How to guard against raw deals from off-plan buying

Wednesday October 2 2019



When Elizabeth Lwali decided to buy a house, she looked for a bargain and found one that she has never regretted.

Unlike many people who go for a completed house, Lwali bought hers even before the foundation was laid.
She paid 20 per cent deposit when the construction started in October 2007. The amount also acted as the booking fees. She cleared the balance when the project was completed in 2010.

“It is always cheaper to buy at the beginning. I bought my unit for [UG] Sh125m, but those who are buying similar units in the same project are paying almost double, at [UG]Sh231m. I have made capital gains while doing nothing, literally.”

The process she followed in acquiring the house is called a pre-sale, buying on paper or buying on the plan — or simply buying off-plan. A pre-sale refers to anything (a house in this case) sold before completion — whether half-way, quarter-way, or 90 per cent complete.

Good offer
People go for this kind of arrangement because they are cheaper than similar ones by the time the construction is completed. Such houses are cheaper — at times by up to 40 per cent — compared to the finished product, according to (Kenya) National Construction Authority chairman Steve Oundo.

As a buyer, it also gives you some “breathing space” to arrange for the financing. Buyers are even allowed to pay the deposit in installments. Off-plan selling also enables developers not to pump in their own money, relying on deposit instead. And as Lwali attests, pre-sales can be gratifying. “There were no ugly experiences. All I had to do was to make the necessary extra payments — including stamp duty, legal fees, and three-month service charge deposit.”


However, despite success stories like Lwali’s, property experts are warning that pre-sale arrangements are not 100 per cent safe for buyers. Although they have obvious advantages they transfer an “excessive” level of construction risks to the buyers.

“Pre-sales are not safe for buyers, especially at this time when the cost of building materials is on the increase, sometimes to a level that makes it not practically feasible to deliver the project at the proposed deadline and price,” says Wilberforce Oundo, a director with Roack Consult, Kenya.

Oundo has witnessed many cases where, towards the end of a project’s completion, the developer asks buyers to top up their payments to match the prevailing market prices, in total disregard of the pre-sale contract signed.

The loopholes
“It is not unusual for developers to change prices at the end of construction. I have seen cases where a developer goes back to those who had booked and asks them to top up and refunds the money of those who are unable to increase their payments.

“Sometimes the depositors are also asked to pay any penalties or costs incurred. There are quite a number of such cases that have happened towards the end of the project,” he says.
Whereas some developers are forced by circumstances like unexpected jumps in the cost of building materials to renege on pre-sale agreements, most do it out of greed.

This has been so, especially given the rapid rise in property prices in major cities like Nairobi.
Oundo says most developers would rather return the deposit for units booked earlier, then sell them at a higher price.
“The developer’s argument is very simple: ‘I am in business and I want to make more money. So, if you can’t give me the money then I would rather break the contract and sell this property at a higher price’”.

Kenya’s property experts are not the only ones urging buyers to exercise caution with pre-sales. In its new book, Housing Finance Policy in Emerging Markets, the World Bank says pre-sales can be risky for the consumer.
“Problems occur when ... the developer fails to deliver the expected housing product — in terms of quality, time, and price — leaving households to take the whole risk and face dire legal straits in trying to recover their advances (deposits),” says the book.

The risk
According to the publication, consumers, especially those who earn low or moderate incomes, frequently commit all their savings to make a down payment. Should the project or developer fail, individual consumers rarely have the resources to pursue a case in court to recover their deposits, which is unlikely when the developer is bankrupt or has been left with insufficient assets.

“If the unit delivered does not meet promised standards, a consumer who pre-purchased it with a mortgage has little recourse except to default on the mortgage and pass the problem on to his or her lender,” it says, noting that this is the main cause of the few non-performing mortgage loans in China.
In particular, it notes, consumers are usually ill-equipped to judge progress or quality of construction of a large development project.

Another disadvantage of pre-sales is that they presume that one’s (financial) circumstances will remain the same or improve for the entire construction period. Usually, one is given 14 or 30 days to complete the payment upon issuance of the certificate of occupation. But sometimes your circumstances have since changed and you may no longer qualify for a mortgage and are unable to get alternative funding.

Sometimes people lose jobs before completion of the construction. Oundo says the most heart-rending case of a pre-sale gone sour was that of a friend who paid a 30 per cent deposit, then lost his job towards the end of the project last year. “He was buying a (UG) Sh534m house on Kiambu Road and signed the contract, confident that nothing would happen to his job,” he says.
Things were made worse by the fact that the sale contract was lopsided. It said in the event of default, he had to pay interest on the outstanding balance.
He ended up losing the 30 per cent deposit (UG Shs178m) and another UG Sh107m in penalties, forfeitures, and interest.

The contract did not have a provision for varying the price, but it clearly stated that in the event of default, the purchaser would forfeit 20 per cent of the deposit paid as well as pay interest at the prevailing bank interest rates on a monthly basis in the event he was unable to complete the payment.

The defence
“The developer’s argument was, if he had not booked the property, someone else would have bought it. He was supposed to pay the remaining 70 per cent within 30 days after practical completion. Unfortunately, he lost his job about a month to the completion date,” says Oundo.
Lesson: Buyers need to ensure the pre-sale contract they sign is foolproof and does not leave room for any changes/amendments instigated by the developer.

The recourse, Wilberforce Oundo notes, lies in ensuring the sale agreement is so tight that it has no provision for varying the price or refunding the deposit.
If that is included in the contract, he says, then the only recourse you have is to go to court and seek specific-performance — that the developer is obligated to deliver to you the product/property instead of giving you the money.

Advice to buyers

(Kenya) National Construction Authority chairman Steve Oundo, advises buyers to first look at the profile of the consultancy team. “Who is the architect; the quantity surveyor, structural, electrical and mechanical engineer as well as the project manager? If they have a history of swindling clients or using substandard materials, then you should run,” he advises.

Francis Gichuhi Kamau, an architect, says: “Buyers will have to set up their own personal mechanisms such as hiring independent professionals to counter-check quality.”
Martin Tairo Maseghe of Architecture Kenya Media, says developers ought to rope in professional consultants to advise on designs and costing for the project.

Kenfrey Kiberenge, Daily Nation