Display homes – are they a good deal for investors?

You see them advertised by builders and developers, often providing a lease-back arrangement of a fixed rate from anywhere between six months to five years. These display homes generally have a better standard of fixtures and fittings as they’re used by builders to entice homeowners and investors to purchase their wares. The display homes usually include additional features such as media rooms, magnificent landscaping and higher quality paths and driveways. There may be feature walls, better quality kitchen appliances and air conditioning. They are picture perfect but are they a good deal for investors? Do the numbers stack up?

It depends. It has been my experience that the concept of purchasing display homes with a lease-back option varies from state to state. So you will need to do your homework. Before I go on, let me explain what a lease back option is. This is when you purchase the house and rent it to the builder for anywhere between twelve months to five years. The builder uses the house as a display home and in return pays you as the owner a fixed rent. The rent varies but is generally higher than what you would earn renting the property to a tenant on the normal rental market.

As an owner of two display homes, both in Sydney, it has been a great experience and a great opportunity to purchase good growth properties with decent cash flow. The two display homes were purchased in the days when the property market was booming and it was difficult to find cash flow opportunities in capital cities. The idea of purchasing a property with a fixed rental return of 7.5 per cent for three years when the five-year fixed interest rate at the time was 5.99 per cent was very attractive. The added bonus was that the builder also paid all the outgoings. Today, one of the lease-back options has come to an end and the display home has gone onto the open rental market. It didn’t take long to find a tenant, especially now that we are experiencing a rental boom, paying $450 per week. The return is not as good as the lease-back arrangement, however it is much better than we would have received had we not had the lease-back option. It would have been difficult to achieve a weekly rent of $300 just over three years ago. The second display home has a five-year lease-back option with all outgoings paid by the builder so it is still ticking over quite nicely. We purchased the second display home from the same builder due to the success of the first display home.

But are all display homes a good deal? Not from my experience. From the success of these two display homes, I thought I had hit the jackpot – long leases, good returns… but it’s not always the case. I expanded my research to other builders and other states and gee, what a difference. I started with Melbourne and searched the internet for major players that offer display homes for sale. They are easy to find. Look up new housing estates – they are all there. I researched a couple of builders and analysed their lease-back agreements. I nearly signed on the dotted line to purchase another display home until I chatted to a local real estate agent. It’s great when you find a switched on agent as he or she can save your backside like this one did for me. He knew the estate very well and gave me a heads-up on the valuation of the display home, explaining that it was not worth the asking price; it was about $30,000 to $40,000 over market value. He explained that I could have purchased the exact same house with all the same fixtures and fittings on a similar size block of land for much less than they were asking. Hmmm… this got me thinking. Firstly I thought the agent may be trying to put me off buying the display home and instead try and sell me something from his agency. Secondly, as I am a skeptic when it comes to people having a vested interest in the outcome (i.e. a commission), I continued my investigations.

It didn’t take me long to work out there was a problem. Although the lease-back option for this display home was 8 per cent for two years, I did have a couple of concerns regarding the lease agreement and the purchase price. Unlike our existing display homes, this lease did not include the builder paying any of the outgoings. Therefore it had to come out of our pocket. My investigations showed that the purchase was above market. It appeared that the builder added on his two years of lease payments to the purchase price of the display home. At first I thought it was a mistake but after exploring other builders in Melbourne and other states, it seemed to be common practice.

Had I purchased the display home with a view to selling at the end of the two-year lease agreement, I would have quickly found out that the valuation would have equaled the purchase price of two years previous. Yet had I purchased a normal home of the same standard in the housing estate, I would have enjoyed around $40,000 in capital growth which is not bad considering the market was commencing its downturn.

By the way, I quickly went back to the builder in Sydney whom we purchased our display homes from and investigated to see if he did the same thing. Luckily for us, this was not the case… phew!

So are display homes a good deal for investors? Yes and no, you need to do your research.

Until next time, happy investing.

Helen Collier-Kogtevs

www.realwealthaustralia.com.au/