The mistakes that could cost you over $10k when building a house
Most people see a glossy brochure or image on the internet with a price tag and assume it’s the final cost for the product. There are almost always additional things to consider, and without understanding this, you could be asked to pay thousands (or even tens of thousands) of dollars extra. Not only can this be an unexpected and unpleasant shock, but it may put you into financial difficulties.
Therefore, when buying a house to put on their block of land, it is critically important to compare ‘apples with apples’ before signing a building contract. We will look at how this happens, help you understand the main issues, and provide a checklist of what to look for.
One of the oldest sales and marketing strategies around this is the ‘bait and switch’ (this sometimes take the form of ‘bait and upsell’ too). It happens everywhere. For example, if you are looking to buy a car – the base model is advertised at a very low price to draw people in, but the model they want to sell you costs a lot more. Even then, they will try to sell you some additional options like window tinting, etc. Similarly, when you buy an airplane ticket, the price you see on the website most likely doesn’t include essentials such as luggage, which is an add-on that you probably have to pay for.
This of course happens with property as well. Generally, the display home features all the upgrades. But the advertising only shows a ‘from’ price. With a house unfortunately, there can be other not so obvious costs that could cause severe financial pain if not managed properly.
Here are a few things to think about:
Is the house you were attracted to, actually the one they want to sell you, and does it fit your needs? Or was it just ‘bait’ that allowed them to ‘switch’ you to a more expensive house that actually meets your needs? This isn’t necessarily a bad thing, as you may need to understand their whole range to see which house best fits your needs.
Once you decide on the right house, it is very important to sign a ‘fixed price’ building contract with the builder. This removes any risk for the buyer in terms of cost escalation of building materials, labour, compliance costs etc – as we have seen in Australia and around the world during the COVID-19 pandemic. Also consider, how long is the fixed price contract locked in for? Is it 3, 6 or 12 months? Resimax Group customers can lock in a Tick building contract with a small 5% deposit for an open-ended, unlimited period of time – this is especially important for land settlements that often take years.
A house purchased by an own-stay buyer is usually very different from one purchased by an investor. Most own-stay buyers (in a new estate) will buy a house with the bare basics (as that’s all they can afford), and over time keep upgrading items (often doing it themselves when they save up some money) – e.g. letterboxes, driveways, landscaping, dishwasher, blinds, air conditioning, light fittings, upgrading floor coverings & benchtops.
On the other hand, an investor must have all these things included (and hence listed in the building contract), so they are able to rent it out to a tenant. In some cases an own-stay buyer may wish to ‘over capitalise’ on a property such as adding a pool/spa-bath, or a wine cellar. For landlords, this will just cause additional maintenance issues and costs. Therefore, for investors the inclusions need to be low maintenance and suitable for a tenant. This is called a ‘turn key’ building contract, where everything for the house to be rented from day 1 is included, so they literally only have to bring their clothes, furniture and then ‘turn the key’ to live there.
Builders are usually competing against each other to initially attract a buyer. They rely on buyers (especially own-stay buyers) changing their minds during the build process and request a ‘variation’ to add/remove/change something in the house. As the buyer is already locked in with that builder, they often charge very high prices on these changes – and the buyer has no choice but to pay for it.
This is why it is so important to understand exactly what is included in the building contract for the house, and to think about any changes upfront, and lock them into the contract during the negotiation phase and BEFORE signing the build contract. It is also important to ask how the builder will charge for variations in case you need them.
Many builders specifically exclude ‘site costs’ from their building quote (some have even been known to artificially pump this up after you’ve signed your building contract, so as to maintain their profit margin!). What are site costs? To build a house and to lay down a slab, the ground needs to be prepared first – if they find rock on your site, it needs to be excavated & removed from site, and then the site needs to be filled and compacted. Similarly, on a sloping block the ground may need to be excavated at places where it is too high or low to accommodate the house slab. These are the typical ‘site costs’. The site costs can be low e.g. $15,000-$20,000, but if they hit rock and/or a sloping block – it can easily blow out to $50,000 and sometimes even up to $95,000 with rocky & steep sloping blocks.
Since Tick Homes works closely with the land developer (i.e. Resimax Group, which is its parent company), it is able to include site costs in all build contracts, thus removing the risk from the buyer.
Two other things to consider that aren’t part of the building contract but are closely related to it are the builder’s reputation as a quality builder, and its financial strength. Without checking both boxes, the building contract may not be worth much!
Here’s what you need to consider – is the builder fully licensed, a member of a professional building organisation (e.g., HIA or MBA), and has been around for a reasonable period of time with good reviews (especially having minimal defects and fixing any within a timely fashion). Secondly, with so many builders in Australia (and overseas) going bankrupt due to cost increases, does the builder have the financial strength to absorb these expenses and still deliver your fixed priced building contract?
If the builder goes bankrupt during the build, then you could lose your deposit and a new build quote from another builder maybe up to $100,000 more (plus you’ve had holding costs for your block of land). Resimax Group is a diversified group (including land development, building, rentals, resales, etc.), so unlike a building company that only does building, this diversification provides greater resilience. Plus, some of the largest global financial organisations have recently become equity partners and invested in Resimax Group, thus providing it with even more financial strength.
Investor’s checklist before signing a build contract:-
- Fixed price and for how long?
- Turn-key (with the appropriate inclusions for renters)
- Variations minimised (or at reasonable cost)
- Site costs included or capped?
- Reputable quality builder
- Financially strong builder (lost opportunity cost)
Resimax Group specialises in masterplanned price controlled staged developments in high growth areas. It’s in-house builder, Tick Homes, specialises in efficiently building stylish, modern homes of the highest quality in Resimax Group estates. Customers buying through RGI can benefit from our unique ‘5/10/20 Guarantee’ of 5 years capital protection, 10 years rental guarantee, and 20 years structural guarantee on fixed priced, turn-key Tick homes. RGI members receive early access to projects well before public release.
Disclaimer: This article is for general information purposes only and should not be taken as advice. Always seek professional advice from suitably qualified professionals familiar with your situation and goals.
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Steven Molnar is Head of Research and Education for Resimax group. With over 25+ years in property and finance in Australia and internationally, he brings a unique perspective to each interview with interesting guests and property insights. Resimax group is one of Australia’s largest private property developers, Resimax Group Investor is headquartered in Kuala Lumpur MY.