Display Homes

Discussion in 'Real Estate' started by NickM, 5th Dec, 2006.

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  1. NickM

    NickM Well-Known Member

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    Has anyone ever purchased a display home on a sale and leaseback arrangement ?
    What are the pros and cons ?
    The finished product would have all the bells and whistles but do they generally repaint and recarpet ?
    Close attention must be paid to the lease.
    Any experiences ?

    NickM
     
  2. Jacque

    Jacque Jacque Parker Premium Member

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    I do recall reading an article in a back issue of API mag about buying display homes with a leaseback, and one couple's experiences of it. They purchased in Kellyville, NSW, but I would imagine the general leases would be the same. Will try to dig it up for you Nick and give some more input by end of this week.
     
  3. Redwing

    Redwing Well-Known Member

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    I have two friends who have purchased Display Homes in Perth, yield was about 8% in both cases, however, in only one house is it getting recarpetted and painted..guess you need to ensure its in the lease?

    Perth of late though has had a lack of these with many many people vying for the properties​
     
  4. Pablo__

    Pablo__ New Member

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    Nick,

    I looked into buying a display home but pulled out after reading the contract.

    The builder was selling the house to me for $310k and said that they would pay 7% on a 2+1+1 year lease, this sounded good to me as it would be cashflow positive after tax and by the time the lease expired market rents would have increased and the house would only have been mildly negatively geared.

    However when I picked up the contract I read that the weekly rental was going to be $344 which worked out to be 7% of $256k. I read the contract further and found that they were going to pay 7% on the market value not the selling price.

    I had heard lots of rumors that the builder adds the cost of the rent on to the purchase price so I had been very cautious in this area. I then found a curious thing $256k + 3 years rent=$310K (the purchase price) and needless to say I ran a mile.

    I enquired with all the major builders here in SA and found that they were all overpriced so I suspect they all probably add the rent to the selling price. This is not always evident when you are purchasing in a new housing development or in a booming market (as with the people in the API article).

    Also consider
    • The builders get land/ materials/ and labor discounted or free but still charge you the full price.
    • Paying for top quality fittings is a bit of a waste in a rental.
    • They are located on the main roads of the development.
    • The development is usually located on the outskirts where there isn't much infrastructure.
    • There is usually allot of vacant land around the development which may effect capital gains due to lack of scarcity.
    Hope this helps,
    Pablo.
     
  5. Simon Hampel

    Simon Hampel Founder Staff Member

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    Pablo - I found exactly the same thing when I looked into display homes a few years ago ... the properties were definitely overpriced.

    It also happens with other types of new development - rental guarantees are often funded through a higher sales price ... as you mentioned, this isn't always easy to pick up in a new development due to a lack of data from similar sales.
     
  6. TryHard

    TryHard Well-Known Member

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    I had always been intending to look at display homes one day as it seemed a bit different and possibly good returns, but they are really good points you raise Pablo. I won't be in a hurry to find one now !
     
  7. coastal__

    coastal__ Member

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    Commenting as a former employee of a large listed development company - all of the above points are true- although you must remember that for some people the peace of mind of owning this type of investment property is really what they are after. Many people never own more than 1 investment property and the fear of the "tenant from hell" and other stories put them off. Display homes are never bargains, but they look great, get treated well, have good depreciation/tax benefits and give a nice return for a nervous investor. That's what I love about property- something for everyone!
     
  8. NickM

    NickM Well-Known Member

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    Thanks everyone for your input. You all seem to be spot on and raise very valid points.

    I havent gone to the point of looking at contracts but they were not very forthcoming when i asked how much the house and land packages were selling for.

    As it turns out purely by coincidence a contract landed on my desk from the same development. A client of mine was purchasing a package. the price was approx $80K less than waht i was quoted on a lease back arrangement.

    Pablo was on the money.

    A little like the DHA properties. 16.5% management fee and a 3-4% return - Not for me !

    Thanks
    NickM