How investors fall victim to shady property deals

It is an established fact that the real estate industry is one of the surest ways to grow your investments. The industry is so lucrative that most wealthy people have a stake in the industry.  For this reason, many people are eager to invest in the industry with aspirations of chancing upon the big bucks.

It is this eagerness to invest that some less than honest industry players take advantage of to make fraudulent transactions. The willingness by uninitiated investors to close deals under less than ideal circumstances has helped many fraudsters get away with so much.

Fraud in the real estate sector does not just happen in land transactions, it can also happen in buying condominiums and servicing mortgages. While classical property fraud rotates around dealing with people pretending to be the rightful owners of the property, the fraud in condominiums and mortgages is more subtle. You often end up overpaying for a poor quality product or owning a property that becomes a source of endless litigation. 

Abuse of the DLP

James Rutaro owns several condominiums both commercial and residential in Kampala and the suburbs. He bought all these properties for business purposes. Even the residential condominiums he owns are listed on AirBnB for rent to people looking for short stays. He notes that among the problems he has found with the condominium market, the tendency by developers to take advantage of loopholes in the condominium law is high.

According to several industry experts, some scrupulous developers will use the cheapest materials that they can get away with to make as much savings on construction costs and widen their profit margin. This is more likely to happen when it comes to the kind of materials, especially finishing materials that are not obvious to the prospective buyer.

“One of the articles in the contract you sign during the condominium transaction states that anything that breaks or malfunctions within the first one year is the responsibility of the developer. They are mandated to make all the repairs at their cost, to the satisfaction of the condominium owner. The first year is called the Defects Liability Period (DLP),” Rutaro says.

“Some condominium developers have used this to their advantage. They use cheap materials that they know will at least last through the DLP. They will choose a much smaller gauge of electrical wires, cheap fixtures, even cheap roofing, well knowing that by the time problems start developing, they will not be responsible for paying for the repairs,” he adds.

Rutaro adds that some developers will even wind up the business after selling a particularly poor quality property so that the disgruntled condominium owners will not be able to visit the office to complain. Instead of exiting the market, they register a new company and start all over again.

“Ten years ago I was looking for a residential condominium to buy. I looked at many properties trying to get the best property for the best price. One of the properties I visited was around Seguku on Entebbe Road. When I eventually got around to buying the condo, I bought it from the same people that developed the Seguku one but under a new company. Why would the same people own two companies that do the same exact job? I later learnt that they had closed the former business after clients started complaining about their unsatisfactory work,” he says.

Mortgage

JohnPaul Okwir decided to buy a home through mortgage financing after finding an advert of shiny condominiums inside the banking hall of a bank in Kampala. This, he says, was a seal of trust for him. He felt comfortable to buy this property simply because he considered this bank an expert on housing. He also knew that he would not buy “air” with this deal. He did not know that a series of disappointments were waiting for him. 

The property of choice was a residential condominium in Naalya. He bought it in 2019. He says the building was as opulent in the real world as it was in adverts. But as soon as he started living in it, he started noticing that the electric wiring was not working well, an issue that was later linked to poor electrical fixtures and cabling by experts.

“They had used wrong gauges for the wires, cheap switches and lamp holders and many people in the building had major issues with their electricity,” Okwir says.

He says because those issues happened around the first year, the developer was able to fix them at no cost. The law provides that whatever goes wrong within the first year is within the defects liability period (DLP) and must be solved by the developer.

“While I initially thought the bank had done due diligence, my experience soon showed me the opposite. But I somehow overlooked these problems because I considered them negligible. But then the bigger structural problems started appearing,” he says

In about three years after buying the condominium, long after the DLP had elapsed, roofs started collapsing, ceilings started falling in, and pergolas started buckling under the pressure of the elements. With no help from the bank that recommended the property, the owners of the entire 78 units in the three blocks pooled money and repaired the entire roof of the three blocks housing over 300 residents. They did it not just for the financial interest in the buildings but mostly for their own safety. The developer told them that the DLP had elapsed and he couldn’t do anything about the roof.   

“They claimed we were having problems because we were not maintaining the building properly. But what kind of maintenance work does one have to do on a roof of a building that is three years old? The truth is, it was very poorly done and the bank had not done due diligence before advertising the property,” Okwir says.

 Okwi adds that they had to drain the swimming pool because water had started seeping into the walls of the property. 

“We had to drain the swimming pool to protect the building, but this means that the integrity of the entire block was probably already compromised. We have spoken to the developers and all they told us was that the DLP had elapsed. We had bought this property with structural problems, they did not develop over the year. I feel that there should be redress in the condominium laws,” he says.

Okwir is still servicing his mortgage to the bank for the property but the bank has done nothing about the unfairness of the situation. He says the bank is still dealing with the developer to sale more of their properties through mortgage.

Property management

One of the ways in which condominium developers take advantage of well-meaning and often ill-informed condo owners is property management. The nature of condominiums is that they need extensive management. While the building is owned by dozens of people, no single owner cares for whole. People care for their own four walls and the whole is left for no one in particular. That is where property management comes in.

It has been common practice that some developers stay on after selling all the condominiums and insist on managing the building. Each condominium pays a monthly management fee and this can be a good source of income for the property manager if the units are in their hundreds.

One of the developers of a condominium apartment in Naalya decided to create a property management arm of the company to fill the management role that had not been filled by the owners. According to the homeowners in the property, the real reason for this move was to gloss over the defects that the developer knew the property had.

“Whenever there was a problem with the electrical connections or a leak in the roof, the developer, through their management company would come immediately and alleviate the problem. But when it came to issues such as security and sanitation, we would call them for months on end and nothing would be done. They hired neighbourhood boys as askaris without any training and they let grass grow in the pavers. So we threw them out and managed it ourselves,” one of the owners says.

The other reason some developers chose to manage the properties they have developed is because they can control the common areas such as the parking lot and public toilets from which they are able to earn more revenue.  Developers take advantage of investors who lack of information. Before entering a transaction, investors should first understand its legalities and do their due diligence to be able to protect their investment.