Monday, November 27, 2006

House Buying

You guys ever wondered how Malaysia's house-buying process is extremely unfavourable to the purchaser? Well, I attended an information sharing session with the volunteer team from House Buyers' Association, and ended up a little more knowledgeable ;).

Just for the purposes of comparison, when you do go out and buy your dream car, be it a Proton or a BMW, worth RM50,000 or RM500,000, what's the process like? Typically, you'll pay 5% to 10% downpayment and the balance once your car is ready for delivery in a week or two.

The question then is, why is it that we as house-buyers have to pay a 10% upfront, and subsequently continue making progressive payments over a period of two years or so, before finally gaining 'vacant possession'? Often, our banks would have disbursed some 90% of our housing loan facility for the purchase, before the house or apartment is even completed!

Given that a car and a house can cost the same, why is the purchase of the car so much more convenient compared to the purchase of a house for the buyers like you or me? What's worse, is that the house-buyers are actually significantly disadvantaged in the process.

Firstly and most obviously, house-buyers are actually financing the developers, hence saving the developers cost of funds, and ultimately increasing their profits.

Secondly, house-buyers have to foot the interest cost for the financing period before the house is actually handed over to the buyer. It's basically a case of paying interest for loans disbursed, without the corresponding returns.

And thirdly, possibly most critically, the house-buyers are sharing a substantial risk in the execution and viability of the project, when they have absolutely nothing to gain, and all to lose from doing so.

Let me elaborate. In the event of poor execution by the developers or poor project viability for any reason, the risk of the housing development should be bourne between the housing developer and their bank or financiers. For example, if the developer faced cashflow problems resulting in the delay to the project, or if the project failed to sell as many units as projected, it is a business risk taken by both the developer and the financing institutions.

However, in the current case today, in the event whereby the housing developer fails to complete the project due to cashflow, poor management or even fraud, the house purchaser actually bears the bulk of the risk, because you have secured financing from the banks by pledging your to-be-completed property.

That actually means that if the developer fails to complete the project for any reason, then not only do you have to continue to service the bank loan you have undertaken, but you will also not have "possession" of the yet-to-be-completed property.

That's because the developers would also have taken some form of financing from their banks to develop the property, and the land under development would also have been charged to their bank. Hence, if a developer fails to deliver or absconds from the project, the developers' bank will have the first say over "your" yet-to-be-completed property or land.

Hence, house-buyers who should not be in anyway involved with the risk of the property development venture, are hit by a double whammy. The logical question then is, is this a fair deal for the house-buyer? And it's a particularly pertinent question for some buyers of 58,000 homes in the country who have had their dream homes becoming abandoned monsters? This number doesn't even yet include commercial properties such as shop offices or service apartments which have been abandoned!

Thanks to the efforts of House Buyers Association (HBA), the Government has now agreed to implement a 10:90 system in parallel with the existing system for 2 years. This 10:90 system means a deposit of 10% shall be placed for the house upon the signing of the Sale & Purchase agreement, whilst the remaining 90% shall only be payable upon the completion and 'vacant possession' of the property. While the government agreed to incentives for housing developers to adopt the 10:90 system, the latter are still given a choice as to the system to be rolled out.

The problem however, is that prior to the rollout of the new system, certain regulations in the Ministry of Housing & Local Government and the Ministry of Land & Co-operative Development need to be amended. It has been some 6 months since the Government announced the 10:90 system, nothing has yet been done.

HBA is a voluntary, non-political, non-governmental, non-profit organisation manned by volunteers. Visit their website for more information, education and see the ways in which you can provide your support to lobby the government for a fair deal for house-buyers.
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