In this blog we talk through Five Traps to be aware of when Buying New Property.
There are so many brand-new designer homes now selling around Australia and let’s face it, for many of us, the thought of living in a property that has not been lived in by others, or being able to personalise the design of your own home, really does appeal. As consumers, we can choose from many different types of new properties available to us, including a unit, townhouse, duplex or even a house and land package in a new estate.
With many types of Government incentives encouraging buyers to purchase new, it can be an attractive option for many property buyers to consider.
But it is also important for property buyers to be aware of the pitfalls of buying new property, before jumping in and committing to a new home purchase. Here I explain five reasons why buying a brand-new house and land property may not actually pay off over the longer term.
1. When Buying New Property, you are Paying for Someone Else’s Profit
The property development process involves a number of steps to deliver the end product to the market. Usually from the time a vacant land site is acquired by a developer, to the time a property is completed ready for sale to the consumer, the steps include obtaining council approval, subdivision, obtaining building approval, construction, marketing and sales. Every step in this process involves a cost and every consultant, contractor or company engaged along the way will usually make a profit.
This accumulative cost resulting from the development process, is built in to the purchase price for a new property. Think about this … town planners, engineers, building designers, certifiers, surveyors, builders, project marketers, sales agents and the developer themselves, will all be making money, and this is always reflected in the listing or offer price for the new property. These are all “hidden” costs, and they could be equivalent to a number of years’ worth of capital growth, which will be putting you behind right from the outset.
Remember, if someone is helping you with the process to buy new property, but their service is “free”, then it is likely that they are being paid directly by the developer. Ultimately, this means that you are paying for their services anyway, because it will be built in to the purchase price.
2. When buying new property you are likely to experience Low Capital Growth
When we look at new house and land properties, we generally find that the location of these new estates is on the outskirts of our major capital cities. This is usually where there is an abundance of land available, and therefore an almost endless supply of new housing may be possible. We also usually see with these types of new estates, that the land is released in stages so that as Stage 1 is nearing completion, the Stage 2 land is released and so the pattern continues.
The problem lies in the fact that, in most cases, the value of the building depreciates at a faster rate than the value of the land appreciates. Property investors who buy new property have the ability to write off the value of the property through depreciation, as the value of the building and its’ fixtures and fittings reduce. Home owners do not have this benefit.
The relationship between the declining value of the building and the slower increase in the value of the land, has an effect on the capital growth for a property soon after purchase. Think about this … when Stage 1 within a new estate is sold out and Stage 2 is starting to sell, the price of the Stage 2 properties is generally the same as the original price of the Stage 1 properties. But the Stage 1 properties are now second hand, so buyers will no longer pay the same price for a second-hand property, when they can buy a brand new one just around the corner! this is especially true to investment buyers who will no longer be able to claim depreciation benefits on the fixtures and fittings on the second hand properties. The demand for these homes therefore often decreases as buyers prefer to lock in everything that is new for a similar price instead.
3. There may be uncertainty about the quality of finishes and other building issues when buying new property
Display homes that are used to demonstrate the brand-new homes that can be built in a new estate are often fitted out with superior finishes and many “extras” that do not form part of the standard inclusions on a new house and land contract. Many buyers can be confused about what they are actually getting, and in some cases even basic features such as driveways, fencing, a mailbox and a clothesline may not be part of the standard price. Getting the contracts reviewed by a professional before signing up for these types of opportunities is critical, so that there are no costly surprises along the way.
Furthermore, just because a property is brand new, does not guarantee that it will be completely free from faults and issues. It is always a good idea to perform your own due diligence on the builder and find out from previous customers if the after sales service of the builder and developer lives up to their promises.
4. You don’t know what the surrounding neighbourhood will look like
One thing often overlooked by people buying brand new property, is that you have very little control over what the surrounding neighbourhood may look like. At the time of purchase, for example, you may have a lovely outlook, but that may be impacted by the future development that is underway in the immediate area.
You also have no control over what the neighbouring homes may look like. In an established area, it is not unusual to consider the appeal of the street when making a purchasing decision. But when all of the homes in the street are not yet constructed, then you are at increased risk of the area being different to what your vision may be.
Another big unknown when buying a new house and land package is that it is likely that you will not know the demographic information of the other residents buying in the same area. This is something that is already known in established areas, so property buyers can get a feel for the suburb and who lives there. You also have no control over whether your neighbours are likely to be predominantly owner occupiers or whether the area will be dominated by tenants.
5. You increase the risk of settlement default when buying new property
There is a possibility that the value of a new house and land property may decrease between the original contract date and when settlement is due to take place. This has certainly been the case in some instances in the past during certain periods of time where property values have fallen in some locations throughout Australia. If a pre-settlement valuation is less than the original value when finance was first set up, then there could be a shortfall in funds to complete the sale. This may leave some buyers scrambling for cash to make up the difference. No one wants to be in this position, so it is important that you understand this risk and have a financial buffer in place to cover any shortfall, in the event that the market value falls during the construction period.
There are plenty of reasons why you would buy new property and why buying a house and land package may appeal to property buyers, and there are obviously some lifestyle elements that will contribute this this decision as well. But it is important to be aware of the pitfalls, to prevent your home purchase becoming a financial drain or a lifestyle burden. No-one wants to have sleepless nights because of the decisions they make about where and how they want to live.
Get in touch if you wish to investigate if buying new property is for you.
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