Split Contract - New House and Land Package

[ferdinandch]

Guys

I am very much interested to acquire new house and land package in Brisbane, but I checked all new H&L package come with split contract (2 contracts, one with land owner and one with builder). Talked to my mortgage broker and he said, no bank will lend me money on this. Then my question, how people acquired them in the past? Did people acquire them in the past with cash? I understand that there are some non-bank lenders are willing to lend in this scenario, but why if most lenders won't touch them, then these new H&L packages are there for sale? This is confusing and frustrating.

I googled and found many naive buyers were trapped in this scenario, signed contract and no bank will lend, then have nowhere to go other than losing the deposit money. Is this sort of scam?

Need help please to enlighten me. I understand why it is unfavourable and has higher risks, what I don't understand is why these split contract properties are still being sold even no lender want to touch it.

 

[Corey Batt]

Split contracts used to be normal fare for lenders up until recently, due to some mishaps with finance failure on one part of a common development causing a domino effect on the surrounding parties.

This has resulted in valuers assigning a 0 value on land which tanks deals for the most part. As a response, these types of developments are largely now being sold as Off-The-Plan, where you unconditionally enter into a contract to purchase the build at completion.

This has it's inherent benefits and downsides, the main downsides being a higher stamp duty paid on the entire cost as opposed to only the land component, and having no means of exiting the contract in the case of poor valuations at the time of hand over.

What type of H&L is the property you're looking at, does it have common walls/build areas?

 

[ferdinandch]

What type of H&L is the property you're looking at, does it have common walls/build areas?

I am looking for a new house, not common wall or build areas, the ones in Fitzgibbon Chase or Carseldine. They pretty much resemble a house, with 350-500sqm of land.

 

[Corey Batt]

PM me the address/link if you'd like, I can have a quick look to see whether we're on the same page. If they can provide you will a fixed priced building contract not reliant upon other building parties there shouldn't be any issue with getting finance across on the type of security.

 

[ferdinandch]

PM me the address/link if you'd like, I can have a quick look to see whether we're on the same page. If they can provide you will a fixed priced building contract not reliant upon other building parties there shouldn't be any issue with getting finance across on the type of security.

http://www.realestate.com.au/property-house-qld-fitzgibbon-117922835

That's one of the example. There is one with plan already submitted to Council, and couldn't make any external change and floor plan, only the building materials and colour choice, even then it still comes with 2 contracts, and I don't see the difference and any reason it will be different with others.

I checked with them, for Fitzgibbon properties, the land owner is QLD government, and it is to be settled within 30 days.

 

[Corey Batt]

http://www.realestate.com.au/property-house-qld-fitzgibbon-117922835

That's one of the example. There is one with plan already submitted to Council, and couldn't make any external change and floor plan, only the building materials and colour choice, even then it still comes with 2 contracts, and I don't see the difference and any reason it will be different with others.

I checked with them, for Fitzgibbon properties, the land owner is QLD government, and it is to be settled within 30 days.

Looks like a normal house and land package - normal finance.

Having a land contract + build contract isn't necessarily a 'split' contract. A split contract covers when there is one overriding building contract, split between multiple building parties (imagine a row of 5 townhouses with common walls on each side). You'll always have a separate land contract and building contract unless you are buying OTP.

I have a feeling the broker may have misunderstood the situation perhaps.

 

[ferdinandch]

Looks like a normal house and land package - normal finance.
You'll always have a separate land contract and building contract unless you are buying OTP.

I have a feeling the broker may have misunderstood the situation perhaps.

I am buying OTP (off the plan) FYI.

My broker said that the definition of split contract is separate contract between land and building.

Can anyone else clarify? I am really confused.

 

[ferdinandch]

I think based on the article below, my broker's definition of split contract is correct and accurate. The ones that banks stop to lend is the properties share roof or common walls e.g. townhouses, villas. But they will however still fund for single home constructions. Although there is confusing clause (they will not fund during construction phase - How buyers are supposed to fund it?) next after that, if anyone care to help me understanding it:

''They will, however, still be funding split contracts that involve single home constructions. They have provided an exception for what they refer to as ?off the plan lending,? but they will not provide funding during the construction phase.''

http://www.purelyfinance.com.au/review-of-policy-for-residential-developments-with-split-contracts/

 

[Corey Batt]

They won't fund OTP during construction phase, so the general structure is to put a 10% (or other figure) deposit down, with settlement being 7/14 days after practical completion of the build.

You'll find very few developers trying to sell common wall/medium density builds with settlement prior to practical completion due to the current regime.

 

[ferdinandch]

They won't fund OTP during construction phase, so the general structure is to put a 10% (or other figure) deposit down, with settlement being 7/14 days after practical completion of the build.

I think that is the real issue. I talked to those few developers, they said, the land owner requires full payment in 30 days after the contract, and then there will be progress payments during construction.

Looks like this is also common, I talked to 3 different developers and they said the same.

This will pose problem, unless other banks (not CBA) are fine with this.

 

[Corey Batt]

I think that is the real issue. I talked to those few developers, they said, the land owner requires full payment in 30 days after the contract, and then there will be progress payments during construction.

Looks like this is also common, I talked to 3 different developers and they said the same.

This will pose problem, unless other banks (not CBA) are fine with this.

Are there any common construction taking place? If not it's just a standard house and land package deal which don't have finance constraints - I've got three of these ongoing currently.

Split contracts are a problem IF there is common construction provisions, as there is the potential for contract failure if the other building party does not proceed. If this is not the case, it's fine and you don't have to worry about finance issues.

 

[ferdinandch]

Are there any common construction taking place? If not it's just a standard house and land package deal which don't have finance constraints - I've got three of these ongoing currently.

Split contracts are a problem IF there is common construction provisions, as there is the potential for contract failure if the other building party does not proceed. If this is not the case, it's fine and you don't have to worry about finance issues.

How do you deal with the land settlement within 30 days and progress payments? Are banks fine with that?

Because as per article, it said that they will not fund during construction phase, hence progress payments won't be funded.

There is no common construction provision, everything is just stand alone, as long you pay some deposits, talk about the final plan, they will calculate the final price, upon agreement, there will be two contracts written, one to the land owner, and one to the builder. The land has to be paid within 30 days, whilst builder requires progress payments throughout construction phase. Does is sound common to you? Do you have an exact case right now?

 

[RPI]

CJay is giving you the correct info. We have done conveyancing on a heap of the purchases in the area you are talking about. Bank settles on the land, they will provide progress payments in accordance with the building contract.

CBA even mentions it in their blog

https://www.commbank.com.au/blog/how-do-house-and-land-packages-work.html

BUT I would go with CJAY (or another one of the excellent brokers on this forum) you will get looked after much better than directly with the bank and may get a better deal through someone else.

 

[Corey Batt]

The article says they won't fund construction on Off the plan purchases. What you're talking about ISNT OTP in the sense they're talking about - OTP consists of the developer funding the construction and you settle at completion. What you're looking at is a standard house and land construction.

You won't have issues with land purchase + construction if there's no common wall provisions.

http://www.mondaq.com/australia/x/2...iers+of+medium+density+townhouse+developments

 

[ferdinandch]

Thanks guys. My broker misunderstood the case. Now I am assured.

Is it correct that I will only pay stamp duty on the land only? because stamp duty is payable in current form, which is land.

 

[Corey Batt]

Thanks guys. My broker misunderstood the case. Now I am assured.

Is it correct that I will only pay stamp duty on the land only? because stamp duty is payable in current form, which is land.

That's correct, you'll only pay stamp duty on the land component - a nice way to minimise govt charges.

 

[ferdinandch]

That's correct, you'll only pay stamp duty on the land component - a nice way to minimise govt charges.

Although with house and land package, I have to pay the interest early from land settlement time, then as per progress payments, the interest will be more and more. I think the benefit of less stamp duty will be offset by amount of interest payable at the time of construction.

 

[tobe]

get both contracts together, and have the finance approved for both together. Its a little more dificult to do, but is an important part of managing risk.