Housing Houdinis
31/05/2003  Published in NST-PROP A Buyer Watch Article by National House Buyers Association

Possible ways developers manage to evade the law requiring the deposit of buyers' payments into the Housing Development Account

A fortnight ago, we discussed what happens when the enforcement of the Housing Development Account (HD Acct) fails, and the trail of havoc that follows.

Today, let's look at how this account can be evaded and/or manipulated by unscrupulous housing developers.

We only have space to highlight some methods - suffice to say, one does not have to be very intelligent to devise more ways as all that is required is a dishonest mind.

Ploy #1

Only projects that are subject to the Housing Development Act (the Act) are required to maintain HD Accts. Hence, the best way to escape the requirement is to make a project appear that it does not belong to the "housing project" category.

There are a number of ways to do this. One is by lumping a project into the "serviced apartment" classification, which is used to describe saleable hotel-standard projects built on land approved for commercial use. For all intents and purposes, however, some "serviced apartment" projects should fall into the same category as condominiums.

With the commercial reclassification, projects can avoid being shackled by the Ministry of Housing, the Act and its corresponding regulations. We believer a number of such projects are now facing abandonment.

Without governance, a dishonest developer operating as a registered limited company can fiddle with its accounts. Funds could be siphoned out to plug up other financial problems or to enrich personal coffers instead of being specifically channeled into the completion of a project.

Such a miscreant wouldn't blink an eyelid when it sees house buyers suffering from financial trauma after they dispense of their life savings and carry huge bank loans for nothing. The rogue mastermind could also cunningly install insignificant persons as proxy directors so that the whole show can be orchestrated behind a corporate veil. And in the event the company goes belly up, the funds that have already been drawn out would become inaccessible to anybody.

The proxy directors, in reality and in all possibility, would have only the shirts on their backs as their sole earthly possession.

Ploy #2

Another way for a developer to extract money illegitimately from the HD Acct is to inflate the expenditure. Invoices can be fraudulently inflated, phantom bills presented and cost quotations from building contractors and other subcontractors artificially inflated.

It's also not unheard of for some unethical professionals such as architects and engineers to be part of a scheme and connive with their developer paymasters. They are quite prepared to sell their souls for short term financial gains. There is even a cliche that suits them: "If you don't play ball, you don't get paid at all!"

Hence, over-certification on the stages of construction is done without due regard to the consequences. This could result in a developer being paid more than what is rightfully deserved, creating a situation where it becomes more profitable for the offending company to abandon the project than complete it.

When this happens, any rescue or resuscitation attempt becomes commercially unfeasible, leading to the need for the government funding to realise completion.

Ploy #3

An errant developer also know that the financial penalties dished out by governing professional bodies are paltry compared with the immediate gains that can be accrued.

In the absence of effective deterrents, the situation is very much dependent on an individual's consistence and ethics - a rarity today.

Auditors too adopt a parochial view of their job, and are only interested to see that collection and payments are appropriately recorded and authenticated.

They do not make it their business to investigate and verify that payments made towards items purchased and services rendered commensurate with prevailing market rates. Hence, the inflation of invoices are easily done and got away with.

Ploy #4

Since many banks are flush with funds and are eager to spend, they are not too fussy about making disbursements to a developer as long as the loan can be backed up by collateral and the interest is serviced.

When a developer obtains Bridging Finance from a bank, disbursements are keenly released regardless of where the developer channels the funds. After all, any delay means a loss of income for the financial institution!

The fund can even be used for aspects unrelated to a project.

"It could even be used for the private enjoyment of the directors!" said a lawyer who is acting for a development company listed on the KLSE.

In their over zealousness to disburse funds to make profit, banks too succumb to the wishes of their developer clients. We at the HBA are of the opinion that bankers and financiers have a fiduciary duty to the house-buying public - regardless of whether they are their customers or not - by ensuring that they do not become victims of a housing scam.

It is also the moral obligation of banks to ensure an orderly and regulated process of growth in the construction industry.

These are but some of the ways that the HD Acct can become a mockery. The sad thing is that there is a sheer lack of deterrents such as enforcement through the prosecution of perpetrators. Because of this, the unscrupulous are allowed to laugh all the way to the bank while innocent and unfortunate buyers have to suffer in their wake.