Am I protected? – A guide on building warranties

Purchasing a New Build property comes with its own unique set of risks. That’s especially true if the property is not built yet.

You can’t walk through it to check the property before you commit to buying.

Your property may have defects, even though it’s brand new. Your builder could go belly-up halfway through the build … yikes!

That’s where warranties, guarantees and insurance products come in. They protect investors in some situations.

But many investors wonder how they work, and if they’re actually worth it.

Here at Opes Partners, we believe in being open and transparent. We want to give you as much information as possible so you can make the right decision.

That’s why in this article you’ll learn what building warranties are, how much they cost, and if you should pay to get more protection. The answer may be “no”.

Quick facts:

• The Building Act gives you automatic (free) defect cover and a 10-year implied warranty.
• Master Build is an extra warranty you can get that costs money.
• Paying for a Master Build guarantee is sometimes worth it (but not always)

What warranties do I get for free (under the law)?

When a builder builds a property, you get two automatic guarantees. They come from the Building Act (2004). You get a:

1. 12-month defect repair period (defect cover), and a
2. 10-year guarantee on the structure of the building (implied warranty)

You automatically receive these any time you get building work done, and they are free. But what does that actually mean? Let’s dive in.

#1 – 12-month defect cover

It often surprises property investors that New Build properties can come with defects.

Some of the paint may not be quite right. Sometimes the plumber doesn’t install the shower the right way.

Usually these are small and you don’t notice them until you’ve lived in the property.

The builder has to fix any of the defects you tell them about within 12 months of you owning the property.

Defect cover is automatic under the Building Act. It’s free and you get it from the day the property completes.

It’s a good idea to confirm the completion date in writing to avoid any confusion later. You have 12 months from that date to let them know about any defects.

If the builder disagrees and says it’s not a defect – it’s their responsibility to prove it’s not one.

Here’s what the Ministry of Business, Innovation and Employment (MBIE) says counts as a defect:

There is also a 60+ page guide from the government that shows what does and doesn’t count as a defect.

#2 – 10-year guarantee

The 10-year structural guarantee is an “implied” warranty.

Like defect cover, this is an automatic guarantee set out in the Building Act. If something goes wrong with the structure of your property within 10 years, the builder needs to fix it.

The clock starts the day the building is completed.

But 10 years is a long time. What if the building company isn’t around when it comes to claiming?

In that case, there are still options.

You can sue the directors of the building company. They still have “directors’ responsibilities” under the Companies Act.

If there is something seriously wrong with your property, you might still get justice, although you’ll need to speak to your lawyer about what’s possible in your situation.

Either way, you automatically get a lot of protection under the law. But, what if you want to protect yourself further? That’s where you use a warranty scheme.

How do I get even more protection using warranty schemes?

If you want more protection than you get under the law, you can use a warranty scheme. These are private agreements and give investors added protection.

There are 3 types of warranty schemes in New Zealand:

1) Member schemes

2) Building company schemes

3) Independent schemes

#1 What is a member scheme?

Member schemes are the most popular. Your builder (or developer) joins an association that gives extra protection.

The most popular is Master Build, but there are other options too.

Getting these added protections cost money. So are they worth it?

The Master Build Guarantee is a 10-year protection contract for the purchaser of a New Build home.

It replicates many of the same benefits you get anyway under the law, but there are some extra benefits. That’s especially true if you have a progressive payment build contract.

For example, with Master Build:

• If your builder goes bust, they will refund your construction deposit (up to 10% of the building price).
• if your builder goes bust halfway through the build they’ll find another builder to finish it.

This is called “non-completion” coverage. In our view, here at Opes, this is the main benefit.

There are some other benefits to the Master Build Guarantee: let’s say your builder has shut their business down and there is a structural issue with your property.

Master Build will organise for another builder to fix it.

You get protection for this situation under the Building Act anyway. But under the law you have to hunt down your old builder. With Master Build, they’ll find a builder for you.

Is paying for these benefits worth it? If you have a higher-risk progressive payment build – then probably, yes.

But if you’ve got a turnkey build, we here at Opes don’t think this guarantee is necessary. There are other ways to protect yourself.

Shane Campbell, a lawyer at Wynn Williams, says the coverage is not as comprehensive as most people think.

#2 Building schemes

Building company schemes are specific to each developer.

For instance, Golden Homes and Signature Homes both provide their own guarantees.

In this case, the developer running the scheme puts money aside to back the warranty.

The price of the warranty is included in the build price. The specific details of the cover are available from the developer directly.

But in most cases the developer will fix problems that come up.

#3 Independent schemes

Independent schemes provide insurance.

Insurance is different from a warranty. With a warranty, someone comes to fix the work. With insurance, you get money paid out.

The developer or building company takes out the insurance. They then pass on the policy to you – the new property owner.

Unlike member and building schemes, they cover any builder registered with them.

The two biggest ones in New Zealand are:

• Stamford Building Warranty Insurance
• BuiltIn Insurance

Both are 10-year policies, protecting property owners from build defects.

The big difference between insurance and other schemes is what happens at claim time.

If something goes wrong, you don't have to figure out who is at fault and prove it. You just deal with the insurance company.

Should I worry about all this added protection?

All things considered, it is up to you, the investor, to choose.

Warranties, guarantees and insurance products give you protection above and beyond the law.

Some of this is useful. But under some schemes … you end up paying for what you’d get for free under the law anyway.

For us, a warranty scheme is necessary if you are doing a progressive payment build.

But, they’re not as valuable if you have a turnkey build: the law already offers a lot of protection.