Display homes are built to show potential customers the final product, a shiny new house with every feature described on the colourful brochure to convince anyone with a block of land to choose that builder over others. However, if you’re new on the scene and don’t know how to buy a house and you’re thinking of investing in this kind of real estate, be aware that most lending institutions won’t say yes to a loan to buy a display home. Why? The reason is the leaseback deals or agreements usually done on these homes between the builder and purchaser.
What is a Leaseback Agreement?
The term ‘leaseback’ is defined as an arrangement where the owner of a newly-built, just completed home immediately leases that home to the builder to use as a display home for a set time period. Leaseback deals or agreements are usually flexible, but tend to range from one to five years. The rent can be quite attractive, with a return usually much higher than a normal property rental. Real estate investors also benefit from no maintenance expenses or management fees. Display homes showcase the builder’s new ideas, quality workmanship, premium fixtures and all the maintenance both inside and out is done regularly and with care.
Why Don’t Banks Like Leaseback Agreements?
Since they show off their design concepts and expertise, display homes are often attractive to new homebuyers and investors. But most lenders, especially now that banks have tightened their lending criteria, take a very conservative approach when it comes to approving loans for display homes because of the leasing deals, which are deemed risky. The reasons lenders rarely approve loans for display homes are the following:
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Leaseback agreements always favour the builder, or they are for a long period and lenders might have no control over the property if something goes wrong.
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Since display home rental agreements are so much more expensive than competitive market rents, maintaining that high level is usually difficult once the leaseback finishes, so the homeowner’s income will be less.
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Finding new tenants for the display home could be difficult if the builder decides to cancel the lease, or the company goes into liquidation. This is a problem, especially if the property is part of a display village far from the city and all the other houses are empty.
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Even if the lease seems safe, there’s no guarantee the builder won’t default, so it’s crucial to check out all possible complications. Your solicitor should be consulted before you go into any lease agreements.
More About Display Homes
Many Australian building companies construct display homes to demonstrate their skills in house design and construction, often using high-end fixtures and to allow potential customers to see what is possible. These homes are often built to the highest standards and are fully customised. They can also be part of whole display villages comprising the works of multiples builders offering different styles and designs in one location. Many of these homes are purchased under leaseback deals which dictate the terms. In fact, if you buy one, you become the one who invests and the builder is the tenant. When the term of the lease is over, you can either use the home as your primary residence or rent it out.
The Pros of Purchasing Display Homes
Despite all of the above, many people do purchase display homes from builders, which isn’t surprising since there are many good points about such purchases:
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Most discerning builders will make a huge effort to ensure their display properties present beautifully so these homes often look much better than an older home that’s for sale.
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With nobody living in them, display homes, they look newer and include premium materials not often seen in other newly constructed homes.
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Display homes often have a built-in discount, so they often sell for less than their true value. This means they usually sell quickly so builders can invest in more projects.
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Anyone looking for a brand new home can have one sooner, no waiting for it to be built, and no stress because you get to see the finished product.
The Cons of Purchasing Display Homes
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