Corrupt Builder (Subject to Finance)

Hey All,
So I just had dinner with some friends who have told me the most insane of stories/nightmares they are going through!

Basically they were wanting to build a house at the rear of their PPOR and later subdivide. They found a great builder and signed a 14days subject to finance clause and at that time paid a 5% deposit (mistake 1). The builder conveniently had a broker they could use and so they went through them and got a Val done (mistake 2).The Val came in shockingly short (they believe an end value of 1.1) and this value came in at 540k.
As finance was going to fail the broker said he would request an extension with the builder...They also called and wrote to the builder who never responded.
In the meantime the builder had reccommended them a building surveyor (mistake 3) who went and got a building permit!!!! All this with a contract still subject to finance.
The builder eventually responded and said no worries you have until Feb. They then went and got 2 more valuations, 680 and then 800. They needed 840 to avoid LMI and didn't want to pay it so they decided to pull the pin. It is worth noting they never applied for finance so were never denied as such, the Val's just came in short.

In the interim the builder decided to drop off some machinery at the house....umm wtf??

So anyway! The builder has now said they are still bound by the contract and they went unconditional as soon as the deposit was paid. He said he will not refund then deposit and that they can take him to VCAT. In an email he said the following;
1 - The text they sent about an extension (even after they called him several times) is not valid because he was sick in bed and not in the office so it doesn't count!!! Haha
2 - If finance is unsuccessful the banks should have provided an unsuccessful letter.

They have spoken to two seperate lawyers who think he is nuts but both agree it may not be worth pursuing because he could potentially counter for more than the 17k deposit. They said they have all the evidence in paper but said he might have something against them which made it somewhat risky although they do believe they had a good chance.

It is worth noting that for the 17k deposit they got a soil test, building insurance and a building permit. Probably about what 5k's worth?

Now here is the best part! They contacted the building surveyor and said they wanted to cancel the contract and permit and he said NO! He said as far as he is concerned it was a dispute and needed to be sorted before they could cancel and as it stood they were still under contract. He then said when the building permit expires in November they would need to get a new one at their own cost!!

Whoa!! I was stunned.
Can anyone with any clue give any possible reason on earth that this builder has a case? Or should they be going straight to VCAT??

 

Were they owner building?

They can extend the building permit for another year, with no extra cost (that's what I did).

What are these extra things they mentioned that make their case weak?

Re. the subject to finance clause - if they relied on this clause, then they should have actually applied for finance as their part of the deal...

Builders schedule in work and their trades rely on it. If you don't provide the work as promised a builder can lose his trades. So I don't think this builder is necessarily dodgy.

 

Tje builder has a case because they entered a binding agreement and did not get rejected for finance and/or did not give notice in accordance to their agreement.

 

So a subject to finance clause basically requires a formal rejection?
Also they indiccated to me that they did email the builder when the first finance fell through but got no response. The broker also said he contacted the builder though who said an extension was no issue. They have an email from the builder later saying that he agrees to the extension of the finance to mid February.

 

They are close to having the subdivison done now as this was their backup. I said why not just get it valued on completion as this will almost certainly give you the required equity to build.

They however quite rightly pointed out that they have absolutely zero trust in the builder and would refuse to build with him.

 

If the condition of contract was 'subject to finance', a concerted effort to secure finance and proof of rejection would lead to recission of the contract. Not applying for finance does not satisfy the rejection criteria.

 

It will all depend on the wording of the contract and what actually happened.

There is a recent wa case involving a subject to finance clause. From memory the buyers lost because they made little effort to get finance and were not actually rejected.

 

Very much turns on the wording of the subject to finance clause and the full conduct of the parties. Some finance clauses impose an obligation to apply and be rejected while others do not. No one can really provide much more guidance without knowing the wording of the finance clause.

 

Thanks all for the replies!
I will ask them the wording of the "subject to" and let you know.

The fact they made several attempts to contact the builder (with evidence) and that he did not respond until after the 14 days! Further though, they have in writing from him that he has allowed an extension of finance to mid February. This was said back in December.

I did say to them the one area I would be concerned with is you never actually applied for finance. As I said the first valuation was 300k short meaning finance was impossible to obtain, the next valuation only slightly better but still no chance as the LVRs at this stage would have been circa 150.
The final Val though only came in 40k short meaning the deal could have potentially got over the line at a 90-95LVR.
It does then beg the question that if they could have serviced that, does the contract mean they HAD to get the finance??

Very interesting! My question then becomes what does one do in this situation? I suppose you would get Val's done BEFORE signing the contract.

 

Two scenarios:

1. Your friends paid too much for the land
2. They're paying too much for the build (or they're overcapitalising - need to get the price and inclusions down by >$40k without affecting the valuation).

With 1, go back to the vendor and ask for the price to be reduced as it is unreasonable for them to make money from the buyer -

Or, get a revised quote from the builder without all the whistles and bells and APPLY FOR FINANCE. They can then stump up for these costs separately or have a provision in the contract to add these back in without having to pay 15% as a variation ( ie negotiate with the builder).

 

Sorry if i was not clear. This is their PPOR, they have been in it for years.
The valuation was based upon building at the rear prior to subdivision.

It is well known the valuations in this situation come in shorter than the end values post subdivision, which of course they should! I mean it is 2 homes on 1 title. I know their is no hard fast rule but from my years on this forum it would indicate allow 20-30% below subdivided values.

They believed based upon comparable sales the end values to be around 1.1mil so it would appear they were not too far off the mark with the last valuation at 800k.

 

Possibly if they applied for finance, they may get rejected regardless of The valuation/ LVR situation because:

1. Their credit card limit affects servicing
2. Their living expenses might be very high
3. She might be planning to go down to 2-3 days a week soon which has an adverse effect on servicing.
If you get what I'm saying..
If they then get rejected from that lender they will be able to obtain the unsuccessful letter and seek partial refund of deposit less costs

 

I suggest reading the contract. The building contract I most recently signed required that cancelling due to failed finance be done in writing with a copy handed in person. From my reading of the clause in that contract a text message or an email would not cut it. I have no idea if this standard or not but it seemed reasonable. It baffles me that someone would attempt to cancel such a significant contract by a text message.

 

Exactly. The only corruption occurring here is of common sense by the OPs mate

 

Why would anyone opt for due process over convenience?

Maybe next time I buy a property i'll hand over $200k in $100 notes, seal it with a handshake and have a chat to the paralegal. That should suffice for transfer of title.

If I change my mind after a few days, I'll text the land titles office.

 

It would be good if more people came up from down south and did business this way,20 dollar bills are good in a brown paper bag..

 

We must be environmentally conscious.

 

Nah,just makes the bag look more bigger..

 

Yes. During GFC I was rejected for finance. I had a contract that was conditional on finance and I had paid a deposit. The real estate agent requested a formal letter from the bank advising my finance had been rejected. I provided that and got my deposit back.