Selecting land to purchase
You have probably heard the saying “location, location, location”. If you want your next build to provide great capital value, it all starts with your section purchase. Our advice is to purchase the best section you can afford. It may have a great view, north facing, great neighbourhood… something that others may be willing to pay a premium for in the future.
A cheap purchase is often not best. It may be difficult to build on and produce the least capital gain potential.
A steeper site may seem ideal because of the view or location, and it may even be less expensive initially. However, a steep site may have far greater costs to build than a flat site making it a lot more expensive in the long run. Major earthworks, including retaining work and piling can make getting out of the ground very expensive, before the house has even started.
Buying land in a sub-division
Buying land in a renowned sub-division by a respected developer can offer great benefits. The sections in most instances tend to be serviced sites (i.e.) power, water and in some cases phone tend to be connected already, saving you these additional costs.
Also respected builders tend to build en-mass in these sub-divisions so they are very familiar with the structure of the land and the costs to get your build out of the ground.
Getting in early into a new sub-division can present opportunities for good capital gains. As the sub-division gains momentum and popularity the land sale prices and build costs tend to raise.
You and your lawyer need to complete your due diligence on the land before committing to the purchase. There may be unpaid levies by the land developer, such as Growth Infrastructure levies, Water Care levies etc. Your lawyer is key in assisting you research these aspects.
Buying a rural (lifestyle) site
Some New Zealanders look for a change in lifestyle and head to the country to live by purchasing a lifestyle block. Points to note are:
- Maximum lending may be reduced to 85-90% (10-15% deposit)
- Depending upon location, there can be additional transport costs to deliver materials to site. This extra cost will be reflected in the final build quote
- The rural site may not have services, in particular power & phone
- Significant additional costs include the need for water tanks and a septic system
Building on a sloping section verses a flat site
When a builder is putting together a build quote, one of the greatest unknowns is the cost of getting out of the ground.
On a flat site in a major new sub-division, where the land developer supplies the builder with the sub-division’s geotech report, it is relatively easy for the builder to price the ground/earthworks. Compare this to a sub-divided site on someone’s back section where the slope across the section is a couple of metres or more. With the latter, it is likely that major earthworks and retaining walls will be required. This can add tens of thousands of dollars to your build cost. In all cases, do your homework.
In addition, where the builder may be very comfortable to fully fix the cost of the earthworks in a flat site in a major sub-division, they are unlikely to do so where a major slope exists. This item is then likely to be included as a Provisional Cost Sum (PC Sum) in the Build Contract. A PC sum is an uncontracted item in the build contract and is regarded as an estimate. As a minimum you would want your builder to provide detailed estimates from reputable contractors for the works to be completed. It is better to arrange with your builder to overestimate the earthwork costs (and agree to a refund policy if actual costs come in lower) rather than underestimate these costs.
Sub-dividing and Building
Sub-dividing can be a really great option for creating equity and wealth. Sometimes the value of the sub-divided piece of land can be close to the current value of the land prior to the sub-division, especially in sought-after locations.
Sub-dividing is a time consuming process as you work with your local council to obtain the necessary consents. It can also be costly, with costs of $80-$100,000 or more with some local councils.
In terms of funding a sub-division of your property, a lot will depend on the equity you currently have in your property. The lender will require you to stay within prudent lending levels (approximately 80%), not only at the start of the project (refinancing of existing debt) but also as additional funds are drawn down to pay for the sub-division costs as you progress through to obtaining a separate title to the sub-divided land.
You may be considering selling off the sub-divided land or retaining it to build for a rental for example. The lender will be assessing the lending levels throughout the project and ensuring your current income and proposed rental income can adequately service the debt.
I already own land; can I use equity as my deposit?
The answer is yes. If you already own your section, then your equity (the difference between your mortgage and the value of that land) becomes part of your deposit. If you only have equity and no cash to pay a deposit to your builder, don’t worry. NewBuild will help by ensuring some of your equity is transferred to a cash deposit so you can make the required build deposit.
I already own land; what is inherent equity?
If you purchased a section and you paid less than its value, you will be allowed to include that extra value as part of your deposit after you have owned the land for a minimum of six months (some lenders require 12 months). We refer to this extra value as "inherent equity" (the value of the land or property above what you paid).
Paying a deposit on the land purchase
You will need to ensure you have sufficient funds to purchase your section and that you also have sufficient funds to build. You will need to pay between 20-50% of the land price to settle on the land. If your deposit does not meet this criteria you may still be able to build, but you need your building contract to coincide with the land settlement.
With NewBuild you may be able to fund both land and builder together with a much lower deposit. If you have a low deposit (less than 20% house and land) you may be required to build only on a flat site (or slightly contoured) that has been engineered to a standard that your builder is confident to supply a fully fixed price build contract without a chance of the foundation costs blowing out.
Buying land without a Certificate of Title
When a lender provides a loan pre-approval, you are then required to provide certain legal documents. For a residential construction loan this will include:
- -Signed Sale and Purchase Agreement for the land purchase
- -Certificate of Title (CT) for the land purchase
- -Signed Fixed Priced Build Contract
- -Concept Plans and Specs
- -Valuation
Especially in Auckland and Christchurch, there is land being offered by land developers where the CT (Certificate of Title)is still to issue. If this is the case then you should consider the following:
1. Include a “sunset” clause in the Sale and Purchase Agreement for the land purchase. This clause is for the sole benefit of the purchaser. If the title is not produced by a defined future date, the purchaser retains the right to cancel the Sale and Purchase Agreement. If there are significant delays, it is important that you have the right to cancel the agreement and move forward with another project.
2. Lenders tend to issue a loan pre-approval for 60 days, i.e. you have 60 days to supply them with the required legal documents. You should check with your lender as to how flexible they are outside of the 60 days and what conditions may be attached to this flexibility. Keep in contact and update your financial information as and when required.
