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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