Developers are creating a bad name for themselves.

Every day I read in the news that developers are putting up the price of properties for both first-home buyers and property investors.

This sometimes happens even when the purchaser seemingly has a water-tight deal after signing a fixed-price contract.

But how can a developer increase the price when the price is meant to be locked in? Let’s take a look at the fine print.

There are two types of contracts in New Zealand: ‘build’ and ‘turn-key’ contracts.

Build Contracts

When you use a build contract, you hire a builder or developer to construct the house for you. You own the land during construction and pay them for their service.

It’s typically easier for a developer to increase the price using this type of contract. That’s because they are allowed to pass on increases in the cost of building materials under the standard agreements used in New Zealand.

For instance, under the standard MasterBuild contract, a builder doesn’t even need to give you evidence that material costs have increased before raising the price.

Unfortunately, in this case, you can’t get out of the contract and generally must accept the price increase. The alternative is to negotiate or pursue a legal challenge.

Turn-key Contracts

On the other hand, turn-key contracts mean investors and first home buyers purchase a finished property from a developer. It just hasn’t been
built yet.

While these contracts are receiving the most media attention right now, it’s actually harder for the developer to increase the price using this contract.

That’s because you don’t own the land until construction has finished. And no clause allows the builder to pass on increases in the cost of materials.

So, how do some developers put up the price anyway?

When you sign a turn-key contract, you’ll eventually go unconditional. That means you’re locked in to buy the property and can’t cancel.

However, that doesn’t mean the developer is unconditional. They might still be able to cancel the contract.

If you go unconditional in January, the developer might have another six months to get their resource consent applications through the local council.

If they can’t get this how they want, they have the right to cancel.

Some developers will use this clause to cancel the contract and ask you to re-sign at a higher price.

However, a turn-key contract has this benefit: you don’t have to accept the price rise. You can say ‘no’ and walk away.

Should I accept a price increase?

So, should you accept the increase? The answer isn’t cut and dried.

If you accept the price increase, you’re paying more money. But, if you walk away, you could miss out on what is still a good deal.

One of the property investors using our services at Opes Partners purchased a new-build in July 2020 for NZ$649,500. By the time the property was due to settle in November 2021, it was worth NZ$840,000.

However, the developer threatened to cancel the contract using a sunset clause if the purchaser wouldn’t agree to increase the price to NZ$700,000.

In this situation, the developer claimed that multiple Covid-19 lockdowns and the higher price of building materials meant he was losing money.

What are the options

What were the investor’s options?

If they disagreed, the developer would cancel the contract and re-sell it to someone else.

If they chose not to accept the higher price, they could get their deposit back from the developer and start looking around for another property.

But, in walking away from the deal, they would also walk away from significant equity increases.

By continuing to buy the property, they’d pay NZ$700,000 for a property that was now worth NZ$840,000. That’s NZ$140,000 worth of equity gained just in settling this property.

This investor decided to pay the higher price. They knew that property prices everywhere had gone up. So, if they got their deposit back and looked at other investments, they would pay a higher price anyway.

Foreseeing sticky situations

While building property comes with benefits – especially with current government incentives – there are also risks. And while you can’t avoid them altogether, you can be prepared.

If you’re using a turn-key contract, ask your solicitor a) for all the different ways the developer could cancel the contract and b) when the developer could do it. That lets you know the risk you are taking on.

Next, start to negotiate with the developer (through your solicitor).

If there’s a sunset clause, can you make it so only you can use it? Could you make it so the developer can’t use that clause to sell the property at a higher price?

While there will always be some risk, a thorough understanding of contracts can help you prepare for it.