Protecting house buyers

The Star 7/11/2005 By Yap Lim Sen

THE housing debate with its calls for “sell then build” (STB), “build then sell” (BTS) and “10:90” has become muddled.

The House Buyers Association (HBA) says that only BTS, or failing that, 10:90, can protect house buyers.

The Real Estate and Housing Developers Association (Rehda) objects vehemently to BTS and 10:90 being made compulsory.

Contrary to the belief of the HBA, the fact is that BTS as a model for protecting house buyers is not an issue because it does not exist in the primary housing industry anywhere.

Indeed, the housing industry everywhere operates on the basis of STB in one form or another.

The critical difference between STB in Malaysia and STB in developed countries is in the extent of protection for the house buyer.

Rehda’s objection to BTS being made compulsory is not without merit. If BTS were to be made compulsory, they would probably be right in suggesting that house prices could go up and that the housing industry might become disrupted causing damage to the economy.

As for Rehda’s objection to 10:90, their concern is that too much risk would be placed on the developer. This concern is not unfounded.

But in introducing bumiputra quotas and low-cost housing into the debate, they have added more confusion and clouded the issues even more.

These requirements have long been part of the cost of the Malaysian housing business and they are already reflected in the overall house prices.

All the slogans and heated assertions should not be allowed to confuse the fundamental issues of the protection of house buyers, which are:

·NO buyer should lose any money if he fails to get his house through no fault of his own; and

·THE house should be of an acceptable standard.

The debate has forgotten that the present STB grew out of the Malaya Borneo Building Society Berhad (MBSB) whose own origins can be traced to the Federal and Colonial Building Society Limited incorporated in Singapore in 1950 to promote home ownership.

MBBS lent to both the developer and house buyer of a project. It took responsibility for the delivery of a good house and had strict control over progress payments to the developer and also for the building quality.

Defaults by developers then were unheard of. Home ownership grew rapidly after Merdeka and the commercial banks began to enter the housing market but without MBSB’s expertise and capacity to control projects.

When developers started to default, the banks foreclosed and realised their security not just at the expense of the developer, which should have been the case, but at the expense of the innocent house buyer as well.

Hence, Government intervention and increasing regulation to protect house buyers which have helped mitigate but not eradicate the problem.

There are proven solutions to the Malaysian house buyer’s dilemma, which contrary to some statements, are in fact beneficial to developers as well.

The current STB which allows developers to have the use of house buyers’ progress payments without first completing the house, or passing title to house buyers, is at the root of the problem.

Such STB can still work if banks like MBBS of old protect the equity of the house buyers and accept responsibility for the delivery of a good house.

The simple and effective way to protect house buyers under STB is, otherwise, by holding all payments made by the buyers in escrow (in trust accounts) to be released to the developer only on the delivery of a good house.

If the title is not available when the house is ready, then on release of the money to the developer, the bank acknowledges the ownership interest of the house buyer.

This simple system has evolved and become standard practice in many countries which have had, like Malaysia, to deal with poor construction and defaults by developers.

Such a system would allow the developer to continue to operate on the STB system or if buyers want to buy a house on payment of a forfeitable deposit only (which is essentially the 10:90 model), the developer should be allowed to mitigate his risks, under Malaysia conditions, by insisting on a higher deposit, say 30:70.

Either way the system would still fully protect the buyer. It does not reduce the bankability of a project nor increase the risk to developers or banks as some parties have claimed.

In fact, it will restrain reckless developers (and their bankers) and reduce poor workmanship. It will also remove the need for many of the regulations now inhibiting efficiency and still fully protect the house buyers. In doing so it will promote the well-being of society and the working of a sound economy.

It is extremely flexible and can be quickly adjusted to suit circumstances, for example, the bank could require the developer to have a higher level of bookings in order to establish the viability of a project or the bank/developer could require the buyer to put in a larger deposit.

All payments held in escrow would support the bankability of the project. Bankers would be free of the moral and legal hazards of enforcing repayment of a home buyer’s loan for which the innocent buyer got neither land nor house.

Under the present system, bankers could be said to be a party to a contract which takes advantage of the buyer – the bank’s own customer!

The objections raised by Rehda lead one to think that its members may not fully appreciate that the law must protect a house buyer.

The “over-regulation” which they regard as intrusive and costly will continue until the system is changed as there will always be reckless and rogue developers.

Significant improvements were made to the law in 2002, including the creation of the Tribunal for Homebuyer Claims. This is an initiative ahead of many developed countries and due credit should be given to the Housing and Local Government Ministry.

The new laws are very onerous on the developer and it reflects the Government’s determination to protect house buyers. The laws have become cumbersome and compliance has been difficult and very costly. However, the underlying risks to house buyers have remained.

The law should ensure that the three parties to the house transaction must take the responsibility for their own risks.

The house buyer might lose money when house prices drop but there is no question of him losing his money and not getting his house.

When a project fails, the developer and his creditors lose money but not a house buyer. The bank when facing default by the developer should not mitigate its loss at the expense of the house buyer.

The industry should therefore seize the proposed review by the ministry as an opportunity to have a totally revamped system that is efficient, free from conflict of interest and unnecessary bureaucracy.

Such a system will enable the industry to respond quickly to the market and protect the house buyer.

Rehda and the Association of Banks are probably the two most important industry umbrella organisations whose activities affect the well-being of all citizens.

These powerful organisations together with lawyers, architects and engineers have a duty to support a system that will protect house buyers from the loss of savings.

The current STB which makes the buyer a systemic victim of the failure by the developer to deliver his house is an indefensible blot on the conscience of a nation.

Malaysia is not a third world country – she is aspiring to be a developed country by 2020.

Yap Lim Sen was a developer from 1960-1993. He was also on the board of a number of leading Malaysian-listed property companies.