There are some problems with house and land packages that you should be aware of before
you go ahead and put down your deposit and sign a contract. Failure to be aware of these
problems could leave you in a poor financial situation.
Hi I'm Ryan from OnProperty.com.au, your daily dose of property education and inspiration.
And house and land packages aren't all bad but I do want to cover some of the problems
with house and land packages so you can make a more educated decision.
House and land packages always catch my eye because I'll be driving down the road and
they'll have a sign - 'House and Land Packages from $300,000 or $400,000' or if you live
in Sydney it's more like 'House and Land Packages from $800,000' but they catch your eye because
they show a beautiful home or a beautiful lifestyle and you think - I could have this
brand new home for such a small amount of money but there are some things that I do
want to make you aware of so let's get straight into it.
Problem #1 is a cash flow problem and that is paying a mortgage without any rental income
coming in. The way financing tends to work for house and land packages, is that you get
financed for the land first and you purchase the land first and then you have a construction
loan for the building of the house itself. Now this construction loan is released to
you and paid in sections and so as usual, it's when the slab is finished you pay a certain
amount and then when the frame is finished you pay a certain amount and so as each different
stage is finished and the builder finishes it, you then pay the builder for their works.
And so what this means is when you purchase the land, no one's renting that because it's
just land and so you have to pay for that and as each section is finished you've got
a larger and larger loan with larger and larger interest rates and it's only once a house
is completely finished, completely signed off, that you can actually get tenants in.
So depending on how long the build is going to take, you need to take into account the
fact that you may have 9 or 12 or more than 12 months of interest repayments with no income
coming in.
Problem #2 is inflated prices. When purchasing a house and land package, it is common that
the people who own the estate will inflate the prices or they will just build in more
expensive buildings which will give them obviously, more profit. In a lot of cases, purchasing
a land by itself and then getting quotes from local builders and contracting a builder to
build it could be a much cheaper option for you. So you do need to do your research into
the area, find out how much properties are worth and make sure that you don't purchase
a property or get a property built that's going to be worth more than the market's going
to pay for it.
Problem #3, which you should be aware of, is built-in commissions. If you're purchasing
a house and land package through anyone but the developer or anyone but the builder, then
there's going to be commissions built into that. So rather than just purchasing, paying
for the land and paying for the build, on top of that, on top of the build generally
you're also going to have commissions paid to the people who are marketing and selling
that property to you. Now these commissions can often be undisclosed and they can be as
little or as much as they want to, it could be as little as a couple thousand dollars,
it could be as much as... I've seen commissions upwards of $40,000 on different deals. That's
going to the marketer's pocket, that's not going to the value of the property and so
therefore, chances are that's going to inflate prices even more. So when dealing with someone
selling you a house and land package I do recommend that you ask what commissions are
in build, what they're getting and if they're not willing to tell you then I would be very
cautious about moving forward.
Problem #4 that you need to be aware of is a housing oversupply. The same with buying
property off the plan, which I've look at the problems of buying a property off the
plan in episode 182, which you can get by going to OnProperty.com.au/182, and we talked
about that. What happens with off the plan is that all of a sudden the building is finished,
usually a block of units and there's just this massive supply in the market and that
can happen with house and land packages as well because you're purchasing a house and
land package, the block next to you is also a house and land package, the block behind
you is and all of a sudden in the space of a couple years, all this land suddenly turns
into occupiable dwellings. What this can lead to is a massive supply in the market and if
the demand isn't there, well then it could affect prices and it can affect rental demand
as well.
Problem #5, which is something that I'm seeing at the moment, I currently live in an area
called Pacific Pines in Queensland which is north-west Gold Coast and what's happened,
Pacific Pines was a new development area, and what has happened now in the back of Oxenford
which is to the west of Pacific Pines and up in Coomera which is to the north of pacific
pines, there's now all these new land releases, all these new house and land packages or new
developments that have been built. And so what it means in Pacific Pines, is that you've
got all of these developments that are about 5 or 10 years old, still in good condition,
but they're competing with properties just 5 minutes away, and sometimes even less than
5 minutes that are brand spanking new. So it's not a far distance to travel but for
a similar price you can get a brand new property. So what would you prefer? And so when it comes
to house and land packages, because you're likely to be in an area that's being developed
all around you, it could mean that in 5 or 10 years you're competing with newer houses
and people will often gravitate to the newer houses over the existing ones.
Another problem with house and land packages is that it's often not a fixed price and that
prices can actually vary due to the soil in the area and due to the slope of your block.
I've done a full episode on how much it cost to build a house, simply go to Google and
type 'how much does it cost to build a house' and I should be the #1 result or definitely
on the first page. What happens when building a property is that you generally have a fixed
price but if your property is sloping, that adds thousands of dollars to the build and
if you don't have the best soil and you have rocky soil or difficult soil, that can add
thousands to the build as well. So even though you're quoted a price or there's a price on
that sign board as you're driving down the road, that doesn't necessarily mean that's
how much you're going to pay.
Another problem with house and land packages is that you almost always get suckered into
paying for the upgrades. And what they do is they give you a package that has a nice
house but for just an extra $2000 you could add this or for an extra $1000 you can have
a granite bench top or wider doors or a better frontage, all of this different stuff that
when you're going through the process and you're spending $160,000 or $200,000 or $800,000
an extra $2000 on top doesn't seem like a lot. But when you're doing $2000 here, $4000
there, $2000 over there, it adds up pretty quickly and you can end up with a very high-spent
house that is great if it's your own home but as an investment property, you could end
up paying more than you want and more than the market is willing to pay for, meaning
that when it comes time to sell your property, you might not actually get your money back.
And lastly, I just want to say with the house and land packages, be careful of what I call
the 'spruikers' or you could also call them marketers because developers aren't necessarily
great at selling their own properties, they'll often commission the sale of their properties
to other marketing companies. Now I've been approached by a lot of them myself, I don't
actually do any at the moment; I don't plan to in the future. Maybe if I get something
that I consider to be great I'll do it. But the problem that I found is, it's so easy
to talk about the good stuff to do with an area, to talk about why it's growing [inaudible
8:23] or the influx of workers or the predictions of growth. But often, a prediction of growth
of an area isn't a prediction of growth of your property because if you're getting $40,000
commissions added to the top of your property and your $40,000 behind the market or over
priced compared to the market, it doesn't matter how fast that area is growing, you're
still playing catch-up. So you really need to do your own research and you really need
to be careful, don't just believe what people tell you and go in with your eyes open. Be
prepared to do some research and be prepared that there are people out there who might
not have your best interest at heart.
So there you have some problems with house and land packages. Not all house and land
packages are bad; obviously I've only covered the problems in this episode. There are some
great things about house and land packages but just always do your research, be aware
of these problems so that when you do go into it, you go into your investment well informed
and well educated so you don't make a bad decision and if you do that then hopefully
you can purchase a property that is going to deliver you a great return on investment.
So until tomorrow, remember that your long term success is only achieved one day at a
time. I'm Ryan Maclane and I'll see you tomorrow for the next episode at 8pm.