As three more builders collapse, how do home buyers avoid the carnage?

In a week that revealed the demise of at least three more building companies, the reality that it could have a devastating impact on anyone buying and building a new home has been rammed, well … home.

Building companies have been the worst hit segment of the economy when it comes to insolvencies, and the past week has been a salient reminder that new home buyers need to take as many measures as possible to avoid becoming part of the fall-out.

In the past week, it has emerged that New South Wales-based luxury builder Millbrook Homes went into liquidation owing $4 million to 80 creditors. In Victoria, Bentley Homes went under with $1.8 million in outstanding debts.

In Perth boutique home builder City Residence entered liquidation this week, leaving 13 want-to-be home owners potentially out of pocket. This was just a couple of weeks after Flexible Homes went into voluntary liquidation with 19 homes unfinished.

While the impact on the building sector’s employees, subcontractors and reputation is hugely damaging, the cost to buyers left out of pocket is perhaps the most destructive aspect of the crisis.

Builder failures: Don’t wait until it’s too late

Sadly, more building company collapses appear inevitable.

To avoid becoming collateral damage in the battle for builders to stay alive, clients should take measures to ensure they have the correct insurance policies in place. If your builder fails to provide these insurance details ahead of the first payment, that’s an early alarm bell.

Regulations differ from state to state but in the event a builder goes bust, buyers should be protected by a mandatory insurance that is compulsory for builders to take out ahead of construction beginning.

As an example, in NSW the total limit (including non-completion of building work, defective building work and any other costs covered by the policy) is $340,000 per dwelling, with a sub-limit for incomplete building work of 20 per cent of the contract price.

In Victoria, domestic building insurance covers residential works valued at more than $16,000 and covers the client if, before work is complete, the practitioner dies, is declared insolvent or disappears. It covers costs up to $300,000 to fix structural defects for six years, and non-structural defects for two years.

In Queensland, the amount covered is $200,000 for residential building work in Queensland valued at more than $3,300 must have insurance through the Queensland Home Warranty Scheme (QHWS), which is administered by the Queensland Building and Construction Commission (QBCC).

QBCC will also suspend the licences of builders who fail to provide evidence of their financial health.

The Victorian Building Authority (VBA) instructs customers of builders that have gone into external administration to immediately contact the insolvency practitioner.

“If owed money by the builder, the insolvency practitioner will be able to provide a proof of debt claim form but clients should consider enlisting legal support to ensure their claim meets the exacting standards required to fully assess the outstanding debt.

“Both voluntary administrations and bankruptcies are sometimes resolved through a compromise with all or a subset of creditors.

“If your builder becomes bankrupt, the proposed compromise will be called a ‘personal insolvency agreement’. If a building company goes into voluntary administration, the proposed compromise will be called a ‘deed of company arrangement,” the VBA notes.

Home buyers often the biggest victim

Avoiding builders at risk of collapse is the obvious best practice but their financial situation is rarely transparent.

Building experts from the University of New South Wales (UNSW) agreed that builder bankruptcies were almost always to the detriment of the buyer, who is an unsecured creditor to the builder.

Dr Peter Swan, Professor in the School of Banking and Finance at UNSW Business School, said the collapse of so many residential building companies has left many buyers vulnerable.

He said there was often “very little” individuals could do in response to a bankruptcy other than expensive legal action, adding that predicting such a corporate collapse was difficult too.

His one recommendation is to avoid buying off-the-plan, claiming this is “always risky” and can and should be avoided.

“There are large, reputable builders who have been around for many decades, which offers some protection but is far from complete,” he told the UNSW Newsroom. 

UNSW Business School’s Associate Professor Rob Nicholls said the fact the house buyer was just an unsecured creditor to the builder raised two problems.

“Some of their funds will be lost and finding another builder to complete the work is difficult because of increased material costs.” 

Professor Nicholls is currently conducting research into consumer protection in the construction industry.

“There is a need to change the regulatory settings for the residential building industry in order to minimise the insolvency risk for both the builder and the consumer,” he said. 

“Unfortunately, previous performance is no guide to future outcomes.

“Under the current and inadequate protections for both the buyer and the builder there is always an insolvency risk.”