The biggest purchase in your life is going to be a house. If you don't have a house of your own and live in Malaysia, you're probably being incessantly pressured to buy one.
Nevermind that it is not necessarily the best purchase for everyone.
Nevermind that Malaysia has a very high rate of homeownership in comparison to many developed countries (it's a whopping 76.3% here).
Nevermind that household debt is 82.2% of GDP.
But let's assume that you can afford it and you're ready for home ownership.
You will find that properties in the primary market can have much lower entry costs than sub-sale properties. Developers offer discounts, absorb costs like legal fees, loan agreement stamp duties, and it may also be possible to get a 100% loan (some people call it buying with no money down). Sometimes, they even furnish the entire property for you.
Developers are real saints who work selflessly to help Malaysians own homes.
I know you read that twice.
Ok, I didn't think you were that naive. I just wanted to see if I had your attention.
You know that every discount and cost benefit you get from a developer is actually paid for by you but we'll come to that another time. For now we'll just stick to the fact that your entry costs can be significantly lower than buying from the sub-sale market.
It is therefore attractive for prospective home buyers. If you're an investor, these discounts and lowered entry costs boost your ROI to insane levels.
However, things can go wrong. If you're not careful, buying from a developer can be the biggest financial mistake you make. But you're not going to make that mistake. Because in this post we'll look at 5 things that can go wrong with explanations on how you can avoid them from happening.
#1 Artist's Impressions Can Be Very Different from the Completed Product
Did you hear about the project in China that promised a lake with beautiful views to its prospective buyers? Buyers were shocked to find what the lake looked like after the condominium was built.
They got a fake plastic lake that looked nothing like what they were promised.
This is probably the most extreme of disparities between a plan and a completed product. But this also tells you how risky buying off-the-plan can be.
Closer to home, I've seen projects that were missing important elements upon completion. One in the city centre was sold with a luxurious rooftop club area for residences. The rooftop had a commanding view of the Petronas Twin Towers and would have made a very nice club facility.
However, this "club" floor did not happen upon completion and it became a sky dining restaurant for the public some years later.
I met one buyer in Damansara Perdana who was told that the road in front of the project he bought into would connect to Kota Damansara bringing in good traffic between the 2 locations. Based on this and the planned design, he bought a commercial space there.
The connecting road was never built and the completed design was slightly different which resulted in the commercial spaces not being visible from the road frontage. As a result, the buyer found it difficult to rent his property for a good price.
There are plenty of other stories that get published on social media networks every now and then. This range from exposed sanitary pipes penetrating through kitchen areas to missing facilities.
A completed property that does not deliver on design promises can be very stressful. Imagine getting a fake plastic lake instead of the real thing. Real heartache!
#2 Completion of the Property Project Can Be Delayed
It is more common than you think. Developers can apply for an extension of time (EOT) with the government and the majority of them have been getting it. In 2018, 78.5% of EOT applications were approved.
When an EOT is approved, the developer does not have to pay you liquidated agreed damages (LAD).
This puts buyers (read you) at loss, especially if you've taken a mortgage on the property. You see, the bank releases the mortgage amount in stages to the developer to complete the project. The interest on the amount released to the developer is borne by you. So, if a project is delayed for a significant amount of time, you'll be paying more interest.
A recent landmark ruling by the Federal Court is set to bring change for the better in terms of protecting house buyers. In its ruling the Federal Court decided that the Housing Controller has no power to grant an EOT.
In the past, the Controller used Regulation 11(3) of the Housing Development (Control & Licensing) Regulations 1989 to grant EOTs to developers. This regulation states as follows:
Where the Controller is satisfied that owing to special circumstances or hardship or necessity compliance with any of the provisions in the contract of sale is impracticable or unnecessary, he may, by a certificate in writing, waive or modify such provisions
The Controller can no longer use this to grant EOTs. Good for you.
You may now be asking what's the allowed time frame for the completion of a housing project?
This is specified in Schedule G & H of the regulation. Schedule G applies to housing projects with individual titles and the delivery time from the date you sign the sales and purchase agreement (SPA) is within 24 months. Stratified houses are covered in Schedule H and the allowed delivery time is within 36 months.
Why do delays occur?
It is largely due to inexperience of the developer or poor cash-flow.
You also want to ensure that the house you're buying is covered by the Housing Development Act (HDA). If it is not, you don't have the protections offered above.
Projects built on commercial land like serviced apartments and SoHo's may not be covered under the HDA. You must check.
Look for the following sentences right on top of the SPA:
"HOUSING DEVELOPMENT (CONTROL AND LICENSING) ACT 1966;" and
"HOUSING DEVELOPMENT (CONTROL AND LICENSING) REGULATIONS 1989."
The presence of these sentences are an indication that you're covered under the HDA.
#3 Risk of the Project Being Abandoned
A project that is delayed can cause you financial loss and distress but an abandoned project amplifies that pain. Fortunately the HDA has some provisions to protect house buyers from rogue developers who may abandon projects midway.
Like delayed projects, abandoned ones also happen primarily due to the inexperience of the developer and poor financials. This has been addressed to some degree in the amendments to the HDA in 2015. Now, only developers with strong financial positions can carry out housing projects.
Nevertheless, projects can still become abandoned. As of 2018, there were 150 abandoned housing projects in Peninsula Malaysia.
Under Section 18A(2) of the HDA, an abandoned project is defined as follows:
For the purpose of this section, “abandons” means refuses to carry out or delays or suspends or ceases work continuously for a period of completion as agreed under the sale and purchase agreement.
The period of completion as mentioned above is 24 months for individual title houses and 36 months for strata title houses.
However you don't have to wait that long to take action. Section 8A (1)C of the HDA states that you can terminate the SPA if
The Controller has certified that the licensed housing developer has refused to carry out or delayed or suspended or ceased work for a continuous period of six months or more after the execution of the sale and purchase agreement
Although you have legal recourse if a housing project is abandoned, the saying "prevention is better than cure" is very apt in the case of buying a house. It is much better to ensure that the house you bought is never abandoned halfway through construction by knowing your developer very intimately.
We'll discuss this at the end.
#4 Major Defects in the Completed House or Project
Remember the 'uncle with the sledgehammer'? This was an extreme case where a defect inspection went out of control. I definitely discourage you from reporting defects in this manner.
Then there have been other cases where house buyers discovered shocking faults after getting the keys to their homes. One case in Kepong had water leakages in many parts of the building, including the lifts. In a video that went viral, It looked like there was a waterfall above the lift.
Small defects have been the norm for most houses I've seen. Good developers quickly rectify them. In one case, the developer agreed to change exterior fittings for the windows of an entire apartment project due to a defect. This was 5-years after the project was delivered to buyers.
But major defects can be a serious problem with no resolution in sight for some home buyers. Especially when the developer is of lesser calibre.
#5 Long gestation period for tenants
You've bought a beautiful condominium in a great location. It's a thriving neighbourhood. This property is a buy-to-rent investment. After getting the keys, you get some recommendations for an interior designer and have the property nicely fitted out.
You're excited to rent the property out. In fact, during your renovations, a couple of negotiators have sent you messages promising you high rent from their Japanese expatriate clients. You've been rushing your interior designer to complete work because you don't want to miss out on these potential tenants.
It feels like ages but the property is finally ready to be tenanted and you call up all the agents who've been texting you. You show them the apartment and some of them take pictures. They tell you they'll get back to you then....silence. You can hear the crickets chirping.
What just happened?
Well, just like you, a few hundred other investors also bought-to-rent. They're all competing with you for a limited pool of tenants and at the moment, there's a flood of supply. Some investors reduce their asking rents to entice potential tenants. Very quickly others do the same and before you know it prices are falling.
The first wave of potential tenants are also hesitant to move in. They don't want to live in a building that's still largely unoccupied. Many units are undergoing renovations so it's noisy with strange workmen walking the corridors and public spaces.
You get the picture right?
When you buy a house off-the-plan from a developer, you may need to wait a relatively longer time to get a tenant. You may also find that your ideal asking price is not as easy to achieve. This is something you need to be prepared for.
So what can you do about all these things going wrong?
When you're going to buy a house off-the-plan, pay a lot of attention to the plan. Don't get carried away with the show gallery. The show gallery is not the real product.
Ask for the architectural drawings approved by the local authority. Take a good look at the drawings and make sure that they fit closely to what's being marketed to you.
Look at your floor plans. If you need more detail, ask for it. If it is not forthcoming, it's a red flag.
You may think, I don't know how to read architectural drawings but it's not hard to understand them. If you're not sure, ask someone to help you look at them. It's a big purchase so commensurate attention to details is in order.
Check the developer's reputation. Don't ask them or rely on their corporate profile.
Take a look at their other completed projects. See if there are any red flags. A simple Google search will yield plenty of results. Just type in their project names ending with the word "review."
Finally, if you're buying-to-rent, you may want to seriously consider the project's density. Higher density projects with a majority of investors as purchasers would mean a lot of competition for tenants when the project is ready. Lower density would mean less competition.
Unless the project is an exemplary transit-oriented development with plenty of pull factor, it may be safer to hedge your bets with a lower density project.