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Land Purchase before build contract

Discussion in 'Property Finance' started by albanga, 19th Jun, 2015.

  1. albanga

    albanga Well-Known Member

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    Hey All,
    What are the considerstions/issues with purchasing a block of land prior to having a build contract?

    I imagine it is more ideal to go to the lender with the land and build contracts and seek finance in the single application?
     
  2. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

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    Some lenders don't accept split contracts.

    No real issues with a land and then construction loan. In fact most applications are structured this may.
     
  3. wombat777

    wombat777 Well-Known Member Premium Member

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    For my PPOR I had an approval first, although was initially going to buy a recently completed house. When land popped up as available I changed that to approval for land.

    I then negotiated an IO loan to buy the land. It took me about six months to appoint a builder. Once I had the build contract my loan was refinanced at a greater value as P&I to cover the land and the build.
     
  4. tobe

    tobe Well-Known Member

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    Don't do it. Get a build contract and have both finance approved together first before you commit to the land.

    It doesn't have to be a house and land package, you just need to present both together to the lender for valuation.
     
  5. wombat777

    wombat777 Well-Known Member Premium Member

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    Also - make sure you are clear on build costs before you buy the land. If you are just starting out searching for builders the prices in display villages are generally only a fraction of the overall cost to build a house.

    For your land searching, pay careful attention to easements and building envelopes as well as developer/estate guidelines that may affect what you can build.
     
  6. Kael

    Kael Well-Known Member

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    When I invested into Brookfield in 2011, I spoke to builders first, selected one, discussed pricing with them, then went and found a suitable block for the house construction. Once purchased, gave all details to the builder, who was able to then issue me with a build contract and I was able to get my construction loan. Not for everyone, but it worked for me because I did a lot of research around it.
     
  7. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    Avoid it wherever possible - you can leave yourself in a lurch if you are LVR dependent, buy the block of land and then it's revalued lower at the point of construction.
     
  8. Brady

    Brady Well-Known Member

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    As above it's best if possible to have both sorted at once. Many times I've seen the land valued, all good no problems. Comes time for construction valuer agrees with the construction price being fair and reasonable for the market... but end value doesn't stack up due to comparable sales. Absolute PIA when It happens and really puts you against the wall with not much room to move.

    Need to ensure final end value is going to stack up, this is most important!
     
    tobe likes this.
  9. wombat777

    wombat777 Well-Known Member Premium Member

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    Also make sure you aren't buying land in a soft/declining market. That won't help valuations down the track.
     
  10. albanga

    albanga Well-Known Member

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    Thanks all for the replies! Great to see the new forum still has the answers.

    But say the land is purchased beforehand, is it likely the land value will be the contract price?

    So for example land contract price 500k, you put 100k plus closing costs down so no LMI.
    So you have 400k loan.

    You then get the building contract which is 400k and put down another 80k.

    So total loan is 720k and the value will be land+build = 900k so 80%? Or is there a chance the lender will value on end product?

    I understand the exception would be if the land price decreases but what is the likelihood of this happening if you get the build contract within 3 months of buying the land? Would the lender even need to do a Val?
     
    Last edited: 20th Jun, 2015
  11. Pistonbroke

    Pistonbroke Well-Known Member

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    Once you have your ducks lined up, finance approved etc the big advantage is that stamp duty is only calculated on land prie no contract value.
     
  12. Sonamic

    Sonamic Well-Known Member

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    Lender will still need to Val to approve the Loan. Get the Land first. That's the hard part. Scope some builders to find something you like that suits your needs and the Block. Or pick the house plan first if Land is plentiful. Buy the block with 20% down, pay the Stamps on the Land Component only, then simply extend the Loan to include Construction Cost. In my experience it helps to provide your Lender with a Fixed Price Build Contract, but it's not always necessary. You save on Stamps this way (non Deductable), but those savings get eaten up by Land Payments and Construction Costs during the build which are Deductable if for Investment Use.
     
  13. wombat777

    wombat777 Well-Known Member Premium Member

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    Avoid buying unregistered land if you can. It can take 2-3 years in bad cases for it to be ready to build on.
     
  14. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

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    100%. I have 2 clients that have purchased unregistered lands in Kellyville circa early 2014 with the hope of having them registered in April 2014.

    The developer has been doing what the waterloo developers are doing which is waiting for the sunset clause to expire and then reselling them at a higher price.
     
  15. Kael

    Kael Well-Known Member

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    I heard that a group of people who did something like this with OTP homes is currently suing the developers... Interesting to see.
     
  16. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

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    Yep I spoke to them and I actually put them in touch with each other and they called me back and they said that they are suing the developer and its the same lawyer for the waterloo project.

    I really feel for these guys because they have families (and young kids) and they have planned their lives around this purchase.
     
  17. CU@THETOP

    CU@THETOP Well-Known Member

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    I suggest making your buy subject to satisfactory soil inspection and then have your nominated or shortlisted builder get his/her soil engineer take the tests to see how much you are up for in extra footings. Use that figure to negotiate a price reduction if you can.
    I agree not to buy into new estates off the plan- commonly an oversupply which will dent your resale value.
    Were I to build (and I am thinking of it in a few years time) I would buy in a more established area in a knock down house. Live in it for a while (stamp duty concessions etc) and do my research as regards approvals and choice of builders during a time when you are not under the gun where there are time delays.
    Get your approval and with military precision move out on Friday for a Monday demolition. Lease elsewhere for a suitable period- I would expect 6-9months allowing for delays.
    I'm thinking of doing something similar myself in about 3-4 years in my current house. Ideally I would like to remove the house to another lot but that may not be practical.
     
  18. tobe

    tobe Well-Known Member

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    Yes it's quite likely the second val will come in short. Probably one in ten is my experience.

    Valuers find it difficult finding comparable sales in new estates. Either they get an older house resale in a neighbouring suburb, or they use the first couple of forced sales from the new estate. These resales are usually pretty cheap, bank foreclosures or similar.
     
  19. sash

    sash Well-Known Member

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    This is the game I am playing at the moment....I am buying land but have a subject to a house and land clause for finance clause. It also makes the developer offer all sorts of incentives to the builder like paying for landscaping and gardens. ;)