Janine Starks looks at the various shades of grey in a green-blue zoning conundrum and sees nothing but red-tape and trouble.

By Janine Starks*

From my mail bag

Dear Janine,

We own a home on ‘TC3’ land (the new green-blue zone), but we are not sure if our house is a repair or a rebuild.

The street fills with liquefaction with each big shake. We don’t have liquefaction on our lawn, but you don’t have to dig very deep to find the silt, so we put in a land claim.

We want to sell up and get out, but I’m getting increasingly worried that no one will buy our house if it only gets repaired. What difficulties do you think we face in selling the house? We have a large mortgage and don’t know how long we’ll be waiting for things to get sorted.

Green-blue trapped

This is a really tough one. The ability to sell a home on green-blue land (Technical Category 3 or ‘TC3’) could be very difficult. It all hinges on the actions of a number of groups of professionals; EQC, insurers, bankers, real-estate agents and lawyers. They all have the potential to increase the barriers to a sale.    

The ‘TC3’ label could cause problems across the board, for re-selling. While the category only applies to houses with foundation damage, this is a bit of a farce. Even if you have no damage, your land may suffer “moderate to significant liquefaction” in a new event. That has got to be a big red flag to future buyers. The resale issue is not going to be isolated to the hard-hit areas, when we face a decade of seismic activity.  

I hear so many people say “I’m on TC3 land, but we’re really lucky our foundations are fine.” I think that’s misguided. It is possible that a good number of TC3 home owners will end up worse off financially than those in the Red Zones – especially those who are not getting new foundations. The erosion of equity is a real risk.   

Here's my thoughts on how the professions involved could impact the situation:

1. EQC:

While some TC3 landowners are pushing to become red-zoned, it’s questionable how wide the government’s purse will extend. An alternative could be another array of sub-categories within TC3. This is just a guess at how they might handle it, but it would classify some TC3 land as being sturdier and some as more dodgie. Those at the worst end of the scale could have their land written off as it’s too difficult or uneconomic to remediate. In effect, we’d have patches of red-zone by another name (minus any government offer on the house). 

Under the legislation, EQC can make a payout equivalent to the value of a 450 metre section. Money wise, that’s quite different to the Red Zone offer of Rateable Value. The double whammy is if your home is repairable – insurers will just patch it up, leaving you with a land payout but no house payout. 

It’s questionable what buyers will pay for a repaired home sitting on old style foundations on liquefaction-prone land which has not been remediated, or the land has been written-off.    

Right now the only people getting individual geotechnical reports are those with damaged foundations. If your foundation survived and no geotech is carried out, the ostrich mentality can prevail – we can all just pretend there has been no destruction in value. In my view this still creates a web of problems for insurers, bankers, estate-agents and lawyers, when it comes to the home-owner selling (see below).

To top it off, there was a subtle suggestion recently that the government should review their role in providing land cover via EQC. If this was removed across New Zealand, it might seem like we are all in the same boat. However, those on TC3 land are in a much wobblier boat, with wobblier valuation outcomes if the reassurance of land protection is thrown overboard. 

Does the government care?

There might be an uncomfortable uproar at some residents getting land offers at the Rateable Value, some getting 450 metre payouts, and others being totally ignored and suffering the market forces of a reduced valuation. But the Government has never been too bothered about inequitable outcomes. 

Look at the leaky home debacle or the way South Canterbury investors were bailed out when vast numbers of others had to suck up the losses. Consider AMI policy holders versus Ansvar customers who have no earthquake cover beyond the EQC limit. Life isn’t fair, but gosh it would be nice to be wrong. 

2. Insurers

If EQC writes off pockets of TC3 land, homeowners will look to their insurers to rebuild or buy elsewhere. The outcome is a good one – they can run far from the green-blue mud, albeit miffed that their land payout wasn’t as high as Red-Zoners. 

But if the land is written off and the home is found to be repairable, will insurers come to the party and write off the house? I have it on good authority that they won’t. They will only carry out a repair. While Red-Zoners with repairable homes had the governments cash-offer to fall back on, Green-bluers would not. They would need to mount a legal challenge against their insurer and argue that the land condition renders the home a total loss and the house must be removed to allow remediation or written off. Insurers will chuckle at the cheek of the suggestion, but I’m not sure they’re on as steady ground as they think. The Red-Zone situation only went unchallenged due to the governments back-up offer. 

Buyers of homes in all TC3 locations must contemplate a number of insurance issues:

• Will insurers continue to let them pass their insurance contracts onto another new buyer in future? 
• Will they ever be able to increase their cover if they want to extend the home? 
• Will TC3 areas suffer larger increases in their excesses than other locations? 
• Will EQC land cover remain in place? 

3. Bankers

Buyers need to negotiate mortgages and banks need to be happy with the quality of the security (liquefaction prone land and homes without foundations to withstand the risks). Banks will have to weigh up the chance of insurance levels sliding over the term of the loan and will want large deposits (so it’s the buyer’s money at risk, not theirs). I suspect there are conversations going on in banks right now about the sensibility of allowing loans on TC3 land – if they aren’t, they’re asleep at the wheel. 

4. Real-estate agents

A quick drive around the Green-blue areas uncovers a good smattering of ‘For Sale’ signs and the odd new ‘Sold’ sticker. It’s difficult to believe properties on TC3 land are being actively marketed at the moment and it makes you wonder what warnings agents are giving to buyers. While they represent the seller there is surely some duty of care owed. 

Hopefully the Real Estate Institute is pondering the legal ramifications of agents selling assets with “moderate to significant” risks. It could be a future misselling scandal given the situation is unusual and buyers are not used to analysing this type of market anomaly. Agents should think about covering their rears and document the risks to buyers.  

5. Lawyers

Unlike agents, lawyers do represent the buyer. A good lawyer will go through the risks of buying a home on TC3 land. If they have any sense they’ll also ask their client to sign a legal disclaimer to prove they were made aware of these risks. 

The waiting game

In terms of how long it could take to work through the issues, rumour has it that the queue to get land assessments from EQC could be up to two years and rebuild queues could be up to four years. Everyone can’t be first, so my guess is that total wait times will be in the two-five year range. Priority will go to those not able to live in their homes. Repairs will be quicker, but insurers are running risk-models and won’t start these until seismic activity settles. 

Consider the emotional impact of the wait. Some people need to leave in order to keep their lives moving – new babies require extra bedrooms and those who want to retire might wish to live closer to family. Whatever the reason, if your home is still livable, consider renting it out and renting the type of home you need in the right location. Your finances might have to sit in limbo, but don’t assume your life must. Sometimes you must try and stick to your plans to stay sane.

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Email questions to starkadvice@gmail.com, subject line: Financial Agony Aunt.  Anonymity is guaranteed.

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*Janine Starks is Co-Managing Director of Liontamer Investments. Opinions in this column represent her personal views and are not made on behalf of Liontamer.  These opinions are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product.  Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.