One of the big changes in the post GFC world is a greater focus on the quality of the mortgage security.

Even with a reported shortage of houses for sale in Auckland, crap properties still don’t sell or sell at a big discount.  There are some mega-ugly properties around, or is it just me?

The issue of quality has also been heightened by leaky building syndrome.  Badly leaking houses are selling for land value.  I recently looked at a property going to mortgagee sale with a CV of $690,000 that had a highest offer on it of $400,000.  I would imagine the lender is owed about $600,000 so they won’t be happy.

As a result, lenders are now more cautious, and some are asking for building reports on monolithic clad houses.

DIY remains a major pastime in NZ.  Typically we Kiwis have added ensuites or converted the downstairs basement into a bedroom.  These have often been done by competent builders, but just as often a building consent has not been obtained.

Councils can be frustratingly slow, bureaucratic, and expensive.  It is little wonder most of us have bypassed due process.  The most common DIY sin I’m guessing is French doors.  Everyone has them and next to none will have them consented.

For property investors one of the noticeable issues is illegal Home and Incomes.  To be legal it must be permitted and it must be fire rated.

For illegal dwellings the risk is that in the event of fire you may not have insurance cover and you could be held liable in court if someone dies in the fire.

Naturally banks will be reluctant to finance illegal dwellings.  Banks have grown increasingly aware of non-compliance.  They are motivated by the impact on any future sale price, the cost of remedy if they inherit the problem as mortgagor, and the risk of no or a limited insurance pay-out.

Lenders become aware of compliance issues through disclosure in the S&P Agreement, comments made in a registered valuation, or by the buyer’s solicitor (who also works for the lender.)  Few buyers fully understand that their lawyer is also the bank’s lawyer and is duty-bound to disclose any issues they become aware of.

Once you own a number of properties you’ll also be business managed.  Business managers are more in-tune with looking out for illegal properties.  I have one client where the bank has refusing anymore lending until they either fix or sell an illegal Home and Income.

The number of illegal dwelling staggers me.  Lazy landlords chasing yield, but taking unconscious risks.  They also end up with properties that may be increasingly hard to sell.  In my mind you’d be crazy to build yourself into a position (1) you cannot exit and to (2) take risks you cannot manage and (3) have outcomes (no insurance cover) you cannot predict.