As an ex sales agent I've seen first hand the financial damage caused to buyers of house and land packages as well as off the plan apartments.
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A decade of struggle, losing money every year on top of the $100,000+ debt buyers can be left with after the sale fails to cover the remaining mortgage.
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Unfortunately our attitude towards property in Australia is that you can’t lose money. So it’s too embarrassing for anyone who has been stung in these situations to make it public. If you have suffered a loss in a similar situation and would like to be able to share your story here anonymously, just let us know.
Identifying The Motive
The first thing you should do whenever anyone recommends an off the plan product is ask for a full disclosure of any kickback or commission they may earn if you go ahead. Unfortunately a lot of industry professionals such as accountants and financial planners recommend these products to earn extra income.
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Topics covered below:
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Inflated Prices​​​
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Rental guarantee
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Continued Supply
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Developers control the market​
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Cheap construction / dodge soil types​
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Negative gearing and depreciation buzz words​
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No way to differentiate from other homes in the area ​
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Multiple large commission and kickbacks built into the price​
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Some people may have made money but it doesn’t mean it’s the best investment
Inflated Sales Prices
Large commissions and kickbacks of around 6% are built into the sales price of the packages. Before anything else, you’re already paying at least 6% over the real value of the property.
Rental guarantees are another trick used to inflate the sale price. The guarantee is reassurance from the builder or developer that you won’t receive less than “$X” rent each week for an agreed time frame – usually 2 years. Even if the market is at $450 a week and they guarantee $500, a tenant pays $450, and they chip in the extra $50 to satisfy the guarantee agreement. This difference will cost the builder $5,200 over the 2 year period.
The cost to you is on the purchase price.
A property that costs $500,000 and receives $500 a week is paying a 5.2% gross return.
The same $500,000 property paying $600 a week is returning 6.2% gross.
So to provide you with the 5.2% return they can sell you the same property with $600/w income for $595,000. $95,000 more than they could have with $100 less rent each week.
So they’re more than happy to wear a $10,400 over 2 years for a $95,000 higher sale price.
In 2 years time when the rental guarantee expires and the selling group has walked away with their profit + an extra $84,600 on top. Hundreds of new properties have been built, massively increasing supply so the market rent has dropped to $450 a week – 25% less than you expected when making the decision to purchase.
These numbers are an example but the principals and strategy applies. The builders/developers will advertise the most attractive figures of course.
The third way they control the price is by controlling the market. They control the price of every property in that area and the speed that they come on the market. The have long windows to sell from initial advertising of the subdivision to the completion of the building.
It’s a lot harder for an agent to sell a house in an established suburb for $800,000 when the last 5 sales in the area for similar properties were sold between $670,000 - $700,000 and there’s 2 others on the market at $720,000.
Increasing Supply
Developments require large parcels of land, which are usually surrounded by large parcels of land that will most likely be developed in the future. Bringing hundreds of new homes to the area.
In an established suburb you may have 1-10 new houses a year being built on infill subdivisions where usually 1 block is split into 2.
Low Quality Construction & Land
If a development is being done in a town or city surrounded by established suburbs it probably wasn’t built on in the past because of the ground, it’s often swampy or sitting above mines which can cause structural nightmares when the ground shifts.
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The quality of the builds themselves can also be a problem. Of course all builders are different but these are volume builders. The quicker and cheaper they can build the more money they make. The pressure is put on the contractors, with so many to choose from and the attraction of long term work with a company the builders are able to keep pushing for lower and lower prices. When there’s no great financial incentive to do a quality job, shortcuts are taken. Some are obvious and will be picked up in the pre-settlement inspection but others may take years to become noticeable.
'Negative Gearing' & 'Depreciation'
Negative gearing was a popular and common strategy decades ago so if they’re not offering positive cash flow with rental guarantees they’re probably trying to use tax incentives to lure people in. It’s true, losing money is the best way to reduce the amount of tax you pay. But losing money isn’t a great investment goal.
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Even if negative gearing was still a worthwhile strategy in 2021 the whole point is to buy a property that increases in value, but house and land packages are more likely to lose value than they are to gain, for all the reasons discussed so far. As for deprecation there are other ways to claim depreciation, for example through a renovation on an existing home, this adds value to the house as well provide that tax benefit.
Just Because It Doesn't Lose Money, Doesn't Mean It's A Wise Place To Invest
Not buying house and land packages was a very easy point to make a couple of years ago. The only people who thought it was a good idea we are either getting paid to say it or had recently bought one and hadn’t realised their losses yet.
Now some stories are popping up of people who built 2 years+ ago and have realised a gain during one of the biggest booms the country has seen. Approximately 96% of property in Australia has seen some sort of price rise. That does not mean that 96% of purchases are going to provide an optimal return.
I think if you hear a story of someone making $200,000 on a house and land package you’ll find someone who bought at the same time for a similar price making $300,000 in a nearby-established suburb.
No Opportunity To Add Value
There’s nothing you can do to these properties to add value now or down the track. You can’t subdivide the land because they’re already on tiny blocks. You can’t add a bathroom a bedroom the same way you could build in an underutilized space in an older home. The only way you can increase the value is by increasing the return (rent) for another investor, and that’s very difficult in a sea of houses that are all very similar and a continuous supply which keeps rent down for tenants wanting to move into the area.
High Tenant %
A lot of these properties are sold to investors through seminars, accountants, financial advisors, etc. so most of them will be rented out. Some tenants are better than others but generally the homes aren’t cared for the same when occupied by tenants as they would be when owner occupied.
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You can tell the difference when you drive through an area that is mostly owner occupied vs one that’s mostly tenanted. These new developments often slide downhill fast. The developers keep the streets neatly manicured while they’re selling blocks but when they hand over to the council they maintained less often, homes and gardens aren’t look after as well and cars are often parked all over footpaths. This makes it unattractive to a potential owner occupier when it comes to resale.
All The Same
All the homes in the area are very similar low set brick construction with 4 bedrooms, 2 bathrooms and double garages on the same size blocks. It’s very hard to differentiate yours on the market. When you’re trying to attract a tenant or a purchaser. Why should they pay more for yours when the last 20 sales were all at a similar price, in a similar condition, a similar age with a slight tweak to the lay out.
Land Appreciates, Buildings Depreciate
I’ve mentioned house and land packages throughout the discussion but most of the principals apply to apartments and townhouses. In fact, I think they’re worse because the land with these options is minimal or non-existent and so many more can be built at the cost of such a small piece of land.
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Hopefully this information will help some people avoid the losses of others who jumped in on the back of advice they received from professionals they thought had their best interests at heart.
At the end of the day, government and councils love new developments. They bring large transactions which generate plenty of tax revenue for the government and the council is able to collect a lot more rates so I can’t see these problems being resolved soon, the best we can do is educate each other on the risks.