What risks to consider in H&L?

I haven't bought a land only or house & land package before so request your thoughts on the risks to consider. What I can think of are:

- Inexperienced developer: may not deliver the promised quality or on time. Could go bankrupt midway.
- Additional costs not known at purchase
- Land titles unclear or disputed
- Location is not well connected to transport like station, motorway, schools and shopping
- Promised amenities not provided properly

By the way, do H&L have strata?

Appreciate your thoughts.

 

I'm new to this game too so here're my inexperienced thoughts. I've only got 3 properties, so relatively inexperienced compared to a lot of folks on here.

1. Go with major developers. Villawood/Oliver Hume, Stockland, PEET, MAB etc. They have a reputation to protect and surely wont go bankrupt any time soon. Research them to be safe.

2. Additional costs at purchase - I reckon your conveyancer should help here. I have always had a good one. I've recently purchased my 3rd block of land and each time have used a great conveyancer. They charge $900 for a transaction. Better to spend $200-300 extra and have that peace of mind.

3. Land titles. Title insurance is commonly suggested by good conveyancers. I know mine does.

4. Location is for you to research. Generally, tightly held, OO dominated suburbs hold their own during downturns and rebound well. Make sure you arent far from a train station (< 3k's), and a school (being built or not far off, established is of course better).

5. Promised amenities not delivered. This is a tough one. We can only research, do our DD and hope for the best. It's in the developers best interest too to provide what they promise.

 

Here's a relevant thread @highlighter started that's interesting reading > Thoughts on the risks of fringe suburbia

One thing to note while searching for numbers of past sales and currently for-sale properties - the numbers are somewhat misleading. For example, in @highlighter 's example, he/she says there 600+ for sale properties in Wyndham Vale. This is likely not an accurate number. Why? A lot of these ads are for blocks only and H&L packages by volume builders that may not represent the real on-ground situation. A better way to research is boots on ground feel for things.

 

@Rolf Latham has nailed it. Valuation is the most significant issue you will come across. A good broker will know where to go to make sure you don't get a nasty valuer.

Just keep in mind you are paying a premium for something new and likely unable to feasibly sell in the short term. Do the depreciation characteristics, zero maintenance, higher rents and better quality tenants make up for the premium?


- Inexperienced developer: may not deliver the promised quality or on time. Could go bankrupt midway.
This is very very very uncommon, particularly if you stick to a known builder. Most H&L packages are separate contracts between the builder and developer that have been bound together for sales purposes.

- Additional costs not known at purchase
If you buy a fixed price turn key package and are happy with the inclusions, there really can't be extra costs. If you get to pick and choose what you want on the build though, this will likely be a problem- most builders just can't get a straight answer to you on price.

- Land titles unclear or disputed
Generally not likely to be an issue with an experienced developer, such as those listed above. Always be very careful with smaller subdivisions though, I've seen some shocking situations from small time developers who didn't do their job properly.

- Location is not well connected to transport like station, motorway, schools and shopping
Research research research

- Promised amenities not provided properly
Again, research. Don't believe the salesperson about anything that's "going to be built" in the area until you've checked it up yourself.

By the way, do H&L have strata?
Very very very very very rarely.

 

I see this a lot from brokers and more so from the sales agents selling OTP that they have someone who can get the loan approved.
You want the valuation to stack up with everyone, not just one place you know gives good valuations.
Don't want to find out later that you paid a premium that was hidden by a generous valuation.

 

True to a point.

Bank valuations are often no where near the realistic market value for the property. You could get three valuations on the same property and they'll often vary by as much as 20% depending on the valuer and lender.

You really must do your own research here and make sure you're happy with what you're paying.

 

@Tom Rivera banks don't typically complete valuations, it's usually independent professional valuers that are paid by the banks.

I find valuations completed are usually around the mark, the most common when they don't stack up is when there aren't many comparable sales.
Which is often the case in a new development (H&L packages).
Also find that valuations are a bit behind in a booming market.

Besides that they're mainly using comparable sales, which I believe is a fair comparison.
Of course if there are many to select from you're going to have variables.

 

Of course the lenders don't complete the valuations internally, but they order them, and they most definitely influence the result.

In my experience across new property they valuations are often wide of the mark, I definitely agree with you on the lack of evidence too.

Direct Comparison is considered to be the most accurate method for residential valuation where there is sufficient evidence, but the result is only as accurate as the input, hence variations in the result.

 

First time I'm hearing about this. Can you explain more? What is it for?

 

Vals don't stack up for H&L because valuers need 3 recent, comparable sales. New estates don't have any recent sales. Valuers can't use sales by the developer, they need 'ordinary' sales.

Usually the only ordinary sales are either in nearby established suburbs of older homes which really aren't comparable to the 4 bedroom 2 bathroom/garage, theatre room and alfresco living in new estates.
Or the comparables are previous land bought from the developer which is back on the market due to death, divorce or debank. Generally sold at a loss, because these private sales don't have the marketing reach of the developers who suffocate the market, and are forced sales that need to be sold quickly.

I've done quite a lot of construction Finance. Vals come in short probably 1 in 10 times. In established sales, 1 in 100 or less. I'd recommend getting finanance and settlement of both the house and land contract together. Manages lots of risks. You don't need to buy them from the same vendor, just present the bank/broker with two contracts.

 

Always better to buy land in the early stages of the Estate/Development, as prices of land continual to rise and you will pay more for the land, especially if it is a boom cycle.

Don't be the last cab on the rack, meaning if its close to peak beware.... prices can go up but they can also fall relatively quickly. L&H can be high risk dependent where the cycle is? Oversupply

 

I was ready to type a reply saying what happens when it goes down, but I took breath and read your second sentence

I think H&L is definitely risky, there are clearly those that do it well, but so many that get it so wrong.

It's not just a case of dart board, pick H&L early stages and will get CG.

Personally I would prefer to be in established area with existing demand with add value potential. Or even better develop in established area in demand.

 

Don't get me wrong, L&H is brilliant, look at some of the investors on PC that are making a killing, however it works well when markets are rising, its timing the market that matters.

The issue is if you are buying land today, and waiting for titles and then build it adds a layer of risk in particular when markets have been booming for some time. One thing we know is fact ... after boom comes bust, and all markets correct eventually. Investors come unstuck when they presume they can continue making money and ignore market conditions.

The saving grace may be is if you are doing the lower entry stuff the rent may cover the cost of interest repayments? and one needs to consider interest rates are on the rise.

One strategy would be to sell off some of the L&H, hold some, reduce debt, increase income and reinvest the profits into other markets... its like having a bet each way. If you don't strategise there may be a good chance that you lose time, one of the most important factors with investing, and you don't get that time back.

 

FWIW, here's an article Domain have run > Will Melbourne property prices continue to rise? Five economists predict

 

Sure thing Amar. This mob does title insurance > Stewart Title Limited.

 

Thanks westie.
Reading through it quickly gives me the impression that a good Conveyancer should be able to avoid the need for such cover.

 

I disagree about 'early' stages. Developers have bought the land. They have done their numbers on a price point for the whole lot. The first stage is sold at around that price point. Subsequent stages may be sold at a higher point. The developer wants to entice buyers, they basically try to 'make' the market. Without a 'rising' market they make the market by including rebates, and incentives with the later stage sales.

People who bought the early stages see the listed prices later and think they have done well. But the valuation issues remain, as above.

I'm not saying you can't make money in H&L. But I see many people who make the mistake of comparing the price they bought their land for with the current list price for similar property and confusing that with equity. It's not equity until sold, or a banks valuer agrees with the increased value.

Valuers don't usually see an increase in value in new estates until the whole suburb is built out, there are lots of comparable 'resales' and a buyer would need to drive another 20minutes down the highway to buy newly developed land.

 

When you buy in the early stages of an estate in a rising market this is where you will make the most money, its just logical as markets are continuing to rise and with each stage, developers increase prices.

Not sure whether we are talking about the same thing? but I come from experience as I was doing land and house packages for quite some time when I started investing.

 

Indeed. In a rising market.

The thing is, you need a sustained long winded rising market. It has to be rising while you wait for land release, which can be two years. It has to be rising while you wait for the build to be completed, 3-12 months.

The point I was making is in both a rising and flat/falling market, the developers make it seem like early stage releases got a bargain, or gained equity. Whereas this isn't the case. It's a show.

There isn't equity there, because valuers don't recognise it, and it's difficult to sell at a profit before the rest of the suburb is built out.

I'm sure there are exceptions to 'my' theory.