Which one: units or houses? 

By: Rick Otton from We Buy Houses Pty Ltd - Sydney


Let's look at the differences between vendor financing houses as against home units and discuss which may be the most profitable for you.

This really requires you as the seller, to know what it is you're trying to achieve and when you wish to achieve it, in order to determine which property type is the right choice for you.

Both property types, besides having their obvious differences have many subtle differences that play out over time. Therefore an understanding of these more subtle differences is important if you are to receive the most benefit and profit.

No one property type is better than the other as I have discovered over time. I continually vendor finance both units and houses depending on my exit strategy. I know my exit strategy before I purchase my investment property. 

Please be aware that the information I’m about to impart is based on my 11 years experience selling houses and home units both here (in Australia) and in the United States using vendor finance. Therefore any results you achieve may be different. You may also not share my view point, that's why you should always get professional advice before undertaking any sort of investment.

Where To Start:

When you search for a property to wrap, you may ask yourself which property type is best-a house or a home unit.

Home units are usually cheaper and therefore are easier for you to buy which have obvious advantages. You’ll find they are just as easy to vendor finance as houses. Because there are as many people in the market place who are looking to get into a home unit as there are trying to get into a house.

But a problem you may come across when marketing your home unit as against your house is the placement of signs. We know that signs are an important sales tool and the correct placement of these can account for the majority of your sales. Though sometimes you’ll find that the body corporate who controls the management of strata units are not overly keen to have your sign placed out the front or inside a window. Overall, this may make selling your home unit a little more difficult or require you to advertise in other ways. 

Houses on the other hand don’t have an issue with signs in the yard because it’s your yard and if you’re going to put a sign in your yard you don't need anyone's permission.

Overall home units are cheaper to buy than houses. You’ll find the yield return (cash on cash return) is greater if you purchase a home unit. But if a lender requires more of your funds be invested as deposit in a home unit versus a house, the house will have a higher yield return or (cash on cash return). 

If you find that lender requirements are the same on both then home units can be great cash flow tools as you have less hard dollars invested and returns are higher. 

Though it's important to note that a home unit has a lower proportion of land allocated to it versus a house and since it's the land that appreciates over time and not the structure, overall units tend to increase in value at a slower rate than houses in a rising market and fall in value faster in a declining market.

Potential lenders and valuers are also aware of this and if your intent is to have your buyer refinance you out of the property in the short term it may be hard to prove to the valuer that your unit has increased in value, especially if a unit in your block was sold for less than your price at the same time your buyer is selling or refinancing. If your long term outlook is for the buyer to pay you off in 25 or 30 years, that's not as important. 

If you're still keen to have your buyer refinance, it's important to be aware that it may take longer for your buyer to prove property value increases and therefore be able to refinance you out. 

Even if your short term goal is to have your buyer refinance you still have another option. You can agree to the lower valuation by discounting the home unit. Sometimes I choose this option if I want to get my cash quickly for other opportunities. I still have made a profit-it's not as high as if I would have waited. But it's important to note that you have the choice to discount your price. 

Also a home unit will attract a different type of buyer versus a house. Typical home unit buyers may be investors, singles, couples who haven’t yet had children or people who are retired.

Home units appeal to those who may be more transient like younger singles or couples who will eventually move once they start having children. 

Selling to other investors can be quite profitable for all parties but selling to investors has another set of rules which we won't go into here but do cover in our WRAP Camp. 

I have found over time that those who buy home units through vendor financing are less apt to stay opting to leave before their installment contract is finished. That's their right-to refinance or sell. But it's something for you to consider, depending on what your exit strategy is for your property. 

Houses are more expensive but it’s important to not concern yourself so much with the price of the house but more importantly your financial exposure or how much of your funds are invested in the house. 

Houses hold their value better than units and it is much easier to have your buyers refinance you in a shorter period of time allowing you to receive your profit quickly and invest again if you so wish. 

Finally, it's important to mention that people who purchase houses are more apt to make repairs to upgrade their property because they have made the mental shift from unit dweller to property owner. We call it a 'home owner's mentality'. (You shouldn't be spending a lot of money upgrading your property before on-selling, (see The Wrap Pack). Home owners are far more likely to invest in their property this way because they aren't living in a 
unit, they're living in a house. 

We dedicate a complete tape to this subject in The Wrap Pack and also spend more time on this in our Boot Camp. It's important that you have an understanding of both types of investment because it will impact on your potential profits.

Rick Otton