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Pushing risk back to developers
01/8/2004 Published in Malaysian Business - Housing & Property By National House Buyers Association of Malaysia

LAST May, the Prime Minister made a suggestion that developers should adopt the `build and sell' concept. The idea has been hotly debated.

Broadly, it involves two principle types of residential conveyances: Purchasers of existing properties and purchasers of off-plan properties (also called `sell-then-build' concept from the developers' perspective).

Purchasing Existing Property

In this principle, also called `sub-sale', there are no fixed rules on the form of agreement for purchases from existing owners. Sellers can also be housing developers of completed units or unsold stock. In this instance, potential buyers can view and inspect the units and its surroundings before deciding on the purchase. As for the method of payment, it is common practice that upon signing of the sale and purchase (S&P), agreement 10% of the purchase price is paid to the seller, and the purchaser is given three months to pay the balance of purchase price with a one-month extension if the purchaser fails to do so within the first three-month period.

Off-Plan Property

Off-plan S&P is governed under the Housing Development (Control & Licensing) Act 1966. No property exists of yet and the sale contract is basically a contract to construct and deliver the unit to the purchaser according to the pre-determined terms and conditions specified in the statutory contracts under the Housing Development (Control & Licensing) Regulations 1989; Schedule G for a Land & Building package and Schedule H for a unit in a building intended for subdivision. The payment method is based on progressive payments on completion of work as certified by the architects. The final payment is upon the certification of completion by the architects where vacant possession is then delivered to the purchaser.

Potential trap

Most buyers purchase off-plan with the expectation that by the time units are built, the value would have appreciated substantially. The reality is that once a purchaser has signed on and even though he has performed his part of the agreement diligently, everything else is outside his control and remedies to breaches are not automatic.

There are numerous potential pitfalls while the project is under construction. As often mentioned, the economy and the housing market are inseparable. The economic situation can affect housing development. If the economy does not turn sour, the developer may. Sometimes, developers run out of money before completion of projects.

When a project is delayed, expect a chain reaction. Buyers have to deal with late delivery claims, original specifications not adhered to, delivery of vacant possession not according to the contract, holding back moving in till defects are rectified, and dealing with transfer of property titles issues.

Present legislations do not allow purchasers to cancel and seek a refund of payments automatically when projects are abandoned or delayed. It is for these reasons and more that HBA advocates that better protection be accorded to residential property buyers by way of a variant of the present concept.

In the tables, we show the differences in the concepts of buying properties and our recommendation that developers fund their own projects with minimum involvement of risk by potential buyers.

Progressive changes

The Housing Developer Act (Control and License) 1966 (Act118) was enforced on Aug 29, 1969 while the Housing Developers Regulations came into force on April 1989. Both the Act and Regulations are aimed at safeguards the interest of house buyers.

Although the Act and Regulations allow for developers to sell completed units without needing to be restricted by the regulations, very few developers have done that. The delivery system has remained stagnant for years as developers are comfortable with the progressive payment method where the financing of the project is shared by the purchasers.

The proposed `build-first-then-sell' concept was talked about for two decades, but no concrete action has yet to be put in place. The government is studying the proposal now, and the biggest worry that the government might have is on the slow-down due to developers finding it hard to get financing for their projects.

The HBA has made recommendations for a variation of the present concept and hopes it will be taken into consideration for the protection of buyers. We understand that changes are hard to be accepted by most people even if it is progressive changes. As a closing thought, developing housing projects is a business, when developers make profits, there is no complain; but when a project fails, the buyers and the Government and its people bear the burden.


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