Adopt build-then-sell variant
11/01/2003 Published in NST-PROP A Buyer Watch Article by National House Buyers Association

It is refreshing to know that the Ministry of Housing and Local Government is in harmony with our thinking and that the newly implemented amendments to the Housing Development Act actually encourages developers to adopt the build-then-sell concept for the property industry.

To propose an absolute build-then-sell concept is probably too big a paradigm shift and the industry players may not be in any mood to consider it. Hence what we propose is a variant of the concept.

We would like to make a brief reference to the procedure of house buying that is practiced in a certain country. There house buyers pay 10 per cent upon the signing of the Sale and Purchase agreement (SPA). This payment is held by the developer’s lawyer who is also the stakeholder. The developer has no access to this money until the plan of subdivision is registered and proper proof is provided that the vendor can give a clear freehold title for the property. The money is further protected by way of the Fidelity Fund pursuant to the Legal Practice Act. The buyer does not pay any more until the house is completed with title and the certificate of fitness for occupation (CFO) issued, whereby he is then required to make full payment.

In the event that the developer does not complete the project in accordance with the time frame permitted, the buyer has the right to rescind the contract and have the deposit returned together with any interest that may have accrued. With this system, we believe more people will be attracted in buying houses and this will benefit developers.

We see this concept as a fair, equitable and practical variant of the absolute build-then-sell concept. The vendors are assured of the number of buyers who have paid the 10 per cent and they can then concentrate on building good homes and delivering them in good time. The buyers, on the other hand are not exposed to the risk of getting a house with substandard workmanship or in a worse scenario, facing an abandoned house after having paid the bulk of the cost.

The financing for construction is the responsibility of the developer and the buyer is only to seek his financial requirement to buy the completed house when it is ready for occupation. He has nothing to do with the financing requirement during the construction phase. Hence he does not carry the financial burden and shoulder the financing cost for the developer. But what is more crucial is that he does not carry the risks of the project not being successful. This scenario is vastly different from our situation where buyers are dragged in to finance the project during the construction phase. Thus when the project is abandoned, house buyers’ money is stuck and they are dragged into a very muddled legal situation.

Such failures of housing projects can come in many ways. First, the developer may run short of funds when it could not achieve the required amount of sales. Next, the developer’s building contractor goes belly-up and the developer is stuck in a legal tussle. There are also instances where developers have sold almost all the houses, yet abandoned their projects.

In such cases the only plausible explanation is that they have siphoned the money that house buyers have paid to plug up their more pressing and serious financial crises.

In some other cases it is pure greed and fraud whereby the money paid by buyers is cunningly siphoned away because these errant developers know that the likelihood of the law catching up with them is remote. They know that house buyers take some time to realise that the project has failed and that the houses that they have paid for (partially at least) have been abandoned. They will take even longer to start instituting legal procedures. By the time the buyers start to institute legal action, (if at all they do so, after having expended the bulk of their savings) such money so siphoned would have been disposed of elsewhere. Records and accounts would have been willfully confused or discarded, making investigation a difficult process. The corporate veil is indeed difficult to lift. Pursuance of the subject in court may not bear the desired results, as aggrieved parties would be facing a development company with nothing worthwhile to salvage.

We wonder as to how many of us actually realise that the whole effort, from the enactment of the Housing Developers’ Act more than 35 years ago, to the latest amendments, will be largely redundant if we adopt the build-then-sell concept or a variant of it. This belief is strengthened by the fact that properties that have already been completed with CFO issued are exempted from certain clauses in the present Act.

There were some arguments that house prices would escalate if developers have to seek their own financing for their projects. This is a fallacy expounded by developers who just want to pass their business risks to their customers. In any business, the business proprietors themselves must shoulder the financial risks. Yes, the financiers also bear some of the risks but then they are also in it for business. (Even Ah Long carries some risks!) Moreover they are usually well insulated (sometimes over-insulated).

But in the housing industry it is the house-buying customers who are carrying the finance risks. And they are the parties who are least protected and who have absolutely no control over the behavior and activities of the developers. The system of progressive payments made right from the beginning when everything is still in the conceptual stage is like the pie in the sky. One shouldn’t be made to pay for that pie. Currently, thousands of hopeful house buyers are left in a lurch after paying so much for that offending pie that never materialised.

Financiers in Malaysia want to make money but they would go to any extent to avoid the likelihood of haircuts if any business fails. Hence they see end-buyers as safer customers than developers simply because house buyers usually have budgeted their payment schedules. Come what may, whether the houses that they have bought materialised or not, or are sub-standard, they have no choice but to continue to service their housing loans. And for the financiers, that is all that matters. We leave readers to judge the moral aspect of such a situation.

Financial institutions should finance developers (as the business proprietors) to build houses. When the houses have been completed, they then finance the buyers to buy the completed houses. Isn’t it a more logical situation?

The proposed concept will also largely solve the problems of sub-standard housing and shoddy workmanship. Developers will realise that if they build houses that are of disputable quality, they may get into litigation with the buyers during the handing-over and since the buyers have not fully paid up, the developers are in a disadvantaged situation. This is in stark contrast to the present situation where the buyers are the ones holding the short end of the stick.

Granted, the present economic situation and the long entrenched mind-set of the industry players may not be receptive to the adoption of the build-then-sell concept. However, we believe that state-aligned projects, including joint-venture projects where only minimal or no land cost is involved, should be the forerunner to the build-then-sell principle. Low-cost houses too should adopt this scheme. In fact the scheme has already been made possible by several reputable developers and HBA reiterates that it is not impossible.

Some quarters are of the view that the original Housing Developers’ Act created a situation of Caveat Emptor, that is, “buyers beware,” whereas with the recent amendments to the Act, the situation is now Caveat Venditor, that is, “sellers beware.” However, HBA’s belief is as follows: Caveat Emptor or Caveat Venditor, build then sell is the Victor.