A beginner's guide to buying a house and land package

Home-and-land packages with generous government grants and benefits can seem very appealing to first home buyers. But before signing up it's a good idea to research the market thoroughly and compare the costs of a new build to those of buying an existing property.

The costs of a new build can be much higher when any unexpected extras are factored in. With new builds delays are common, which can lead to unexpected costs if you have to  extend your current living arrangements.

Take into account that you may be moving into an unfamiliar neighbourhood with a number of unknowns in terms of infrastructure and facilities such as schools and healthcare.

First home buyer Reilly Baker and his wife Aimee decided on a new house-and-land package in Schofields, part of Sydney's north-west urban area. "It was the incentives, what the government was offering," says Baker. "We were in a position that we could manage the 12 months it would take to build, and save more for the house deposit. It meant we could buy there and then and have a longer time to save. And the fact we bought in that market meant we were locked into that price."

In two years the property's value rose from $585,000 to around $700,000. Now, another three years later, the house is worth closer to $900,000.

The Bakers say that before building they looked at several existing properties, but the lower end of the market was super-competitive and houses sold quickly.

They hadn't considered building their own home. "It wasn't something I thought someone like me could do. My parents had always bought existing homes, but Aimee's parents had built their home and encouraged us," says Reilly.

Now they have three daughters and are at capacity in their current space. Reilly says he would be happy to move further out and build another house, but it might not be feasible with the 18- to 24-month wait for a new build.

While there were significant advantages to building a new home, including having it done exactly to their specifications, this time it would be more challenging. They would need to sell their current home to finance the new purchase, but paying rent while they wait would be a challenge.

The time it takes to build the property can see a change in fortunes for the prospective owner. For example, when Alex Smith (not her real name) bought her house-and-land package with her fiance they were happy to have time to save more money before their wedding and moving in. However, they split up before getting married but were locked into payments on the property until it was built and they could sell it. They also found that the high-end finishes they had paid extra for were not appreciated by new buyers, so while the property had gone up in value slightly, paying more for what they thought would be their lovely new home had not been worth it.

Home or investment?

Peter Ishak, a licensed conveyancer and specialist in house-and-land packages, says it is important to decide whether it's an investment or a home. "If it's an investment it's specifically about two things - capital growth and rental yield," he says.

However, if it's a home there are practical and emotional aspects to consider. The proximity to employment and education are important, and you might want to choose special finishes.

"For example, you might want benchtops to be granite, but if it's something to live in now and move later, then you need to consider what is appropriate to spend on extras.

"From an investment point of view it's different. If you're buying house and land in the western corridor of Sydney, like Hoxton Park or Willowdale, most people who live there have families and they like backyards. Make sure you're targeting the right demographic with your investment.

"I'm a strong advocate of not buying a property just because of government grants. It's like committing $100 to get $10."

Government incentives for first home buyers are restricted and target a very particular demographic, says Ishak. "They're not across the board - they restrict on income, price point and whether it's a new acquisition.

In addition, he says there's a dangerous trap to watch for.

"Interest rates are the lowest they've ever been and that's creating a market where money is so cheap people are getting a false sense of being able to afford an asset. Someone who thought he could not afford a home but then sees interest rates drop, and sees there's money from grants, decides to buy the asset, but when the interest rates go up what will happen to the market?  He can hold the asset for four or five years but when the interest rates go up, and there are no longer grants, what will happen?"

Key questions to ask

If you've decided to go with a house-and-land package, you need to be confident that you're on top of each step of the build.

Research the credibility of the builder - do they have a current licence? Make sure you see it. How long have they been in the industry and what are some examples of their work? What type of homes does this builder specialise in?

Look at completed work in a number of areas. One of the biggest tips in making sure you have a good builder is customer feedback, which you might see online. It might not be 100% accurate, but you can get a sense of the quality of the work.

Look carefully at where you're buying. Compare what you're paying with the price of similar places in the area. If you're building four bedrooms, two bathrooms with a two-car garage on a 500sq m block, what has your neighbour paid and what is the average for the suburb?

Compare it with a property built within the previous five years. If a new home costs $700,000 and a similar home less than five years old costs $600,000, then you could be overpaying. Make sure there is sufficient infrastructure, with access to transport, good roads and medical care.

Think about the burden versus the benefit. Building a new house isn't for the faint-hearted - there are lots of decisions to be made,  small and large. Think about what might go wrong, including delays and poor quality of the workmanship.

Check the small print

You need a conveyancer to go through your contract  - one who is experienced in off-the-plan and house-and-land arrangements, says conveyancing specialist Ishak. The building contract should identify all the important elements and your conveyancer has to make sure they're all covered, and bring to light what isn't, for your protection.

"A lot of people come to me saying I've signed this, we're fighting over that," says Ishak. "They give me a copy of the contract and sadly I see things that have been missed and then it becomes a nightmare because their rights are not enforceable. The contract has been there to protect the builder. That's why a lot of conveyancers hate to review build contracts."

Tips from a first-timer

Julian Clarkstone, Money magazine's marketing associate director, and his partner weren't really looking to build a property. But last year, with all the grants being rolled out, he thought, "Why not, it's a bit of help - $35,000 in grants [first home buyer and HomeBuilder] and a reduction in stamp duty."

Clarkstone put down his deposit in July for a package in Sydney's north-west, in a suburb filled with first home buyers and young families. He says the build has only just started and it will be completed 
in nine months.

The deposit was 10% of the land value, on which stamp duty was added (at a reduced rate). "We have the entire loan approved, but so far are only paying interest on the land and the money will be released in stages from the bank when the invoices come through from the builder," he says.

Clarkstone says he originally thought he'd find an existing property further south, but while his land is smaller than the typical existing properties there he felt that having a new home was worth it.

Transport infrastructure has been promised by the NSW government, but now seems to be on the backburner. There are also plans for a new school, although there are already some schools in the area.

Clarkstone says the choice of builder was limited: each block of land was allocated to a particular builder, with an extra financial promotion running between the developer and builder. You could change the builder, but then the financial promotion wouldn't apply. There is a different builder on each block in my street. Just looking at the building signs in front of each property, there are at least 10 builders on that street," he says.

"We needed to negotiate a lot on the build. We weren't happy with the design, but the builder said they could offer a custom design. We pushed hard to get what we wanted and although it took a while, with back-and-forth changes, they were helpful in eventually giving us a custom design which included changing the layout. That was a big reason we went with them in the end, because they could change the design."

Clarkstone says he would recommend that any first home buyers who go through the same experience get a flow chart of what needs to be done from their broker, lawyer or builder.

"I didn't have one and I found the whole process really confusing. Other family members going through this agree that it can be a nightmare trying to work out when payments are due, or who you need approvals from, what you need 
from your builders, and when.

"If the builders were clearer about what they needed from us and we had more knowledge, it would be a quicker process."

He says the most frustrating part of the whole project is the time it takes. "It takes longer than expected."

Clarkstone and his partner are living with their own parents at the moment so they are not too financially disadvantaged by the delay, but this is a consideration for anyone who is paying rent.

What to watch out for

- Cheapest isn't always best. Generally, some builders have a monopoly on certain locations, but in most estates you have the flexibility to choose from a number of builders. Check what the builder has done before to ensure they will be the best for your project. 
- Check the design guidelines. Some developments and estates are strict about what you can have - you might want a flat roof instead of a pitched roof, for example. They are generally positive but can be restrictive. If, for example, the developer insists all houses need to be brick veneer or double brick, make sure your builder can meet the guidelines, including cost.
- Is this a full turnkey contract? Turnkey means that once the house is built you don't have to do anything else to it. It's a complete package. A lot of builders might quote a good price, but you might have to do your own fencing, landscaping or driveway. When looking at terms and price, know what you're paying for.
- Do you know exactly what you're getting - if you've seen a display house with top-of-the-range finishes, is that what you've agreed in your contract?

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