Not all good things come in packages
November 6, 2010
Buyers should do a lot of research before investing in house and land packages suchas those at Truganina (pictured).
Investors are turning to house and land deals but experts say they should heed the adage “buyer beware”.
The pristine veneers, manicured gardens and sanitised streetscapes prominent in promotional material for house and land packages paint a rosy picture of ownership — but there’s more to the story for investors to heed.
According to solicitor and real estate watchdog Tim O’Dwyer, in some instances, it can involve downtrodden gardens, shabby home fronts and cars on nature strips.
That’s not to say all house and land projects are fated to grow old ungracefully but, Mr O’Dwyer says plenty do.
“It’s really important, no matter where you buy a house and land package, to compare apples with apples. It’s really important to get independent legal advice, valuation advice and property management advice because, so often, house and land packages wind up in new estates that become slum estates down the track,” he says.
The Housing Industry Association’s most professional Australian builder 2010, Porter Davis, has house and land packages on more than 450 blocks across 50 estates in Victoria. Porter Davis director Paul Wolff says the company markets to “mums and dads” rather than investors but he estimates about 5 per cent of the market is DIY mum-and-dad investors — though the company makes no effort to single out this market.
Builder Metricon’s primary house and land package market is also mum-and-dad owner-occupiers, says Yvonne Abood, Metricon’s general manager of marketing, but in the past financial year, the company fielded an increased interest in house and land packages from investors.
Ms Abood estimates there has been a 5 per cent to 15 per cent increase in the number of inquiries about home-and-land package “investment property solutions”.
She attributes this interest to a growing rental demand driven by high property prices and the fact the new estates popping up under the government-driven urban growth boundary expansion in Victoria are spotlighting the potential of outer suburbs to generate good rental yields.
“New estates or growth boundaries are actually promoting very good rental returns,” she says. “Most people were relying on inner-urban for rental returns, where that market is quite flooded and competitive.
“But you’re getting stable returns within the new urban-growth boundaries and greenfield markets, so I guess that’s why people are not only looking to move and build out there but there is an investor market as well that’s looking to build and invest out there.”
Nevertheless, indications are that Metricon and Porter Davis customers champing at the bit to sink their cash into house and land packages are still very much in the minority. Despite that, Robert Loader, chief executive of property investment recommendation expert Pulse Property, disputes the idea that minority interest in house and land package investment (as reflected in the cases of Metricon and Porter Davis) means the packages are inherently doomed as investment products.
“I think the general public perceive it is a lower risk and easier investment to invest in units and townhouses; they have a perception of a lower operating cost and a perception of a higher probability of getting tenants,” he says.
“I think it’s a valid assessment but that’s not to say that there aren’t areas where there are great house and land opportunities … It is on a case-by-case basis.”
The 2005 Korda Mentha report Property Investment Due Diligence and Risk Management states that due diligence for the acquisition of investment property is typically divided into six main categories: legal, financial, physical, building services, environmental and regulatory. The nature of due diligence can be a “relatively complex” and “systematic process”, the report explains.
But whether investors perceive due diligence around house and land packages to be complex is another matter, says the head of property research at Adviser Edge Investment Research, Louis Christopher.
“Investors don’t have to do any research … they can just sign the contract the developer gives them and away they go,” he says. “But of course it’s recommended that investors do a lot of research, particularly surrounding the contract itself. Some less-scrupulous developers can put some pretty dodgy clauses into house and land contracts so it would always be recommended that a buyer of these types of packages gets some independent advice from a solicitor before signing.”
Mr O’Dwyer concurs that package investors would stand to benefit from heeding the “buyer beware” message but at the same time, he says, the safeguards in place to protect consumers against making ill-informed house and land investment decisions could be improved.
“Buyers are often naive and buyers are being persuaded by highly sophisticated techniques,” he says. “Therefore, there needs to be legislation to protect buyers more — to warn them more — and, at the same time, there’s a need for more education.”
The regulation ready manager for the Property Investors Association of Australia, Rosemary Johnston, has first-hand experience of the problems that can affect investors who neglect to give due consideration to the area in which they are interested in buying.
During one due diligence audit she conducted, she says she was concerned to discover on a real estate website that there were 150 vacant rental properties in one Victorian town for that particular week.
“I was so concerned, I rang up a few agents to ask them about what was happening,” she says. “The properties that were renting were the ones that were airconditioned and when I looked at those properties, 149 of them weren’t airconditioned.
“And the other thing was there were a lot of Muslim schools in that area and the Muslim families that came had younger children and they wanted to have a living area where they could have the younger children and a living area where they could receive the elders from their community.
“So the houses that rented first generally had two living areas and airconditioning and three-plus bedrooms.”
Mr Loader identifies four common considerations inexperienced package investors are likely to overlook: the complexity of raising the finance necessary to buy a package; the time it takes to build, complete and occupy the dwelling; maintenance costs; and the existing supply of houses and land in the marketplace, which will affect rental vacancy rates.
Louis Christopher says accessing existing data about the overall performance of house and land packages as an investment product is problematic, too.
“There’s a fairly low sample size and data from the [Land Titles Office] doesn’t distinguish between what’s a new house and land package and what’s an existing property,” he says.
“So it’s very difficult to work out how successful these house and land packages have been.”