19 Feb Buying house and land packages – Andrew Mirams
With an increasing amount of building and construction around Australia, more buyers are needing to fund new house and land packages. It is also an affordability consideration and as such it is attracting many first home buyers. We look at the funding requirements from the banks with Andrew Mirams.
Kevin: I recently recorded a Skype interview recently with Andrew Mirams from Intuitive Finance, which you may have seen. We were talking about financing new and established properties and we branched a little bit into house/land packages.
It’s a conversation all on its own, isn’t it, Andrew? How are you?
Andrew: Good day, Kevin. I’m very well. And yes, absolutely it is. With the amount of building and development that’s happening all around Australia, it’s quite a current concept, one that’s happening a lot around the place.
Kevin: Does it happen more with first-home buyers? Do you find that that’s the sort of package they’re looking for, Andrew?
Andrew: It is often an affordability issue where you have newer estates that are more affordable than inner city and inner rings. Obviously, where you have inner Melbourne, inner Sydney, inner Brisbane, they’re all developed so they’re not house and land packages, but you have new estates in areas all around outer suburbs, where from an affordability or a location perspective, people are looking to buy into.
Kevin: Is it always advisable to buy the land and then engage the builder, or do it as a joint package? How does the bank look at that?
Andrew: That’s a great question, Kevin. There are probably two ways of doing a house and land package. There’s one we would term as a turnkey solution or a turnkey purchase, and the other one is where you actually buy the land and then build the house on it.
The differences are that a turnkey is really one where you go, you find the piece of land, you find the house you like, and you’ll contract the builder and the land, you’ll put down a 10% deposit. It’s very much similar to a traditional purchase where you put down a 10% deposit and the balance on settlement. That’s kind of what you get with a turnkey solution.
You’ll agree to the price, the fixtures, the fittings, how it and when it will be built and what time it will be built by, you put down your deposit, and then the builder goes and builds it. On completion, they’ll hand you a brand-new home and you’ll pay the balance. And that’ll be done in a fairly timely manner, because obviously, the builders want to get in and get out. They’re holding the actual cost through the whole development, so they want to turn that around relatively quickly.
With a house and land, it’s different. You can buy the land… And a lot of people will do this. It might be an affordability issue, it might just be that they’re in no hurry, they’re not sure what style of house they want to put on, etc. Do they want a pool? Do they want a big shed? All the other things.
With a house and land deal, you can settle on the land today, and then you have time to make those decisions about your house, and then you’ll do your house as a separate contract and normally as a separate loan. Within that, instead of just paying a deposit and then the balance on completion, you’ll pay for your land, and then through a building contract you pay certain stages.
Traditionally, the stages are the base stage, then you get your frame stage. You go then to your lockup stage, so once it’s all bricked up or boarded up, the roof and the door is on so that it can be locked up as the name suggests. Then you have your fit-out or fixtures stage, and then pretty much your completion stage.
Kevin: There are quite a few stages to that sort of development. Does the bank normally come out and just double-check that all those stages have been completed before they’ll actually forward the money?
Andrew: It varies a lot lender to lender. Normally, they won’t go out and view a slab; they’ll assume that the slab is down, because nothing much can be done there. But as you get to the main stages, the lockup, they will generally do an inspection on lockup just to verify that it is in fact at that stage. Certainly, at fit-out and on completion, they’ll absolutely want someone to inspect and make sure that the work’s been done.
Kevin: With that type of construction, let’s hypothetically say that there was a build cost of $500,000 and it’s going to be done in maybe half a dozen stages. Is the full $500,000 funded right up front? In other words, when do you start paying off the loan?
Andrew: It’s a pay-as-you-go type arrangement, because the house doesn’t get built in one lump sum; it gets built progressively. So, it goes on a progressive stage like the stages I’ve just mentioned.
You’ll pay a deposit, then as the base – either the footings or a slab – goes down, then you’ll pay another percentage then. So, a 10% deposit, 10% at that stage. The frame stage is generally a smaller stage. About 15% might be attributed to that stage. Then the lockup is pretty significant with the roof and the doors, and if it’s getting bricked and everything, that’s normally a significant stage. That might be 25% to 35% of the build, and that’ll draw down that part then. The fixtures and fittings, now your carpentry, cabinetry, any dishwashers and all those things that are being installed all go in, so that’s another significant stage, and they’ll draw down there.
They draw down the money as it gets expended. So, as you get to the stages, you put in a progress draw claim to the lender, it gets shuffled off, and then once it’s paid, you pay interest only on what you’ve actually borrowed.
You might have, like you said, that peak limit of $500,000. You don’t start paying interest on the $500,000; you only pay as you go, as you hit those stages. So, it gets expensive near the end once it’s actually complete, and that’s when people are generally getting excited because they have their new home to move into.
Kevin: A dumb question, and I apologize up front for this. When these progress payments are made, does the builder invoice the bank, or does the builder invoice me as the ultimate homeowner and then I pass that on to the bank?
Andrew: No such thing as a dumb question, Kevin. That’s a good question.
The contract is with the builder and with the customer, so they will invoice the client as they get to that stage. The client, in our case, we ask that they be forwarded to us so we can manage the bank in a timely payment, but the client will then send that invoice off to the lender saying this is what stage we’re up to. On most occasions, the lender will then normally send out someone to inspect and make sure it’s at that stage so that they’re happy to advance the funds, and they will advance the funds.
Kevin: There’s a lot involved in this. That’s one of the reasons why it’s always good to have a broker working with you. You guys are doing this all the time. I may only do it once or twice in my entire life, so it can be quite a mystery.
Andrew: We have dozens of build projects happening as we speak, Kevin, so you’re right, we’re dealing with it all the time. Most people might build once, maybe twice. If you speak to a lot of people, they’ll say, “After I’ve done it, I’m only building once,” for that reason. It’s a bit to do, and it’s quite complex.
Kevin: It is quite complex. Having been through it once myself – but it was quite a long time ago – I don’t think I’d like to do it again, anyway.
Andrew: I only finished my own build a couple of years ago. I hadn’t built for a long time, so it was great to be back involved in it, and it does give you a nice reminder of why you only do it once or twice in your lifetime, Kevin.
Kevin: Yes, it almost becomes a full-time job. Great talking to you.
Andrew Mirams from Intuitive Finance. A great fountain of knowledge, and you can reach him, of course, through our website. Any question you have for Andrew, anything to do with financing, just fire it in to me – firstname.lastname@example.org – and I’ll have Andrew answer it for you. Watch out for his regular videos too. I mentioned at the outset that we had done one just recently. We try and get them out every couple of weeks, or a couple a month, anyway.
Andrew, good talking to you, mate. Thanks for your time.
Andrew: Great, Kevin. Thanks, mate.