Super-House&Land Package

I belong to a number of closed SMSF discussion groups and there was a great discussion topic this week ending  3.10.12, best summarised by the advisor as follows:

“Good point Rich – it is in fact the biggest hurdle in acquiring a good house & land package, rather than an ‘off the plan’ apartment, where the developer owns the lot & takes the whole risk. In a normal house & land deal, the developer only owns the land. In my experience, they will only carry the finance themselves on that while the builder builds the house. As I said, this is usually covered by an Option Contract between the developer & the builder, where the builder pays the developer on completion.

Because the builder has the exclusive option over sale of the land, he is the entity who contracts with the smsf to sell them the full package & receive a deposit upfront on the completed, single asset, full turnkey house & land package. The full turnkey is important, because of the prohibition on improvements after settlement under finance. This is where all the experience, negotiating skill, property market knowledge plus well developed & researched industry contacts of the Financial Adviser come into play. He or she must first find a developer who is prepared to forego payment on the land, & allow a builder to build on it, with only the safety of an Option Contract, where the builder must buy the land at a given time. The Adviser must negotiate this time frame to ensure it fits the realistic build times (including council approval) that the builder you choose can meet. A caution here is that a fixed price, fixed term sale contract is the ONLY instrument acceptable here, & the only one that provides sufficient safety for the client & the financier. Unless all parties, especially the builder, can be convinced to go with such a contract, the Financial Adviser will have failed at this point. These are easy enough in Queensland, where they are the norm, but almost impossible in Victoria, notoriously the state of contract variations and non-turnkey packages by most builders.

The second difficulty is to find a high quality builder (as Kelvin said – VERY hard) who, additionally, is prepared to a) enter into an Option Contract with a developer and b) apart from receiving a 20% deposit upfront, carry all the rest of the build cost to completion themselves. Most small builders cannot do this – they simply don’t have the capital or cash-flows. You therefore need to find a higher volume builder whose reputation for quality is established. I can’t name any here, but they do exist, in every state. On completion, the builder finally gets paid by the lender, but only after the astute Adviser has had an independent building inspector do the final inspection and list all defects.

In this process, the Adviser also needs to choose the right land, in the right area, with high growth, good rental characteristics, & is superior to other lots around it in North-South orientation, flatness, outlook, etc (all keep costs down while maximising capital growth & rent returns). Then they must choose the right house to build on it, with the right orientation, size, rooms, quality of build, fixtures & fittings, inclusions & at the right price. The latter can be hard, because the builder who foregoes payment until completion will normally want an offset payment for carrying ‘finance’ to completion, & this can ‘blow’ the valuation, if the Adviser is not very knowledgeable of that local market, & valuers.

The good news – it IS all achievable, as is the great outcome for our investor clients, who end up with a superior, quality, long term growth asset that gives a massive capital injection to their smsf it would otherwise take most members over 20 years to accumulate through contributions alone. In the meantime, they now get the benefit of negative gearing tax deductions on their super contributions tax, and if they make extra super contributions to top those up, still get the tax deductions on their personal income as well. I hope this answers your queries.”

It’s only right that he gains the credit for the comments so here are Max’s contact details, i agree with the strategy, but as usual, be sure to take care of the detail in documentation.

MH- Phone: 03 9530 2111