe not.

    In these days in which the property market seems poised to come off the boil, says Gilbert, buyers interested in an apartment but unhappy with the contract they are offered may consider trying to get conditions varied in their own case.

    They may want a way out if an apartment is not built within a year of the date promised.

    They may not get it, but then they may just find they have more power than they thought.
    Regards


 

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