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For both home buyers and property investors, Buying Property Offplan is a great way to strike a bargain in the real estate market. The acquisition of a home is undoubtedly a momentous achievement for the vast majority, a pinnacle of financial success.

Buying Property Offplan is popular in Kenya, particularly with working-class families, self-employed individuals and business owners whose cashflows are not evenly spread out throughout the year. Because the Buying Property Offplan also provides investors with the opportunity for quick capital gains, it is also a preferred mode of acquisition of investment properties.

Bargain-Hunting: 6 Keys To Buying Property Offplan

It, therefore, follows that understanding off-plan property acquisitions is absolutely essential. In addition, home buyers and property investors alike need to be sufficiently knowledgeable about the market in order to make sound decisions both before and during the construction period.

Because the principal risks posed in Buying Property Offplan relate directly to the capabilities of the property developer, homebuyers and property investors should have some guidelines or criteria that help to assess property developers and determine the viability or opportunity presented by the project(s) before committing funds to the acquisition.

Buying Property Off-Plan

Buying Property Offplan: What Should a Homebuyer of Property Investor Do?

Become savvy. That’s the simplest answer. And if you couldn’t be bothered to, hire someone unbiased to do the work for you. Or, really, don’t get in unless you’re prepared for a world of hurt and crushed dreams.

  1. Get to know the property developer. Intimately.
  2. Get to understand both the benefits and risks of investing off-plan.
  3. Get to understand the process of Buying Property Off-Plan.

Buying Property Offplan: Overview of Property Development Industry in Kenya

The space of real estate development in Kenya, indeed even parts of the world, features a litany of challenges, not least of which are the many bogus and fraudulent players whose sole aim is to defraud buyers and investors alike of their hard-earned money.

Many are not suitably capable or experienced to deliver on the pledges they make, inevitably leaving in their wake disgruntled home buyers. Who can fail to recall the hundreds of millions that were swindled from prospective home buyers under the infamous tenant purchase schemes that were conjured up under the Simple Homes scam? Or the myriad schemes that overpromised on their deliverables but failed to deliver on their promises?  And without fail, new scams will continue to rear their ugly heads every so often. This trend is bound to continue unabated until more regulation and enforcement is introduced.

The systemic issues with Buying Property Offplan in the country are not new. But because they still remain largely unaddressed, home buyers and property investors should undertake their own due diligence and take sufficient precautions to protect their investments. The industry does have mechanisms for self-regulation so Buying Property Offplan is fraught with many risks. However, as I noted in a previous blog, self-initiated efforts at reining-in errant players or bringing sanity to an industry invariably start with the agenda of industrial networking and lobbying, commercialization agendas and perhaps, at best for the consumers, the introduction of industrial benchmarking. The much-touted Kenya Property Developers Association may do better in developing consumer education programs and lobbying for policy frameworks besides benchmarking in the industry. Membership is voluntary meaning that there is no universally applied gold-standard. Disciplinary action may be taken on errant members at best. However, while these measures may improve industrial compliance, there is little that the organization would be able to do in the way of enforcing compliance or indeed even dispute resolution.

#1. Establish the Property Developer’s Performance and Delivery Record

  1. Visit their website online to check the developer’s portfolio, its corporate associates, and affiliates and its history. If you can find online reviews from previous customers not necessarily published on the company’s website, they should give you some insight into its interactions
  2. Talk to any previous clients where possible
  3. Visit any current project sites to see their finished product, observing finishes, work quality and delivery of the complete project to the level of detail proposed at the time of sale.

The most important aspect to mitigating risks of Buying Property Offplan in any property development scheme is undoubtedly the property developer’s ability to deliver on their pledges. Performing a background check on the real estate developer helps you know their track record, past project performance, and delivery rate. Solicit as much information on them as possible – right from their ownership status and directorships, their legal and financial partners to all the teams of professionals that they work with be they architects, realtors, surveyors, building contractors, engineers and so on. The teams of professionals that a property developer puts together, especially for the project you are considering buying into, are critical to measuring the performance and likely outcomes of the project.

You will want to know that the property developer is financially sound as this will affect the delivery of a high-quality project on schedule without the spectre of hidden costs and unforeseen, unplanned costs. If the property developer is not forthcoming on their financial health, is non-responsive to queries on their financial reports, financial partners such as their bankers and so on, you may want to flee the scene. If they have in the past worked under a consortium or joint venture, be sure to make queries into those projects to understand how they were involved and whether they were effective business partners.

Cautionary Note: If you find that price being offered for the scheme you are buying into is significantly lower than the current market values of similar properties in the market at the time you are considering the project, you should investigate why. Dramatically low prices are indicative of possible shady business practices – hidden costs, inferior materials, non-compliance with building code, substandard workmanship. Be keen to get a sense of any information on costs that are not disclosed or overt in the contract between yourself and the property developer.

Avoid developers notorious for either under-delivering on the development pledges they make and are known for a less-than-stellar reputation in the industry. You can do this by soliciting information from their professional interactions and perhaps using your networks to get the unfettered truth from previous home buyers or property investors who’ve had experience dealing with them.

#2. Seek Guidance from Industry Professionals

If you are a home buyer, get yourself a good lawyer to help you understand the nature of contracts and the solid disclosures you will require before signing on the dotted line. On the technical issues around design, find an architect who can help you create a mental picture of just what the property will look like and speak with construction experts to determine whether the property is what you have in mind. Speak to a property valuation expert to help you make an assessment of whether you are paying fair value for the property at the point of adoption into the project so that you can determine the cost-benefit of early adoption.

Work with professionals to determine whether the project you want to buy into is sound on the fundamental aspects. Get to know both the professional and ethical reputation of the property developer and solicit reasonable information on their background and history. While it is preferable to work with an established, well-known property developer, developers who have steadily come up the ranks taking on progressively larger or more prestigious projects but who may not have as wide a portfolio as the more established ones are well worth considering too. Investigate the financial health of the property developer to determine whether you would even want to consider doing business with them otherwise, you may commit and then lose your money.

#3. Get Your Research Right

Glean as much possible information as you can from any public and/or private sources you may have – it will amaze you just how much you can learn even within the public domain! Whereas property investors are more likely to solicit information that will point towards the potential capital gains, yields or property rentals in the area, the accrual of property ownership rights and so on, home buyers, on the other hand, are likely to be keener on the aesthetic details of the specific property (number of bedrooms, style of construction, property layout, property finishing and so on), and the lifestyle features packaged into the off-plan scheme. Property investors will be more interested in the intrinsic qualities of the development’s location (which will determine the market’s appetite for property in the development), the developments around the project (especially infrastructure and institutional developments) that add value to the project and any ongoing trends around the project (population, settlements, etc) and other upcoming features around the project. Whichever the case, you need to be fully aware of the implications of the transaction with the property developer. Demand any and all relevant information on the property.

#4. Understand the Process of Acquiring Property Off-Plan

Before Buying Property Offplan, you should satisfy yourself with all the elements of the off-plan scheme. If you are comfortable and feel that the benefits outweigh the risks and have made the decision to proceed, you would then contact the property developer and request to be provided with a reservation document in which you would indicate the specific unit you are interested in acquiring along with any other information relevant to the acquisition.

The reservation document will likely contain layout and plans for the property from which you can reserve a property. Upon returning the reservation form, the company will then send you a letter of offer.

It is advisable to engage legal counsel to read through the offer before Buying Property Offplan. The letter of offer will usually be prepared by the prospective subscriber’s lawyers with standard clauses substantiating the interest in acquiring the property, notably the price is accepted by the prospective subscriber.

The letter of offer may also take the form of a standard document sent out by the developer to any prospective subscriber and as such it will include the standard terms and conditions under which the offer is made.

The prospective subscriber can at this point decline the offer, or even negotiate and enter into discussion on varied terms as may be agreed to with the property developer. Thereafter, upon returning a signed copy of the letter of offer, the developer will then send to the lawyer of the prospective subscriber, a Sale Agreement under the terms and conditions as stipulated and agreed upon in the letter of offer.

#5. Perform Project Due Diligence

Prospective subscribers need to establish and secure full disclosure of the facts around the project before Buying Property Offplan. This includes physical verification of the site through site visits both prior to any agreement to invest in property within the development as well as throughout the development period. This will keep the home buyer/ investor updated on the status of the project on a regular basis. Keeping tabs on the project is very important because any significant problems are not likely to be reported by the property developer. As a buyer, you want to be able to track the development and exercise of your rights in a timely manner.  Additionally, the prospective subscriber should establish the following facts:

  1. Does the property developer have proper title to the property? It would be important to take note especially, of any charges, liens or encumbrances and whether these were disclosed early. Any follow-up questions arising should also be adequately addressed by the property developer
  2. Comparable Properties: These will help you determine whether you are overpaying for the project and therefore also whether there would be more attractive offerings in the market.
  3. Are the development plans approved? Prospective subscribers should only invest in the project off-plan if all approvals have been passed, including change of user approvals where necessary
  4. Who are the key partners on the project? Their capacities and capabilities should be looked into beforehand to assess whether they can deliver as promised.
  5. What is the property developer’s channel of communication? Who are the key personnel responsible for disseminating information to subscribers? Is there a scheduled, regular plan for updating subscribers about the progress on the development? If this is not planned for right at the outset, there is a strong likelihood that the property developer will not be transparent or accountable during the term of construction
  6. Are project timelines being maintained? Without the pressure to keep up with deliverables as and when they are disclosed to fall due, the project will inevitably fall behind schedule. Keep the property developer accountable!

#6. Make Contingency Plans

If you buy into an off-plan property with a timeline in mind and a delay occurs, you may have a significant problem on your hands because it may require that you finance the potential outcomes of such a delay.

As a home buyer for example, if you were expecting to move from a rented space to your own home purchased off-plan, a delay may require that you continue renting a living space and suffer the inconvenience of paying for a cost that would otherwise have been catered for. As a property investor, for example, if you intended to dispose the property upon its completion and had financed the acquisition(s) with investors’ funds, you may have to renegotiate for time or pay a premium on the capital which may significantly diminish or even wipe out your capital gains.

Even with the best-laid plans and armed with all the possible information you could gather, things may still go awry. Put in place contingency plans that would cover at least six months between which such additional costs may arise owing to delays on the developer’s part.  In addition, you can also counter the losses or inconvenience arising from delays by insisting on clauses that would mitigate their occurrence, for example, clauses that impose special terms or conditions (such as penalties) on the property developer when delays occur.

Conclusion

  • Buyers and property investors should understand that property developers in our market are really in it for what they can make out of it.
  • An investor mindset is critical.
  • Do the work.
  • Watch out for dramatic offers that seem unrealistic based on market conditions.
  • Ask yourself the hard questions and attempt to place yourself in the property developer’s shoes as they pitch to you so that you can see beyond the trappings that may be set before you.
  • Be wary of property developers who have mixed financing models for their different projects; especially where they apply short-term financing models for long-term projects.
  • Get to know and understand the commercial interests around the project and how they interact and would likely affect your investment before you buy into any project!

The market will continue to have unprofessional, unethical practitioners. However, there are still good apples even among the bad! Press forward and don’t let the potential for failure deter you from seeking your fortunes or dreams. Exercise prudent, thoughtful action and remember, fortune favours the bold!

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