The Problems With House And Land Packages (Ep183)
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.
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. If you have already purchased land see my post on how much does it cost to build a house.
Problem #1 – Paying A Mortgage With No Income Coming In
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. When the slab is finished you pay a certain amount and then when the frame is finished you pay a certain amount and so on as each different stage is finished. Basically the builder finishes a section of work and then you pay for that section of work.
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 you are going to be negatively geared for some time.
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 – Inflated Prices
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 the 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 – Built In Commissions
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 extra commissions built into that.
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 (I have even heard of $80,000 commissions).
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 built, what they’re getting and if they’re not willing to tell you then I would be very cautious about moving forward.
Problem #4 – Housing Oversupply
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. 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.
That can happen with house and land packages as well because you’re purchasing a house and land package and he block next to you is also a house and land package and so is the block behind you.
All of a sudden in the space of a couple years, all this land suddenly turns into occupied 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 – Competing With Newer Properties
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.
Problem #6 – Not Always A Fixed Price
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 costs to build a house. 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.
Problem #7 – You Almost Always End Up Paying More For Upgrades
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 $2,000 you could add this or for an extra $1,000 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 $2,000 on top doesn’t seem like a lot.
But when you’re doing $2,000 here, $4,000 there and $2,000 over there it adds up pretty quickly and you can end up with a very high-spec 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.
Problem #8 – Beware The Spruikers
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 dodgy 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 and I currently don’t plan to in the future.
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 or to talk about 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 then your $40,000 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.