10 Minute Read
Owning your first home is emblematic of the Australian dream, as it is in many other countries. It is a significant achievement at any stage of life, and is a product of one’s strong personal efforts. However, first home ownership is a burdensome and complicated process for the uninitiated. There are a series of steps that you must go through before even selecting a builder, let alone building the house itself.
Over my 20 years of professional experience in residential homes sales, I have helped countless individuals, couples and families in moving into their first home. Through this experience, I’ve identified a number of commonalities for having a successful first home buyer experience.
This blog post will guide you through the steps leading up to signing a contract with a residential builder. The length of this post and the detail included should highlight the extensive work required in purchasing your first home, as well as indicate that there is more to be done after signing the contract. I will be sure to guide you through the rest of the process in subsequent, digestible posts.
Secure Your Finance
This is the foundation of home building, and the reason for many new ventures falling away before even starting. In determining your financial suitability for home ownership, you should first consider creating a simple budget which addresses the following parameters:
- What is your current earning potential (as an individual, couple, etc.);
- How much are you spending towards your current accommodation (rent, transport, utilities, etc.);
- Are you expecting any grants or personal loans that would contribute towards your home ownership;
- What is your current savings level, as well as your projected savings level for the next few years.
With regards to your savings level, whatever percentage you arrive at, you should aim to include a 10% buffer to it, to account for unanticipated problems arising through the build process.
The outcome of this budget will be to demonstrate that you have sufficient liquidity to secure 20% of the home purchase. When you do not have 20%, you are subject to lenders mortgage insurance (LMI)/private mortgage insurance (PMI), which is a substantial problem that is certainly avoidable in my view. I’ve seen a lot of people willing to suffer the consequences of LMI instead of spending a little extra time in saving for that 20%, or instead finding other avenues to secure that balance. Remember that the money you spend/allocate towards LMI can instead be repurposed for home items that bring value to you.
After settling your budget, consider reaching out to your bank or independent broker to determine your borrowing capacity based on the factors outlined above. I advise this approach instead of securing finance through your builder, because under builder financing, it is typically one hand feeding the other. That is to say, builder financing is driven towards having you build a home with them, and may result in you achieving less favourable lending terms than if you were to obtain financing with an independent lender.
Identify suitable land
In Australia, unlike some other global markets, we are blessed with an abundance of land. However, the price of available land is influenced by a number of factors such as suburb value, size, land quality (i.e. sandy vs clay site), level of gradation, etc. Furthermore, consumer bias also influences land value – for example, two adjoining suburbs may have very similar location characteristics (e.g. proximity to metropolitan area, ocean, etc.), however may vary significantly in value due to socio-economic factors or historic bias.
As a first home buyer, you are welcome to choose your own land. At the end of the day, you will be the one living there so you should be comfortable with your surroundings. However, your decision for choosing land should be made in the context of your borrowing capacity. An industry standard is to spend between 40-55% of your total budget on land value, and it should not exceed 55%. The reason is due to ‘re-sellability’. While selling your home may not even cross your mind as a first home buyer, it is a likely future outcome. By weighting your budget heavily towards land (which is an appreciable asset), you effectively devalue the home built on that land.
Understand the components of home building
Before speaking to a builder, you need to do your homework. In reading this blog, you’re already part-way there towards achieving that goal!
Having an idea of what you want your house to look like will make the rest of the process run smoothly. However, this may be easier said than done given you’ve never had to think about this idea previously. At a minimum, you should address the following when conceptualising your first home:
- How many sleeping areas do you want: This is intimately linked to where you are in your life journey. If you are part of a young family, you may wish to have a greater number of bedrooms to accommodate your current family and make provisions for future additions. If you are single and are unsure of your life plans, you may wish to be conservative and choose a fewer number of bedrooms
- How many utility rooms do you require: Homes, like fashion, come and go out of style. There are certain single-purpose rooms that may have existed in previous builds but are non-existent in new homes due to changing consumer preferences (e.g. dedicated home theatre rooms, sculleries, etc.). A more sensible approach would be to evaluate how many multi-purpose rooms you could require, in order to accommodate your changing needs over time
- How much work do you intend to complete around the home: While home ownership comes with its own challenges, you can certainly conceptualise your home to align with your expectations of future housework. For example, if you’re not interested in gardening, you can consider maximising the size of your living space at the expense of your outdoor areas, or consider alternatives to grass/planters.
The intricacies of the home can always follow later, and can be worked through with the assistance of a residential sales professional. However, if you have this concept in mind first, it will make those discussions easier, and you are likely to end up with close to the same product that you envisioned.
Complete your due diligence on builders
The housing market is saturated with residential home builders, ranging from national building chains to boutique home builders. As a new home buyer, you can certainly feel overwhelmed with the choices. However, there are a number of straightforward ways to limit your choices and find the most appropriate builder for you:
- Ask your friends and family: It is almost certain that, in your circle or network, someone has built a home in the past few years and has used a builder for that home. Seek out their experience on using that builder, as well as what their selection process was in arriving at that builder
- Research newspaper articles and company websites: I would personally not devote the majority of time on this step, as most of these third party publications are funded by the building company themselves, therefore you may not receive a truly impartial view. However, these resources remain helpful in understanding the core offering and what the builders can and can’t do
- Check social media and blog posts: There has never been a time in history where real time information has flown more freely. Conducting research through social media channels and property blogs provide an honest, albeit coloured view of consumer experiences with certain home builders. I would caution against solely relying on this channel, as one cannot vouch for the legitimacy of these reviews in all cases
- Check for service awards from independent sources: In Australia, the Housing Industry Association (HIA) and Master Builders Association (MBA) are two independent bodies that award home builders with awards for excellence in service and quality. It’s prudent to check that these awards were granted in recent history, as you don’t want to fall victim to a builder stuck in the ‘glory days’
- Research the sales consultant: This may be trickier to accomplish, and may require a combination of different research channels, but you should have a fair degree of comfort with using that particular sales consultant. A misconception for some is that the relationship with the sales consultant ends after the contract is signed; in actuality, that person remains with you until the end of the build, so be sure that they are the right person for you for the long haul.
After you have completed your research, you may naturally arrive at a list of 5-10 builders that you would be willing to consider. I caution against speaking to each of these builders, as it will only serve to overwhelm you and move you further away from making a decision. Instead, whittle that list down to something more manageable (I recommend 2-3), by creating a methodical approach to reviewing each builder’s offerings, strengths and weaknesses.
I recommend setting up a simple excel spreadsheet to include each builder, their offerings, the sales consultant’s information, cost to build, available discounts, and any other factors you identified during your research. This will provide you with amazing visibility over which building companies are non-starters, compared to the ones you are interested in and may need more information.
Make a decision and live with it!
So you’ve gone through all the research, shortlisted the builders and have made a decision. Congrats!
As this is your first home, and perhaps the single largest investment you have made in your life to date, it’s natural to suffer from buyer’s remorse. However, whatever your decision is, feel comforted by the fact that it was a product of the research and methodical selection process it took to get to this point. Dwelling on other potential options will only leave you unnecessarily miserable.
The benefit of shortlisting to a few builders is that, in the unlikely event something falls through with the builder you’ve chosen, you still have an existing relationship with another builder/sales consultant that you liked. In short, you don’t have to start the whole process again.
Building your first home is a momentous achievement, and I commend you for taking this step. If you have any questions or thoughts regarding the concepts outlined above, please feel free to leave a comment below.
The content outlined above was written, edited and published by the Lost Realtor. The author has over 20 years or real estate sales and investing experience in the Australian property market. He has held senior positions in Australian building companies, including being the General Manager of the residential sales division of Collier Homes. His qualifications include a Bachelor of Commerce degree and a Graduate Diploma in Building and Construction Law.
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