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September 25, 2021

Exploring the risks of illegal dwellings

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The Byron Shire and the Northern Rivers are well known for the range of illegal dwellings, additions, sub-divisions, and converted garages that abound. The Byron Shire Council is currently running a second illegal or ‘unauthorised’ dwelling moratorium the first being under Jan Barham in 2010. But what does this really mean for owners, sellers, and buyers?

In their PR the council have said that they will be taking a ‘tough stance’ on illegal dwellings that were built after 18 June 2020. But it is more than the council that residents need to be concerned about; it is also insurers and resale that need to be considered.

‘If there is a house on the land but it is not approved by council then the property is only worth the land value,’ said Russell Shaw from Acceptance Finance in Bangalow.

In regards to secondary dwellings and improvements he said that banks aren’t particularly concerned about illegal granny flats or if it is built in downstairs. However, if you are looking to use the existence of a secondary dwelling on the property, that doesn’t have council approval, to support your mortgage application you will struggle.

‘A legal secondary dwelling increases the borrowing capacity of the buyer,’ said Mr Shaw.

‘Seventy-five percent of the potential rent from the legal secondary dwelling can be used to increase the mortgage capacity of the borrower. It is up to the valuer to do a full check on the legal status of the buildings on the property.’

Mr Shaw cited a recent case of a property in Ocean Shores that had been cut into two dwellings. If the property had been legally subdivided, ‘The property would have had a significantly higher re-sale value.’

But it is a buyer beware market, and even if you believe due diligence has been done you can end up in challenging legal wrangles with council. As reported by Echonetdaily on 26 August, New Brighton local Barry McIntosh, who bought his house ten years ago, is now being prosecuted by council for the work done downstairs prior to his purchase of the property.

Local building certifier and consultant Nat Andrews from Ccertifiers2U told Echonetdaily that they deal with issues of illegal or unauthorised dwellings and building additions and alterations every single day.

‘Most of our business is working with vendors and purchasers to regularise dwellings and other diverse types of buildings. It is a day-to-day occurrence for us,’ he said.

Insurance risks

However, he pointed out that if people don’t have an occupation certificate for dwellings or buildings, then there is a real risk insurance companies won’t pay out if they are unaware that the property doesn’t have approval. This can be a risk for unauthorised secondary dwellings, converted garages, and additions to otherwise approved dwellings.

In relation to converted garages Mr Andrews said it ‘can be a problem,’ and ‘can often be difficult for Council to approve.

‘You have removed car parking from the site. The minimum car parking may still be required for the development(s). Council has recently refused these types of applications where car parking cannot be provided behind the front building line of a property. Council will base its decision on a merit assessment and the process is not black and white.

‘Council and development applications (DAs) have to comply with the local environment plan (LEP) and development control plan (DCP). This includes streetscape, amenity, privacy, overshadowing, view loss, and amenity issues.

‘If owners want to sell the property, or Council comes knocking, that is when it really becomes an issue,’ he said.

Booming market

And the property market in the Byron Shire and Northern Rivers seems to be booming.

‘Four to five years ago, it was baby boomers and retirees buying properties. Now it feels like the younger generation with families’, said local real estate agent Gary Brazenor.

‘Across the board, people are wanting to get out of the city. The COVID-19 pandemic has changed the demographic [of buyers] to younger people with families. They are coming up earlier than they were planning, and are looking for property now, because they are able to work from home.’

Mr Brazenor said that currently the demand was coming primarily out of Sydney, as Melbourne is in lockdown, and Queenslanders can’t cross the border. However, he said he had also seen an increase in digital sales, where people hadn’t physically seen the property.

‘I’ve also had sellers who have pulled out of offers at or above the asking price. They felt there is a paradigm shift happening, and felt that they might be selling too early.

‘One buyer recently bought a house with a pool here for $900,000 and commented that it was ‘really cheap’. For people with a city wage of over $100,000 who have sold a flat in Sydney for well over $1m, being able to buy a house with a pool looks cheap to them. If the trend of city wages coming to the area continues, it will have an impact.’

Price impact on illegal dwellings

The fact there is an illegal dwelling can, but often doesn’t, impact price at the moment. Though for people coming from out-of-area it can be more of a concern.

‘When properties were, say $300,000, people were prepared to accept more risk, but the property market has changed,’ said Mr Andrews.

‘People are now spending $1–2m and they are looking more carefully at what they are getting for this and wanting issues sorted out.’

Mr Brazenor agreed that people coming in from the cities are more likely to want dwellings to meet council regulations.

‘Sydney and interstate buyers are more concerned. Locals up here, and anyone looking for a period of time in the area, will have come across plenty of these illegal dwellings. If the building work has been done well and to council requirements but they just haven’t gone to the process it is less concerning for buyers. However, even if there are illegal dwellings they still add value the property.’

‘If Council become aware of something that is done without approval they have some obligation to at least investigate it,’ said Adam Van Kempen from BVK solicitors and attorneys in Byron Bay.

‘Council’s attitudes have waxed and wanned over the years. As a general proposition I have found council are willing to assist landowners to work it out rather than coming down like a tonne of bricks.

‘Where there is an unapproved secondary dwelling – where it is approvable – it doesn’t reflect any discount in price. Though it might be an opportunity for the purchaser to go through the approval process to increase the value of their asset.’

‘The thing that always worries me, and I tell clients, is that there is a real insurance risk. If you have an unapproved dwelling that you rent out and there is a fire and people die you are in terrible trouble.’

One way to provide some security for buyers is that a building information certificate is obtained from your local council Mr Andrews told The Echo.

This provides ‘an “insurance policy” that Council will not take action against the future owner if there are unauthorised works unless that were so dilapidated the works needed to be removed or became a fire safety concern,’ he said.

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