Making build-then-sell work
20/11/2004 Published in NST-PROP A Buyer Watch Article by National House Buyers Association

MANY countries in the region have adopted the build-then-sell concept of housing supply. However, developers in Malaysia are far ahead of those in many other countries in terms of skills and technology. Is there any reason, then, as to why they cannot adopt this same concept?

The National House Buyers' Association (HBA) does not see any reason why they can't. Of course, we do not expect them to adopt the build-then-sell method overnight, for to start implementing this system completely would be too big a paradigm shift for the players.

However, there is ample "encouragement" within the system for developers to sell completed houses. For example, they can get the Certificate of Fitness for Occupation (CF) without having to comply with the full requirements of the Housing Development (Control and Licensing) Act and its Regulations.

We at the HBA believe that Malaysian developers too can deliver housing the build-then-sell way, by adopting a system that is quite similar to the one successfully adopted by housing developers in Australia.

Our proposal is a variant of the present concept, in which the existing practice of buying-off-the-plan is merged with the build-then-sell concept. We term this the "Buying-off-the-plan Variant", a 10:90 arrangement based on the Australian model that we believe is a fair and equitable system.

Under this concept, purchasers pay a downpayment/deposit/reservation fee of 10 per cent of the contract price upon signing the Sale and Purchase Agreement (SPA). This deposit is then placed in an escrow trust account or fidelity fund.

The remaining 90 per cent of the purchase price becomes payable within 90 days of the delivery of vacant possession of the house, together with its title and the CF. The deposit and interest earned in the escrow account will go to the developer simultaneously with the balance payment. We see this as a very fair and practical concept.

The developer, assured of the committed sale, can now concentrate on completing their project on time with an assurance of quality, while the financial institution concerned will release bridging finance funds as construction progresses.

In this way, the financial institution is in a better position to ensure that the developer is paid what it deserves and that every ringgit disbursed goes towards the completion of the project. There will be no room for siphoning or diverting payments from buyers, since they make no progress payments.

There are numerous housing projects at a standstill at present, despite the majority of the houses in those projects having been sold. This proves that these failures have not been due to insufficient buyers but because of mismanagement or fraud and the exploitation of the not-so-foolproof Housing Development Project Account.

Our proposal of a 10 per cent deposit upon the booking of houses and the remaining 90 per cent upon delivery of vacant possession is one that the Malaysian market can adopt, and it appears viable from the angle of most, if not all, market players.

We also recommend that a pre-delivery inspection be included in the SPA. The developer will notify buyers of the joint pre-delivery inspection, by both builders and buyers and during this exercise, all the observable defects in the property will be recorded.

The developer is to rectify the defects before the house is handed over to the buyer. It is important that vacant possession of the unit is delivered only after the defects are rectified, for this will also go a long way in promoting mutual respect between a developer and its customers.

The HBA also recommends that buyers be allowed to hold back a part of the full payment until the defects that have been identified are rectified.

There are two reasons for this: One is that there should be no obligation to pay for work that is not done or is not done properly; the other is that the work will be done in a satisfactory manner only if the
developer knows that it will not be paid until the defects are rectified. As for the defect liability period, it should remain at 18 months' warranty as a safeguard for buyers.

Other defects in workmanship and materials that are identified by the purchaser over the course of a certain number of years, say five years of occupancy, may be raised directly with the developer.
Ideally, the purchaser should not have to complete the purchase until the property title is issued.

The National House Buyers Association is a non-profit, non-governmental and non-political organisation manned by volunteers. Its website is www.hba.org.my. E-mail: info@hba.org.my