Recently, our client Josh built a new house with the help of a construction loan from us. This was his first home. He found the total cost for his new house was much less than buying an existing house in the property market. Inspired by the potential margin, he was wondering what if he could use it as a strategy to make money from building houses and selling them.

In this week’s blog, we share our perspectives on whether it’s worth building houses then selling immediately for profit, so that you can be aware of the potential risks and costs and make an informed decision.

Be careful if you want to build a house and then sell it immediately for profit in New Zealand

Video Timeline:

1. Why your bank isn’t interested in approving construction loan for making money? 03:02

2. Can I not tell the bank my intention of selling for profit immediately? 05:02

3. How can I get finance to build a new house if bank doesn’t approve? 04:24

4. What are the costs involved in selling a house? 01:55

5. What are the risks involved when building a house then selling? 06:11

6. The property ownership structure matters 07:48

Why your bank isn’t interested in approving construction loan for making money?

If you’re building a residential property and your intention was to sell it immediately and make profit, then your bank will not approve your construction loan.

Here’s why.

A construction loan is a common way to finance the build of a property. However, if you’re selling your new build soon, your bank won’t generate enough profits from the interests you pay for the construction loan.

There is a “Property Finance” department in the banks, though specialising in some large property development projects, such as big subdivisions, building apartments, rather than just building one or two residential houses and they charge a fee. The retail lending department in banks doesn’t have appetite in approving this kind of construction loan.

Can I not tell the bank my intention of selling for profit immediately?

As professional mortgage broker, we won’t recommend you hide your real intention from the bank.

Firstly, when you sell the property you build, your bank will find your intention is for making profit, then this will have a negative impact on your character.

Secondly, when it comes to buying a property for trading purpose, it’s common to use a company name to buy that property and the company is GST registered. After you finish the transaction of land purchase, you can claim the GST. But your bank will see the GST on the property purchase agreement and question your intention, and they will say no. However, if the company is not GST registered, then you can’t claim the GST later. So you have already lost your money upfront.

In conclusion, if you do not tell the bank your real intention when you apply for a construction loan, it might help you save some financial costs for the particular transaction, but you end up with paying more and get no GST claimed.

How can I get finance to build a new house if bank doesn’t approve?

In some cases, your bank won’t approve your construction loan for trade purpose, then non-bank lenders might help you.

Compared with New Zealand banks, non-bank lenders have more flexible lending criteria on approving your loans to buy land and build a house, and they can often offer loan products that better fit your unique situation and needs.

However, the costs of dealing with non-bank lenders are higher than banks:

Lending fee – 1% or 2% will be charged, based on your loan amount and your lender

Higher interest rates – Non-bank lenders will charge higher interest rates than those offered by mainstream banks. The interests are varied, depending on different loan types, non-bank lenders and your project period.

What are the costs involved in selling a house?

Income tax – New Zealand haven’t applied the Capital Gain Tax yet. If you’re building a residential property and your intentions when you build the property was to sell it, then you’ll pay the tax on any profit you make from property sale.

GST – You’ll have the GST to pay on the 15% of the property sale price.

Real estate agent commission – You, as a seller, pay 3% to 4% of the sale price.

What are the risks involved when building a house then selling? 

Not selling at desired house prices -- 2019 has been a flat year for the real estate market. You’ll find it’s really competitive and you may not sell your house at the desired price as you expected.

Cost overrun – Compared to buying an existing house, it’s very hard to foresee the building costs when you build a house from scratch (or even sub-division). Especially if you don’t have previous construction experience on building your own house, you probably end up paying much more than your budget.

So, on one hand, you may not sell your property at the desired price. On the other hand, it’s hard to control your building costs within your budget. Your margin from selling a house you’ve built could be very small or even negative.

The property ownership structure matters

If your intention is for trade, before building a house then selling for profit, we highly recommend you engage a property accountant to set up a right ownership for you. Normally they would not recommend using your personal name to do that because potentially you will be tainted as the result of the commercial activity, which means you’re potentially subject to pay on tax even if you sell your long term investment property, just because you were deemed as a developer in the previous transaction.

So, it’s crucial to discuss your property ownership structure with your accountant and set up a right one before you make any major decisions.

You need to always consider risks before you build a house then sell for profit and above are some of the risks that you must be aware of; this is not to scare you, but to make you aware the potential risks and costs, and make an informed decision.

Prosperity Finance - here to help

Prosperity Finance understands all the complexities of construction finance. We manage your construction loans from beginning to end, and empower you to make the best long-term, informed decisions. As professional mortgage brokers, we’re here to help. Whether you’re ready to start building or you’re still planning your new home, give us a call today on 09 930 8999.

Other Blogs You Might Like:

How are residential construction loans different to home loans for existing houses?

How can I have a newly built house if I can’t find my perfect home in the current property market?

Why is property ownership structure more important than you think