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The ultimate protection for house buyers
15/04/2003 theedgedaily.com By P Gunasegaram

Buying a house not already built, the riskiest financial move that most people will undertake in their lifetimes, need not be as perilous if some payment and control measures used elsewhere are adopted here.

Such a method, if implemented properly, could well free the house buyer from the real risk of a developer failing to meet all his obligations and making it impossible for the buyer to use his house even after having spent thousands of ringgit in progress payments.

At present, statistics indicate that hundreds of housing projects involving more than 50,000 house buyers and development values of over RM15 billion have been abandoned since the Asian financial crisis in 1997.

That is a monumental waste of money and scarce resources, resulting in hundreds of thousands of people experiencing much lower standards of living because some unscrupulous housing developers basically ran away with their money.

A number of suggestions, including one by this column, have recommended the build-first-sell-later plan, which has its own set of complications. Under this plan, developers would be required to build the homes, complete with infrastructure and certificate of fitness, before selling it.

While it eliminates risk to the buyer, it puts a burden on the developer who not only has to get his projections right but has to use his own resources or borrow substantially to undertake the project. That means very few developers would have the stomach or the capacity to go ahead on those terms, which may reduce the supply of houses to the market.

Is there an alternative that will make it less onerous for developers to build houses?

There just may be and the method is already being used in countries such as Australia.

Under the system, house buyers will still buy from a plan and still make progress payments based on stage of completion of the units they have contracted to buy.

But there is an important difference. The sums will be paid, based on satisfactory and professionally inspected approvals at each stage of completion, into a trustee account in favour of the developer.

The monies will only be transferred to the developer after the full completion of the project and all infrastructure and the issue of the certificate of fitness. In the meantime, the developer takes bridging finance or uses his own resources to fund the project.

This is a major protection from the current system where any money advanced to the developer can be used by him any way he wants to. Thus you have projects which are 90-per-cent complete (and 90-per-cent paid) but the infrastructure has not been completed for the house buyer to take possession. And the developer is nowhere to be found.

A buyer finds himself in the scary position of having paid for a house, and having to service the loan but still no place to stay in. His finances have been stretched to the limit and there is real possibility of financial ruin.

Under the proposed system, if such an event occurs, the monies are still with the trustee and the buyer has the option of getting it back or using it to complete the project - no more abandoned projects and no more house buyers wringing their hands in despair when the developer disappears.

This arrangement will be more costly, yes. But it puts enough accountability on the developer and provides a real push for him to complete the project as soon as possible. The faster he completes it, the faster he gets his money.

Too many developers have absconded with the hard-earned money of house buyers, diverted progress payments into other accounts not related to the housing development and failed to live up to their side of the agreement. The proposed arrangement will solve all that and then some.

The current waiting period for houses is typically 24 months for landed property and 36 months for high-rise developments. That's too long when the construction of a single house can actually be done in a matter of months.

With the new proposals, developers would probably think of turning their projects around faster; smaller projects in areas with existing infrastructure perhaps instead of the gigantic township developments with the promise of mega profits that most want to be involved in.

For such smaller projects, financing should not pose a real problem. Let's take a turnaround time of six months, no, let's make it a generous year. If the units are pre-sold, developers should have no problem getting bridging finance as they not only have property that can be pledged but the promise of a payment stream. And the trustees can be instructed to keep the progress payment monies in deposit-bearing accounts, which will mitigate interest payments on bridging loans.

Thus, the eventual extra cost is likely to be closer to half of the bridging cost or less - if the bridging cost is, say, 10 per cent, then the cost increase may be 5.0 per cent.

Thus buyers may on average pay up to 5.0 per cent more for properties built under these proposals, which is a small price to pay for virtual guarantee that the final goods will be delivered or the buyer will get his money back.

What about township development then? The proposed system will ensure that township developers have deep pockets and/or the ability to raise financing based on the viability of their projects and other criteria. Which is the way it should be.

The next thing we need is for the authorities to have the courage, the political fortitude, the moral rectitude to resist temptation, and genuine concern for the rakyat to implement this fully and fairly. Is that too much to hope for?

P Gunasegaram is editor-at-large at The Edge.

 

 

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