John and Sarah considered themselves to be quite handy when it came to a spot of DIY. They’d spent years watching renovation reality TV shows, and they thought they knew everything there was to know about renovating a property for a profit. So, when they moved to Melbourne, Australia and found a dilapidated property for sale in the outer suburbs they thought this would be their chance to “flip” a house. They’d have a bit of fun, unleash their hidden creativity and make some serious money, all in a short space of time.
Unfortunately, reality renovation shows leave a lot of important details out when it comes to the legalities of carrying out works on an existing property. In the case of John and Sarah, they were surprised by just how long it took to get permit approval for their proposed works (causing serious delays to their quick-flip timeframe). But they were even more surprised at the completion of the project when their buyer suddenly reneged on the contract just days before settlement. The reason? John and Sarah didn’t have Owner-Builder Warranty Insurance.
According to the Building Act 1993, works carried out by an Owner-Builder are subject to a warranty period of 6.5 years. This means that if the property is sold within 6.5 years of the Owner-Builder works being completed, the Owner-Builder will still be liable for any faults that become apparent after the sale of the property. This is where Owner-Builder Warranty Insurance comes in. The Owner-Builder must obtain Warranty Insurance prior to selling the property so that the seller is protected in case something happens to the Owner-Builder during the 6.5 year warranty period (i.e. death or bankruptcy). If this Warranty Insurance is not obtained prior to the sale, then the buyer can pull out of the contract at any point up to the date of settlement, and the Owner-Builder can face heavy fines.
While this law has been in place for quite a while now, the recent interest in flipping properties has seen a greater number of Owner-Builders looking to renovate and then sell within a brief timeframe. The exact requirements for Owner-Builder Warranty Insurance do vary from one State to the next, but generally, it will be a requirement for all building projects costing over a certain amount. Because John and Sarah’s renovation project was in Victoria and the total cost of the works was over $16,000, they needed to have Warranty Insurance in order to comply with the regulations in the Building Act.
Although there are various insurers who offer Owner-Builder Warranty Insurance, they all require an Owner-Builder Defect Report to be submitted as part of the application. This report (also known as a ‘137B Report’, after the section of the Act it applies to) is prepared by a licensed inspector, and will also form part of the Section 32 Vendors Statement prepared by your property conveyancer.
There’s no doubt that many inspired property flippers have been successful in renovating a home and then selling it for a profit. But the key to carrying out a winning property flip is to be properly informed from the start. By all means, watch hours of reality TV for inspiration, but also look into the regulations and permit restrictions that apply in your area. And make sure that you obtain Owner-Builder Warranty Insurance (if required) to avoid any headaches down the track.