You may be wondering what is a turn key property? We are halfway through January 2021! It’s gone by so quick, but not as quick as the house prices across New Zealand! If you’re a first home buyer, you must be feeling left out of the market and just feel defeated. So, you find alternatives, one such alternative is a turn-key property. But,

What is a turn-key property?

Well think of having a home key in your hand and as you slide the key into the lock, turning it to the right and opening up the door into your home. You proceed to walk into your new home. 

Basically, all you do is pay the deposit to the developer, generally is 10% of the purchase price. Then you pay the rest on the settlement date, which is normally 10 days after the title and CCC being issued (Code Of Compliance).

In a nutshell, you’re buying a brand new home and waiting for the developer to complete the works. Usually between 9-12 months. 

As a recommendation and I’d highly suggest it is to get your solicitor to review the contract before signing it. Two things to look out for is

1. Sunset Date
2. Deposit is in a trust account

The reason with the trust account is to ensure that your deposit is safe, should the developer go bust during the build then at least you money is protected. Otherwise, good luck trying to get your deposit back.

Sometimes also called a house and land package too. 

What are the benefits of buying a turn key property?

• You’re buying a brand new property
• Usually, would come with a 10-year master builder guarantee (I’d recommend that they are, otherwise banks may not lend you money)
• Fixed price, so you know what you are paying and not like going to auction
• Your approval will usually last 1 year, depending on the bank too. 
• You have time to continue building your deposit because you pay on the settlement date
• Can look at using the first home start grant from the Government  - as it doubles when it’s a new build. Although it is capped at $650k in Auckland. You can read more here 
• Less stress - i.e. no more open homes and will know that the developer will take on the risk if he hasn’t correctly managed it correctly. 
• You don’t need to start repaying your mortgage until you settle i.e. when CCC is out 

What are the negatives of buying a turn key property?

• Can be delayed due to many things such as weather, trade incompetence, developer incompetence and unforeseen circumstances like COVID-19.
• The developer could go bust
• Opportunity cost at other places
• Poor workmanship
• Typically more expensive than a traditional construction loan 

Is buying a turn key property worth it?

It ultimately comes down to your financial situation and position, with booming prices across NZ, it’s becoming increasingly harder for first home buyers to get into the market and one way to get in is to look at purchasing a turn key property or aka a house and land package. 

In fact, the RBNZ (Reserve Bank of New Zealand) has been encouraging it. As we face supply issue across the country, the RBNZ has actively made lending for brand new builds easier to fund for main retail banks. Some of these initiatives are:

• No LVR restrictions on new builds i.e. help people with less than 20% deposit
• The first home grant allows you to access up to a maximum of $10,000 for new builds vs $5,000 for existing homes

I think land and build packages are great for first home buyers as it allows them to buy a brand new home at a reasonable price. 

All the risk is put on the developer to deliver the project, such as getting consents approved. 

What about construction loans?

I want to buy land and then build my own home. This is the most typical question that I get, what is a turn-key property and what is a construction loan? 

A construction loan is a more traditional way of getting your home build. However, I’d say there is a lot more work in this for you. Which I’ll explain below what are the advantages and disadvantages of a construction loan.

So, one of the key things before considering this option is that you need to know your numbers! As in doing your due diligence, before even purchasing a section.

You need to know if you were to buy this section, do you also have the means to fund the project. That is why it is super important that you get yourself a mortgage adviser to really sit down with you and break down the cost and what is expected from you with the banks. 

A construction loan is drawn down in progressive payments, most typically it’ll be broken down into key stages. For example, after purchasing the land, the construction company that you’ve engaged will send you invoices and at each key milestone you’ll need to send the invoice to the bank for the funds to be released, below is a very basic stage breakdown

1. Deposit for the builder
2. Foundations
3. Framing
4. Roofing
5. Internal 
6. Landscaping etc, 
7. Practical completion - CCC 

What are the advantages of a construction loan?

• It can be typically cheaper if managed well using a reputable builder
• The finance is locked in
• You can choose who your builder is, as long as they have the qualifications and insurances in place
• You have control of the finishes and have what you want 
• Fixed price contract 

What are the disadvantages of a construction loan?

• Bank will typically require you use up most of your money before making any drawdown i.e. your hurt money upfront first
• Budget issues, i.e. cost overruns and could impact cash flow
• Significant more work involved
• You’ll start repaying your home loan as each progressive stage is drawdown

What if I want to manage my own construction rather than using a construction company?

This is one other option, but quite difficult to get approved. This type of loan is called a ‘labour-only contract’ basically you project manage the entire project and you hire all the subcontractors and a builder to do the work.

I’d recommend you consider this option if you have experience as a project manager in construction in the building industry. Otherwise, the reality is without the experience and the contacts you will most likely not save any money or time. Because you’ll need to be on-site to make decisions as you are managing the project and the manpower. 

Generally, if you work in the industry, you’ll have contacts then this may be an option for you to consider. Speak to your mortgage adviser who can assist. They can point you in the right directions and also ultimately help you understand the numbers. 

Summary - what is a turn key property?

There is no right or wrong which way you go down when buying a property or even if you decide to build. It really depends on what your financial situation is. 

But the common theme from this is that the NZ government and RBNZ are encouraging people to purchase turn key properties. However, it pays to speak to a mortgage adviser as each bank assess each type of mortgage on the above differently. 

For example, most banks will require a Registered valuation to be completed on the new build property even if you got a 20% deposit. However, one bank does not require a valuer to come out on the turn key property. That saves you $900-$1,100 in cost.

Hopefully, you got value out of this blog and learn what is a turn key property plus the other types of construction loans out there. 

If you got any comments or questions, do feel free to drop a comment below.

Or if you want to get a free no-obligation 10 minute phone call with me. You can book in a call with me below or send me an email will@simplyfinance.Co.nz