Construction Vs Purchase?

Construction Vs Purchasing a New Home

Shall I buy or Shall I build

Once you have made up your mind to buy your own home. The first logical question that spurts up in your mind is

Is it better to buy an established house?
Is it better to construct one?

Unfortunately there is no hard and fast rule. The solution to this dilemma is answering a few questions below.

Q1) How long are you prepared to wait before you get the keys to your home?

Q2) How much deposit you hold or will accumulate towards your home?

Q3) How close to the city you would like to live?

Q4) How much spare time are you ready to put in towards the various stages that are involved in either of the processes?

This list is neither exclusive nor exhaustive. We will try to answer various questions below to help you decide on the right course of action for you and perhaps discuss both the processes in detail in another blog.

Q1) How long are you prepared to wait before you get the keys to your home?

The process of either buying an established home or building one involves time. It may take anywhere from a few days to a few months or even a few years before you can move into your home.
Historically speaking the process of buying an established house involves much less time compared to building a home. This is mainly because the established house is already built and ready to move in as soon as the settlement process is completed. Hence all the time that is required from your end is

a) Getting your finances sorted and
b) Preparing the paperwork for settlement.

The settlement date (the date you get the keys to your newly acquired home) is mutually decided between the seller (also known as the vendor) and the purchaser (that is you). This date is put in the designated column on the Contract of Sale as the “Settlement Date”.

Generally, the time given for settlement by the vendor is anywhere from 30 days to 90 days. However this date may be flexible, which means if both, you and the vendor, agree and if all the necessary legal paper work required for settlement of the property is ready (viz. Singing of your home loan contracts with the banks, relevant searches and title transfer documents that are prepared by your solicitor), then the settlement date may be advanced forward to any such suited date.

Whereas on the other hand, when it comes to constructing or building your own home. The time involved in the whole process may stretch to a few months to even a year or so.
The construction process needs to go through various stages. The first and foremost being finding the desired block of land. While deciding on the block of land you have to seek answers to one of the most important question from the vendor

a) When are titles expected to get registered (if the titles are not already registered) with the Land Titles Office.

As this is the most important thing that will determine how long you will have to wait before even the construction may begin. For example: if you are seeking to secure a block of land directly from the developers, then the titles may not be available for another 12 months of so, or even more. This means you won’t own the land till the new titles are registered. This is not the only delay. The construction of your home will consume another 4-6 months after the land gets transferred in your name.

This means even though you have committed towards a project today. You will not reach the end for another 12 – 18 months. You may have to continue to live in a tenanted place during this time.

Q2) How much deposit you hold or will accumulate towards your home?

Deposit is one of the most important constituent towards purchasing your own home. As we know Vendors put a price on the house they are selling and you as the purchaser need to come up with the asking price and pay it to the vendor prior to the titles get transferred in your name.

You can come up with the asking price either purely from your own pocket (viz. without needing any help from bank or any outside party) or if you are falling short from the asking price, then you seek the help of a bank or any financial institution body to cover up the deficit.

In most of the cases the purchasers do not have the asking price, hence they seek outside help. When this is the case, the purchaser has to satisfy some prerequisites of the lending body before it agrees to lend. One of the most primary prerequisite is: YOUR CONTRIBUTION. All the banks and the lending bodies want you to contribute a minimum deposit which may range from 5% to 10% towards the purchase price.

Unless you have the designated money saved up, the banks may not be willing to commit their portion towards the purchase.

You now need to determine as to if you have enough money available right now or you would require some time to accumulate the deposit component. This may be a driving force in determining if buying an established home will work for you or would it be better to go for a land and construction project.

As you already know that purchasing land that is to title in the future could be a long term project compared to purchasing an established house. This means that if you are falling short of savings, it may be better that you go for a project that gives you time to save the shortfall. Knowing the bank loan process only starts a couple of months prior to titles are registered.

Other factors that may affect the decision is the availability of First Home Owners Grant or commonly known as FHOG. Depending on where you buy (metro / regional) or what you buy (established house, off the plan purchase or a house and land package) you may be eligible for some Government funding to assist you in deposit. Please check with the State Revenue Office (SRO) in your local state to know your eligibility.

Q3) How close to the city you would like to live?

The third intriguing question is the proximity or the closeness to the city you would like to live.
Historically the closer to the city you are, the dearer the real estate becomes. City being the Commercial Business District and where most of the people go to work. Hence if you want to cut down on the commuting time to and from work, you will need to live closer to the city.

However, if you follow the normal laws of nature, the expansion of a city is always outwards, hence, new developments that comprise of vacant land and construction usually are going away from the city. On the other hand the stock of old established houses with a good public transport connectivity is usually found closer to the city.

In simple words it is may be hard to find the construction projects closer to the city and you may have to settle for an established house if you are willing to live closer to the city.

Q4) How much spare time are you ready to put in towards the various stages that are involved in either of the processes?

Frankly speaking this may arguably be the most important factor in determining whether to go in for construction or buying an established house.

Finding the right home or a builder to build your home is a very arduous task. If you are deciding to go in for an established house then you will have to take time out from your daily busy schedule and go to the various house inspections (Opens) in the area of your preference. You do not know how long it will take to come across a house that appeals you.

While in case of the construction, the task is even more tedious as this involves a multi-layered process. It starts from

a) Short listing the builders
b) Finalising the plans
c) Deciding upon the detailed list of inclusions and specifications that will go in your dream home

d) Signing the tender before you sign the final fixed price building contract.
e) And once the construction starts, then going out on regular inspections seeing that the builder is sticking to the schedule and the agreed inclusions and specifications.

Going with the option of an established house may involve considerable less time than the construction process. As once you have finalised the house and done the initial inspection prior to signing the contract, you can get on with your daily routine as you need not worry about daily updates on the house till settlement.

However on the other hand construction involves much more attention. You are required to be actively involved at various stages and may involve numerous visits to the builder’s office and their warehouse before you finalise on each and every small item that will go in your house, from the colour of the outside bricks to the colour on the internal wall. From the knobs that go on kitchen cabinets to the door handles.

Now if your job is such that you can hardly take time out from your daily chores to actively think on what goes where in your house, then going the way of an established house may be a simpler and much less laborious task.

The above questions are just a few questions from a big list of questions that may be considered prior to choosing which is better for you

Other things that may influence your decision may be

1) Any forthcoming changes to the financial position of your family. (Getting married, planning to start a family, unpaid leave or changing jobs).
2) While construction is under process, you may have to have adequate resources to meet the mortgage repayments on the new house under construction on top of your existing expenses including current rent.

We hope the above discussion has helped you to make up your mind by clearing the doubts about which one is better for you. If you still have doubts, please contact a friendly staff from Apt Mortgages to answer your questions.

Avnit Singh
Director, Principal Mortgage Analyst and an MFAA Accredited Finance Broker
Phone: 0433 815 388

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