Melanie Hearse - 27 Apr, 2021

The pros and cons of buying a display home

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Snapping up a shiny, completed display model is a seemingly ideal way to buy a brand-new home while skipping the building process. It is also a popular move with property investors, as leaseback agreements generally net a higher-than-average rental return. However, there are downsides and as with any property purchase, it pays to consider the fine print.  


Usually located in housing developments or dedicated display villages, display homes allow potential buyers to visualise what their off-the-plan home will look like once built. They are also the best way for builders to show off their work and upsell premium fixtures, fittings, and other additions.

Builders or developers will often sell the display homes to investors and lease them back until their development sells out to free their capital for their next venture.

display home kitchen with white cabinets and wooden floorboards

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Why buy a display home?

If you are looking for all the benefits of buying a new home but are not in a hurry to move in, display homes can make a great investment choice. Potential benefits include:

  • Display homes are a key marketing tool for house and land packages, so they are maintained to a high standard with regular professional cleaning and garden maintenance undertaken.
  • Being the perfect opportunity to promote premium fixtures, fittings and other mod-cons, many developers will fit their display model out to a high specification. This can translate to paying less for the property than you otherwise would have to get the same property built yourself.
  • For this reason, they are also likely to have more extensive landscaping and kerb appeal.  
  • As they are only accessed for viewings and meticulously kept in peak condition, they have far less wear and tear than other properties of a comparable age, including appliances.
  • If located in a display village, it will be surrounded by other high spec, well maintained homes – great for resale values.
  • Lease back arrangements mean no vacancy period from handover. It also means you’ll have a guaranteed rental income for the period of the lease back contract. This means you won’t need to pay property management fees.  
  • Display properties often attract a higher rental rate during their leaseback period.
  • You may be able to negotiate a deep discount on furnishings or other staging items.

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What to watch out for

While there are advantages, there are also some potential issues to consider before signing on the dotted line. These can include:

  • Display villages are often located by main roads, freeways and busy shopping centres which does not appeal to all buyers.
  • It is easy to be dazzled by all the extras when they are dangled in front of you as part of a neatly packaged and priced deal. It is important to assess their actual value to yourself and to the bottom line of your investment because you will be paying for them, even at a reduced rate.
  • If the display home has had multiple upgrades, it runs the risk of being overcapitalized and you may struggle to see the investment back.
  • You will not have any input about the fixtures and fittings. This could mean missing out on features you want or paying extra to make changes after the leaseback period.
  • Some appliances may be out of warranty by the time you take physical possession of the home.
  • You will not really be getting a new home by the time you are able to move into it or sell it.
  • You will have to pay stamp duty on the total value of land and house, rather than stamp duty tax on the price of the land alone as you would with a new build.
  • Some leaseback agreements favour the developer. Should the developer sell out the development quicker than expected and ends the lease while the rest of the development is still undergoing heavy construction, it could be difficult to attract a tenant. For this reason, it is vital you thoroughly understand the terms and conditions before signing on the bottom line.
  • While the initial period is cash flow positive when a leaseback is in place, the longer-term yield on display properties is generally low.
  • Many lenders will not loan on a display home.

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exterior of an Australian display home

What is my mortgage repayment?

$1,514
/month

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Why are lenders reluctant to offer loans for display properties?

It can be notoriously difficult to secure a loan for a display home. There are a number of reasons why lenders are very conservative towards lending on a display home, including:  

  • Long leaseback periods reduce the saleability of the property.
  • If the developer vacates their lease early, it can be difficult to find a new tenant depending on what stage the surrounding development is at.
  • Banks do not take the rental income from developers into consideration – they will only consider residential lease agreements (ie: if a person rents the property to live in.)
  • Due to the high specifications of the build, display homes are often priced at a far higher valuation than a lender. As with any property purchase, this makes it hard to secure a loan.

When it comes to deciding if buying a display home is right for you, it will come down to your circumstances and how they marry up to the terms and conditions of the home you are looking to purchase. You should also consider your ability to cover any potential worst-case scenarios that may apply and have a plan in place should you move ahead. Display homes are a popular choice with many property investors, so be prepared to shop around.

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Words by Melanie Hearse

Sources:

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