8 Things to Know Before Building a New House. One will surprise you.
Updated: Sep 15, 2020
Building a New House can be exciting. But what do you need to know before building?
Building a new house can be an exciting journey to home ownership. It is one of the more popular options to home ownership with first home buyers in recent times. But is this the right for you? What do you need to know when building your new house? What are the pros and cons? How does building a new house compare to buying an established house or any other types of residential properties in Melbourne?
First off, what is an new house? It is a house that either has not been built yet, or is in the process of being built. It can also be called a new house and land, where you either:
1. buy a piece of land and engage builders to build your dream home; or
2. buy a new House and a Land (House and Land) as a package, from a developer. It is a 2 part contract, where you purchase the land and house building contract separately.
It is brand new when it is completed. You are the first owner and you get that "new-house-smell".
Benefits - Advantages of a New House and Land
One of the biggest benefit of building your new house is:
Stamp duty savings. You pay stamp duty only on the value of the land. If the property is being built when you purchase it, then you will need to pay stamp duty on value of the completed part.
Depending on your state, you might be eligible for additional First Home Owner Grants (FHOG) from your state.
You might be eligible for the First Home Loan Deposit Scheme (FHLDS) where you only need 5% deposit.
Eligibile for the Federal Government's $25,000 Home Builders Grant (available till end Dec 2020), if the contract is signed before 31 Dec 2020.
You can custom design a floor plan and have it built in a location of your choice. You can truly call this YOUR house.
The house will come with a 7 year builder's warranty.
Everything in the house is brand new, and comes with their respective warranty.
If you are an investor, planning to build and lease it out when it is completed, you might be able to claim depreciation on the new house and most things in it. Have a chat with your accountant to determine your eligibility for a depreciation schedule.
Downsides - Disadvantages of a new House and Land
There is always a downside to every choice you make. The biggest risk would be uncertainties. It is a much more complex and intense process than buying an established property. You must be prepared to be flexible, accept that there will be delays and be prepared to resolve any unforeseen issues. It is also a much longer process to buy and build, taking anywhere from 6 to well over 12 months, before you can move in.
As mentioned in the earlier, building a new house build can be split into 2 purchases:
Purchase 1. Finding and Purchasing the Right Land
Finding a suitable land to build on, is easier said than done. Not all land can be built on. Not all parts of the land can be built on.
In Melbourne, land can usually be found either in established residential estates, (in-fill areas), or new residential areas, in the various growth corridors. These are usually a lot further from the CBD. In Victoria and Melbourne, these are
South East Growth Corridor eg - Clyde, Pakenham, Cranbourne
Western Growth Corridor eg - Tarneit, Rockbank, Wyndham Vale, Melton
Sunbury and Northern Growth Corridor eg - Donnybrook, Sunbury, Cragieburn, Wallan
Your budget will determine where you can buy. Blocks of land in in-fill areas are generally smaller and more expensive, while land in new residential growth areas are cheaper.
The council planning zone characteristics and attributes of the land and surrounding area, will determine what you can build, how large the house can be, what shape and design the house should be and the cost. You will also need to understand the council's design and planning requirements. It is a very technical process, and you should seek expert advice or you may end up with a land that does not meet your needs. A good buyer's agent who is familiar with the area and have the new-build experience will be able to give you the right advice, and make your selection a lot easier. Not all buyer's agents know what is required though, so, you have to be careful with whom you go with. At Concierge Buyer's Advocates, we have development experience and have been buying land and helping to select and engage quality builders for many of our clients. We are very particular with whom we recommend, and we only recommend builders whom we trust.
Purchase 2. Building the right house
The applications and planning process and time-frame to build a new house varies from state to state and even from council to council. Building on a new land (land that has never been built on before), is also different from building on a land that had previously been built on. In Victoria, the high-level process and time-frame typically looks like this:
- Purchase of land: 1-2 months
- Design, prepare and submit applications for permits and plans: 1-2 months
- Council review and negotiations for building permit: 2-6 months
- Building the house: 4-6 months for a single storey house, a double storey house could take 1-2 months longer for a typical sized house.
The time-frame give above serves as a guide. Obviously the workload of the people involved, delays in reviews and responses, and even the weather will determine how fast or how slow the build is completed. The entire build process has been known to take well over 1 year.
Other downsides include:
- What you planned may not be what you get. A good, reputable, honest builder is critical here. And it does not necessarily mean the bigger the brand, the better the builder will be.
- Cost blow out. Always buffer at least 10-20% as emergency fund for the build. It is very common that the build process encounter unexpected hurdles. Quality and styles of the materials used will also affect the cost of the build.
- Valuation is not guaranteed. Despite what some marketeers and sales agents want you to believe, the valuation of the house is not guaranteed. The value of the land changes, and the look, feel and quality of the finished house will help determine the valuation.
- Permits and fees. The savings from the various stamp duties are off-set by the additional costs in the various planning and building permits and fees. In Victoria, the can range between $20,000 to $40,000. Cost will vary between states and councils.
- Devil is in the details. Some build contracts do not include finer details such as site cost, landscaping and driveways, heating ventilation air conditioning systems in the build contract, to keep the build price low. The un-suspecting buyer usually ends up with a semi-complete property. A good, honest builder will include these costs into the contract. This often makes the build contract a lot more expensive, so, price is NOT the only thing you should consider when you're choosing your builder.
Other Things You Need to Know When Building a New House
Some other considerations that you need to be aware of are:
Unlike the purchase of an established house, buying a land and building on it, is often considered a 2 part mortgage. You need a mortgage to buy the land, and a separate construction loan for the build. Have a chat with a good mortgage broker, and have this discussion with them. Your serviceability can be different from buying an established house, as lenders usually have different lending criteria.
b. Your Surrounding Amenities
Buying a land in a new residential estate is always gamble. There are no certainties on where the amenities will be. You have no idea who your neighbours could be. Plans do change, and plans can get delayed.
c. What Was On The Land
If you are buying in a new residential estate in a growth corridor, always enquire what was on or near it. While most residential estates in the growth areas were former farm land, it is not uncommon for an old, decommissioned landfill to be re-zoned and sold as residential land.
d. Stamp Duty, Home Builder Grant, FHOG, FHLDS
First home buyers in Victoria will enjoy First Home Owners Grant (FHOG) stamp duties exemptions for properties up to $600k and some stamp duty concessions for properties costing between $600,001 to $750,000 in Melbourne. You might also be eligible for the First Home Loan Deposit Scheme (FHLDS), whereby you'll only need a 5% deposit. From now till 31 Dec 2020, you will also be eligible for the Home Builders Grant, saving a further $25,000.
You will need to budget around $1000-$1500 for conveyancing costs.
f. Council and water rates
The council and water rates are determined by the valuation of the property, and it varies from council to council. For a typical established home in Melbourne with a median price of $800k - $1.2 million, expect to pay around $1500 - $2000 annually in council and water rates.
g. Body Corporate/Owners Corporate
Stand alone houses usually do not have any body corporate or owners corporate fees. However, a body corporate fee may apply in certain situation. This information is also available in the Section 32 of the Contract of Sales for properties in Victoria.
What else do you need to know before you get started on building a new house?
Refer to our getting started guide. This guide should show you what you should do to get into the property market. Buying a land and building a house is a long and often intense process. But the rewards are often worth the pain.
With the above information now, would you still consider a building new house? What else should you consider?
Feel free to have a chat with us, if you need further guidance.