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Not right to pay first
11/09/2004 Published in NST-PROP A Buyer Watch Article by National House Buyers Association

WE at the National House Buyers Association Malaysia (HBA) agree with Prime Minister Datuk Seri Abdullah Ahmad Badawi that it is not right for purchasers to pay first before getting their houses.

He had pointed out that if developers don't sell all their houses, the money collected wouldn't be sufficient for them to undertake their projects. Therefore, Abdullah asked, what would happen to those who have paid up under the current sell-then-build system of housing provision?

For the past two decades, the "build-then-sell" concept has been debated and studied, but it has still remained a voluntary concept. And it has brought on a raft of problems.

Time for change is long overdue so that the hazards, risks and uncertainties experienced by buyers can come to an end - even though it would appear that we have unwittingly acquiesced to the adage of "a wrong thing when done over a period of time will become a right thing".

But no, we haven't. The present situation is grossly unfair and creates a very disorderly environment in the property industry.

In the first of a series of articles, we'll take you through the present sale and purchase system of "buying off the plan", all the way through to what the ideal system should look like.

For a start, let's look at the present Sale and Purchase Agreement (SPA). Essentially, it is a contract between a developer and a purchaser, controlled by the statutory Schedules G and H of the Housing Development (Control & Licensing) Act.

In it, the first 10 per cent of the purchase price is paid when the contract, the SPA, is signed, while the remaining 90 per cent is payable in stages, in accordance with the progress of construction. As the purchaser usually needs a loan to fund the purchase, it is the bank that releases this remaining amount.

If there is default by the purchaser, the developer is allowed to forfeit 10 to 20 per cent of the purchase price, depending on the property type and the stage of construction. The purchaser also needs to have up to five per cent of the purchase price to pay for ancillary costs such as stamp duties, legal fees and registration expenses relating to the purchase and the loan.

Even when the bulk of the purchase price is drawn down by the developer upon an architect certifying that the house is practically completed, the purchaser still cannot move in - he can only do so when the Certificate of Fitness for Occupation is issued by the local authorities. However, from the time vacant possession is delivered (with the architect's certification), the purchaser has 18 months to report to the developer of any defect in the house.

Meanwhile, on the developer's side, it has to set up a separate, private limited company for each housing project it undertakes. The current system does not require a developer to have substantial cash in hand before embarking on the project, particularly if no land holding cost is involved.

A significant portion of the construction is funded by the progressive payments received from purchasers, while a margin of financing based on pledged collateral is sought to cover the construction and infrastructure costs, until the progress payments are received.

The nature of the Malaysian housing development industry can be summarised as widely varied in its composition, highly cyclical, ultimately competitive and inherently complicated.

The industry has almost no legal barrier to entry. Anyone can create a development company, buy land or form a joint venture with landowners, hire a team of consultants and contractors, obtain financing and obtain approvals to put up housing units.

Such a framework invites the entry of errant companies whose objective is only to eke profit at the expense of innocent purchasers. It is time, therefore, that the Government steps in and puts an end to the sell-then-build practice of housing supply in the country.


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