Build-and-sell projects
07/09/2004 The Star Articles of Law with
Bhag Singh
Once again there is some discussion on the merits
of a house buyer paying in full only when the house is ready or
paying 10% of the purchase price when the sale and purchase
agreement (SPA) is signed and the balance when the house is
completed.
There can be little complaint against the idea.
At first sight it appears to be in the interest of
the buyers as the balance will only be paid when the house is
completed.
The idea also envisages that the 10% be held by a
stakeholder to be paid to the housing developer together with the
the balance 90%.
A reader wants to know why this approach is not
adopted.
This approach is not new as it has been discussed
on numerous occasions. It is what is otherwise known as the "build
and sell" concept as opposed to the present way of making progress
payments to the developer starting even before construction has
commenced.
The build and sell concept would certainly be the
more beneficial approach for the house buyer because in such a
situation a house buyer would be assured that the property purchased
exists.
In such a scenario the house buyer would be in a
similar position as a buyer of a car or other equipment whereby he
can inspect the product before buying.
As a matter of fact the purchaser would be in the
same position as a house buyer who is buying an existing house.
Where such an approach is used the house buyer
would have the property registered in his name in exchange for the
payment of the price.
Problems such as defects in workmanship and
materials would continue to exist even if the transaction is
conducted in this way.
Viewed from the point of view of the housing
developer such an approach creates a different perspective in terms
of funding of the project.
It would mean that the developer must have his own
financial resources to buy the land to build the houses which are to
be sold. This would mean the developer uses his own money or borrows
from a financial institution.
The inevitable question that would arise would be
whether the developer would want to enter into an SPA until the
houses are ready or almost ready for sale.
If the developer has financial resources it would
be better to build the houses and sell them only after they are
ready.
The prices could then be fixed at that time given
that landed property generally appreciates in value. The developer
would be better off selling the houses at a higher price when they
are ready.
Of course if the property market were to collapse
the developer could end up losing money. But this is a risk that the
developer may want to take if such an approach is adopted.
However this alternative approach could result in
other implications for all involved with different and results for
all parties.
Firstly it would mean that only developers who
have their own capital or are able to secure loans from financial
institutions to undertake build-and-sell housing scheme would be
able to stay in business.
Furthermore some financial institutions may be
reluctant to provide the loans for such build-and-sell schemes.
This could be because the financial institution
would only have recourse to the developer and the land on which the
houses are built as a security for the loan extended.
On the other hand, where financing is through the
house purchaser where the property is charged in addition to the
liability of the individual borrower, the risks for the financial
institution is spread over a much larger pool of people whether the
houses are built or not.
If such an idea were to be implemented it could
result in a small number of housing developers in existence. If this
happens then there could be a reduction in construction which could
have an impact on the economy and result in an increase in house
prices.
The issue is therefore like two sides of the coin.
It has advantages and disadvantages.
No one particular approach can be said to be
better in any specific situation. What is foreseeable is that the
present approach of paying progressively will continue with
opportunities for those developers who build and sell proving to the
public that what they offer is a superior alternative.
In the end public sentiment and market forces and
other related factors would determine the acceptable approach.
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