Bargain-Hunting FT 4: Investing in Distressed, Bank-Owned Property

by | Sep 5, 2018 | Bargain-Hunting Series, Property Market Advisory Series, Real Estate Market Intelligence | 0 comments

Investing in Distressed, Bank-Owned Property is a real estate investment strategy that can yield high returns. It is most ideal for capital growth (buying low and selling high) but can also be applied for income and equity growth strategies.

Repossession and Auction of Properties

When mortgage-borrowers default on their responsibility to make their monthly mortgage payments, the credit officers at the bank will attempt to seek advice from them. Eventually, if the default persists without remedy, the bank will follow due process to recover the balance on the defaulted loan. This process culminates in the repossession and auction of the property.

A mortgage-borrower may take legal steps through court orders and injunctions to prevent the process from proceeding if they can show cause or make good on the loan balance. However, once the process has been cleared by the court, the bank can take measures to repossess and dispose of the property to the highest bidder at public auction. Distressed Bank-Owned Property will be valued and a foreclosure value assigned. At public auction, the bank may indicate a reserve price, usually the bare minimum at which the bank is willing to dispose of the property.

Profiting From Distressed, Bank-Owned Property Sales

A simple example would be negotiating to acquire a property valued at KES 5M for say KES 3.5M and then disposing of it in the open market for say KES 4.8M or as close to its open market value as possible. The transaction above, after costs, can yield a net profit of KES 1M. Depending on the condition of the property, and if the investor is merely looking to make immediate capital gains on the property, he can even commence the sale of the property as quickly as is legally possible.

In both instances, the circumstances driving the sale is the pressure to meet with the financial obligations arising out of default on mortgage payments. The main distinction is that distressed sales are triggered by the borrower while the latter is triggered by the financier (bank). Both represent an opportunity for real estate investors to make massive profits.

Distressed Bank-Owned Property: Where is the bargain?

Properties that have come under the hammer are usually sold either at public auction or sale by private treaty. Lenders prefer public auction because they are deemed to be the faster route to disposing of property as opposed to open market sales.

Rather than getting involved in managing property – which is not their core business – mortgage financiers are inclined to offer substantial markdowns just to offload them from their books. This is what makes them great bargains. In addition, except in a sale by private treaty, the lender is not obligated to secure any of the defaulter’s interest in the property. This means that the price may be significantly lower than the market value of the property.  Defaulters ultimately lose their entire investment since there is no legal requirement on the lenders to recover any amounts from the sale of a collateralized property above the outstanding loan.

The best bargains rarely make it to public auction. These are usually referred to as short sales or sale by private treaty. On the initiative of either the property owner or the lender, when the borrower falls behind on their mortgage payments and the lender has commenced legal action to recover the property, the property may be sold. These properties are much more profitable because both the lender and the property owner are highly motivated to sell rather than bother with the cost, hustle or, risk necessitated by public auction.

Short sales are usually win-win for both the lender and borrower, which means both parties are looking to mitigate their losses and are willing to accept less than the full balance owed on the existing mortgage. They work especially well if the property condition is bad enough to reduce the current market value below the loan balance (usually dilapidated properties). At the bare minimum, short sales can guarantee the investor potential returns of up to 15% of market value on securing distressed property. The Land Act prescribes that land or property must be sold at a reserve price when sold under public auction.

Distressed Bank-Owned Property: Rehabilitation and Restoration

It is important for any investor to understand the process that leads to the auction of real estate properties. It may take an extended period of time between default and completion of the judicial process that approves the sale of a property by public auction, especially where the process is heavily contested by the borrower. This means that by the time of sale, some properties can be collected at much deeper discounts as they may require rehabilitation. Make sure to investigate the physical state of a property on offer. Properties that are occupied tend to be better maintained and would have lower costs of restoration compared to vacant unoccupied properties which tend to be rundown.

Conclusion

Being auctioned is an ignominy – just about one of the worst experiences you could face. It is an unpleasant experience. And auctioneers are possibly some of the most loathed individuals. It comes with the territory. Auctioneers conjure up terror and the disgrace of going into unmanageable debt is unfortunate. But as sure as the sun will rise in the east, it will happen. Setting aside the emotional conflict that may arise from leveraging these situations allows seasoned investors to create an opportunity for themselves. Public auctions in many parts of the world have a much more pleasant “whiff” about them because they are associated more with the voluntary disposal of fine things – homes, art, jewellery and even charitable causes. Not so in Kenya! In the lingua franca, being auctioned is referred to as “kuchotwa”, which loosely translates to “getting scalped”.

According to reports by the Central Bank of Kenya, The outstanding value of non-performing mortgages stood at KES. 22.0 billion in December 2016 with an average mortgage loan size of KES 9.1 million. While mortgages are not the preferred form of financing the acquisition of property, the same source cites that there were 24,085 mortgage loans in the market in December 2016, a decline of 1.5% from the year before with banks being forced to rein in their loaning practices through tighter credit measures.  With the relaxation of interest capping rules, the market will inevitably see growth beyond Q3 of 2018 after the market bounces back from the slump of 2017. The volume of premium bargains available in the market is deep. This is perhaps one of the most important tools the top 1% of successful real estate investor use to fast-track their capital growth. Time to jump in!

Find more deal-hunting opportunities?

Bargain-Hunting: How Soft Markets Create Massive Investor Profits

by | Aug 31, 2018 | Bargain-Hunting Series, Property Market Advisory Series, Real Estate Market Intelligence | 0 comments

Soft markets present investors with one of the most idyllic market conditions – an opportunity to reap massive profits from a disengaged market where demand is depressed because of a multitude of sellers chasing after very few buyers.

Also referred to as the buyers market, or a depressed market, a soft market is a down-trend in the market cycle characterized by a scarcity of buyers in the market followed by a glut or oversupply of particular types of properties.

It can occur in different market segments and in particular areas (locations) in the market. These market conditions adversely affect demand leading to a massive drop in prices. Soft Markets create an opportunity for massive investor profits to those savvy enough to realize the trend and how best it can be leveraged.

Soft Markets: Understanding Market Cycles

Cycles are normal and, without exception, all markets go through both cyclic and non-cyclic patterns which collectively form a trend or a path against which their growth or decline can be measured. In an open market, cycles are determined by demand and supply trends which are in turn determined by perceptions of the market and occurrences both within and extraneous to the market.

One of the cycles in the market is a downcycle; a sustained period of low demand and trading activity within the market. Downcycles, which occasion soft markets, are rarely ever universal (affecting the entire market), but instead, occur within “pockets” of the market.

Their impact on different property segments and categories are not necessarily even across the market, so some segments and categories of properties tend to experience the downtrend more profoundly than others. A downtrend is characterized by three key indicators:

  • Depressed demand (few buyers)
  • An influx of sellers creating a glut in supply with vastly more property offers than buyers in the market are willing/able to absorb, and;
  • Falling prices.

This cycle is also referred to as a soft market, or a buyers’ market – buyers’ market because they become the dominant determinant of price in the market. It follows naturally that with depressed demand, prices will fall as sellers become antsy to dispose of their holdings with very few takers in the market.

For as long as soft markets persist, investors can profit massively out this cycle by negotiating steep discounts out of sellers desperate to close on their property offers. The conditions give buyers the “ascendency” in the market, allowing them to snap up investment properties at solid bargains that will eventually fizzle away once there is an equilibrium between demand and supply and the downcycle comes to an end.

Soft Markets Create Massive Investor Profits

In Kenya, soft markets are most common during the end/beginning of the year when the incidence of sellers making sell decisions is at its peak – usually to finance some other acquisition or to meet the financial burden of some pressing needs. However, it is the period immediately before, during and after the cycle of political contest in this country that the conditions of soft markets reverberate through the industry. The election cycle slows down the market through the uncertainty it creates by scaring away buyers from the market.

With diminished demand, motivated sellers looking to cash out quick become more readily susceptible to terms and offers as determined by the few buyers braving the market. Indeed, to see just how much of an effect the prolonged election cycle of 2017, peek into the Q3 Hass Property Land Price Index which details clearly how profoundly the prolonged electioneering period stunted the growth of prices of land in Nairobi and its environs. Land prices, which were hitherto considered immune to political risk, took a beating as sales stagnated across the market.

Pockets of downtrend cycles also occur for particular property types because of exceptional events in the market which are perceived negatively by the sellers. For example, the introduction of dumpsites in close proximity to residential areas, the influx of undesirable elements in a particular residential neighbourhood, especially upmarket areas; land rezoning into commercial use in a hitherto residential area may cause a flurry of quick exits by sellers. It is important to note that the only significant beneficiaries in such scenarios are those who get in immediately at the onset of the scramble to exit. Rezoning from residential to commercial use invariably causes prices to sky-rocket in the long run and so it is important to invest early right at the onset of the exit by residential property owners.

Just as any corporate organization entering the market would perform a SWOT analysis covering both macro and micro factors that would affect their business, any real estate bargain-hunter would/should be inclined to assess the market to determine whether or not the deals (opportunities) they find in the market are premium quality offers.

So how do you identify a soft market and leverage the best deals around?

#1. Build Market Intelligence

You must be in touch with the market. You can’t see something unless you know that it is there. There is absolutely no way to know if a deal is good if you are unfamiliar with the market. You have to know the prevailing market conditions and prices for the type of property in the specific location in which an offer has been made, that way you can compare it with the offers you’re looking at in order to make the determination that you have a bargain.

#2. Find the Seller’s Motivations

It’s just as important to know the sellers’ motivations as it is to know the market. The seller’s motivations will provide insight into circumstances necessitating the sale and therefore the seller’s willingness to enter into a bargain through negotiations over terms and price favorable to a buyer. If you are looking for a good deal, knowing that the seller is highly motivated to enter into a deal will give you an edge in the negotiation allowing you to push for the very best terms and price.

#3. Research, Seek Professional Help

To this end, you can either consult with a property valuer, your realtor, or even a property investor who is more knowledgeable than you are. You can visit online realtor platforms and websites to get comparative information and do research on property price growth trends. A bargain is only a bargain if you create equity on the acquisition at the time of acquisition. Any gains made during your ownership of the property are incidental to the acquisition and cannot be part of the bargain. Additionally, if the acquisition is not in a growing market, the long-term returns may also be diminished.

#4. Hone Your Negotiation Skills

The reason it’s called a Buyers’ Market is that buyers rule! So, drive that bargain and drive it as hard as you possibly can for the maximum advantage. It’s not enough to assume that you know well enough about the market and the sellers desire to strike a bargain. Push for the price and terms that best suit you, within reason given the opportunity and circumstances. Leave nothing on the table!

#5. Have an Exit Plan Going in

Just because you can buy it doesn’t necessarily mean you should. And just because you got a bargain doesn’t mean you should hold onto it perpetually. The savvy investor will tell you that they determine when to get out at the time they get in. An exit strategy gives you an idea of when to offload the property and will be determined by the sort of returns you are considering when entering into the acquisition. Even a good bargain has a shelf-life – don’t ruin a good thing by overstaying unnecessarily.

Find more bargain-hunting opportunities.

2020 ADDENDUM: This postscript was added during the Covid 19 pandemic in 2020.

The Covid 19 pandemic has greatly eroded market activity in 2020 and it is likely that the real estate market will remain soft to mid-2025. Not all market segments have been affected but across the market, there is an endemic lethargy. What’s your outlook for 2021? We would love to hear from you in the comments section.

Bargain Hunting: 5 Keys to Find Great Property Deals

by | Aug 27, 2018 | Bargain-Hunting Series, Property Market Advisory Series, Real Estate Market Intelligence | 0 comments

Property is ubiquitous and the Keys to Find Great Property Deals are available to any committed property investor disciplined enough to set off after their goals unwaveringly. If you are at that point in life where it has dawned on you that your current financial resources may not be sufficient to keep up with the lifestyle you desire or to meet the growing financial needs of your family, then this is for you. And if you are simply looking to increase your income and work towards financial independence gradually, then read on.

Keys to Find Great Property Deals: Everyone Loves A Bargain

At least all investors do, and they realize that bargains equate to profits, plain and simple. The most prolific bargain-hunters are capable of fashioning some sort of a win out of calamities, whether theirs or those of others. In this series, we explore how seasoned real estate investors seek out bargains to grow their wealth through bare-knuckled, unabashed opportunism –  taking a regimented approach to achieving their goals.

Keys to Find Great Property Deals: The Story of The Vulture and The Hyena

In African anthology, certain animals are disparaged and vilified for their opportunistic nature. So to be compared to, say the Hyena, or the Vulture, is most disagreeable. Scavengers are tenacious and in the natural world, they possess some of the most unique and amazing qualities. They have guts, literally, comparable to none others in the animal kingdom. Hyenas organize socially in matriarchal societies and have the strongest jaws of any animal on the planet. Like vultures, they have an acute sense of smell. Vultures have eyesight only comparable to that of their higher-flying ornithological compatriot, the eagle.

Becoming a great real estate investor is in part a study of the amazing qualities these creatures possess. Much like the hyena and vulture, the success of bargain-hunters is achieved through tenacious effort, knowing where to rummage for opportunities and learning how to sniff them out. Their overall success is not built on overwhelming strength or dominance of the food chain, but rather on their opportunism, vision, and tenacity. Much as how these creatures are able to pick up the scent of a fresh kill miles away, real estate investors learn to hone-in on investment opportunities. Bargain-hunting, tenacity, and opportunism are synonymous, there can’t be one without the other.

Whether you are looking at meeting additional financial demands for the educational requirements of your children, or you are considering the resources you will require for your retirement or whether you simply want to have additional cash to spend on your lifestyle, learning how to invest will be critical. Real estate is a great avenue to pursue these goals.

Keys to Find Great Property Deals: What are your Objectives?

The goal of any investment strategy is profit. Setting out clear objectives of what you want to achieve gives your investment clarity and purpose. Your objectives will then determine the market segments you will be focused on. For each objective, you will be looking at properties in different market segments best suited to achieving the objective.

For long-term capital growth, for example, you may consider vacant land in a rapidly developing area that can provide capital gains (appreciation) within a reasonable period of time. While for income, you may consider rental property. Success will lie in aligning your acquisitions with your goals – the right property for the specific purpose

5 Keys to Find Great Property Deals

The intrinsic properties of real estate make it one of the best investment tools for wealth creation available in any investors toolkit.

Here are 5 tips on how you can find an investment property.

#1. Find the Motivated Seller

In the world of real estate, profit is made at the point of purchase and not the point of sale. Otherwise, as the investor, you will be obligated to hold the profit for an inordinately long period of time before you can cash out. The motivated seller represents the single best opportunity to strike a big bargain. When the seller is motivated, half the task of negotiating a great deal is already accomplished.

Wherever you see the phrase ‘quick sale’ or ‘distressed property’ right there is your motivated seller! This individual is hard-pressed for liquid resources (i.e. cash) to finance some other priority which itself has been triggered by the occurrence of some unprecedented/unexpected or unplanned event or circumstance.

  • Unplanned events: An individual may accrue additional financial costs associated with the relocation of family out of the country for reasons of employment or to meet the cost of additional financial burdens associated with, hospitalization or educational requirements for a family member and so on. This, in turn, may necessitate the disposal of assets within the shortest possible time to raise the funds to make this possible.

  • Calamity: this includes the loss of income, hospitalization and even loss of life. For instance, an individual who has lost their source of income is highly motivated to make a quick sale of a mortgaged property at a time of sharply spiking interest rates.

  • Sometimes, quick sales are driven by a combination of events; individual circumstances unique to a seller which are then aggravated by occurrences in the market. For example, an investor who purchased a property on a mortgage may want to sell the property before racking up stiff penalties and interest – and well before the auctioneers come calling – in the event that they have lost their income. A combination of events such as the loss of a job combined with a mortgaged property in a scenario of spiralling interest rates and growing family needs may necessitate the quick disposal of that property to enable the investor cope in deteriorating circumstances.

Striking a rapport with a motivated seller is a great way to establish a baseline for negotiation on price and other terms. It is equally important to establish the reasons for the sale as this will also provide you with more insight on how to negotiate the acquisition and possibly give you some more flexibility on the terms and conditions.

#2. Get Your “Ducks in a Row”

Develop and collate your sources of property information to create a list of potential properties that are aligned with your respective objectives. Your sources may include local real estate agents, online property portals, newspapers, real estate magazines, government websites, fliers, local events, your networks including investment clubs and SACCOs. Finding and identifying profitable deals takes a bit of experience so it is also strongly recommended that you drive around to actually visit the properties and to expand your information sources to include local agents who can identify motivated sellers.

Your local realtor will be able to identify investment opportunities and motivated sellers. They will be an integral source of information on comparable properties, accurate market valuations, providing you with networks to resource persons, undervalued opportunities and they will be an invaluable resource in helping achieve your objectives.

#3. Study the Market

To follow the money, you have to know where it is headed. You simply have to know where to look otherwise your search will fall short. Neighbourhoods with growing populations in close proximity to markets, trading centres, educational institutions, shopping centres, hospitals, and transportation hubs are ideal investment property locations for both income generation and capital appreciation.  In these locations, there is high demand for tenant-occupied properties and because the neighbourhood is developing, there is also increased settlement in the area which translates into higher demand for housing and therefore a faster rate of capital appreciation even for vacant land. If the location is a low-income neighbourhood, there will be a sustained high demand for rental properties because of the relatively transient nature of low-income earners translating as well into good returns on investments and relatively higher growth in rents (compared to middle-income and upmarket neighbourhoods).

Understanding the markets is also critical to an awareness of when to invest. Like all markets, the real estate market is not immune to cycles. Markets go soft for a variety of reasons. Importantly though, it places sellers at a great disadvantage because demand becomes highly depressed. In Kenya, the season of political contest invariably causes the market to go soft leading to an oversupply of particular types of properties. With so many sellers trying to cash out in a market with very few buyers, prices become depressed and great bargains abound.

#4. Leverage Your Networks

More Keys to Find Great Property Deals include leveraging your networks. In addition to your local agent, making connections with bank credit officers and other professionals closely linked to the financial services industry may offer great value in your search for investment properties.

The importance of networking cannot be overstated. To sell, you need to create and hold the trust of your buyers. So your networks become the most important asset you own because they already know you. These include professionals working within the same industry from realtors to property surveyors, tenants, contractors, lawyers, accountants, other investors like yourself, financial services practitioners and many more.

The effort to building and maintaining contact with your network will align with your success as an investor and pay off handsomely in time. The great advantage of networks is also that they give advance information on opportunities even before they hit the market allowing you to be first to market with the information.

#5. Investment Opportunities Hiding in Plain Sight

It is not always obvious to the undiscerning eye, but there are opportunities that rarely present themselves as such because they are often couched in unpleasant situations. Family disputes are a case in point. They can take many forms from family feuds to disagreements over inheritance, lawsuits and so on. In these circumstances, a property owner may seek to dispose of assets in order to re-establish themselves elsewhere or to settle the dispute at hand. Usually, individuals looking to settle disputes via the sale of assets are highly motivated to get rid of the property.

Another opportunity is dilapidated, incomplete or even unused structures. Properties may fall into disuse for a variety of reasons, for instance, age, ravages of weather, partial destruction by fire and so on. When they become rundown, such properties become opportune bargains which can be collected from the market a mere fraction of their rehabilitated value. Obviously, a seasoned investor would know to assemble a team of professionals who can provide them with costs for rehabilitation before acquiring such property. In this way, they can make a fair estimate of the actual value of the property in its current state and therefore the capital gains they stand to make should they choose to acquire such properties.

Keys to Find Great Property Deals: More Options You Can Explore

There are other approaches to finding great investment opportunities depending on the requirements of the particular investor. These take a less hands-on approach to property investment through structured financial securities such as investment clubs, fractional (commonly referred to as time-shares) and sectional properties (REITs). Off-plan property investing is also a great way to secure property bargains in the market.

Keys to Find Great Property Deals: Conclusion

  • If you fancy yourself a savvy investor, above all else, you will be looking to grow and get paid to do it. That, after all, is the game – untinged by the moral dilemma of taking advantage of the market or other peoples’ circumstances.
  • Find those perfectly scrupulous, legal and moral ways to strike bargains without distressing others or breaking any laws.
  • The places where bargains are to be found are not invisible; they’re in the marketplace and if you develop the eyes of a seasoned investor, you’ll notice them staring back at you.

Do you have any additional tips? Please share them in the comments section below!

Bargain-Hunting: 6 Keys To Buying Property Offplan

by | Aug 22, 2018 | Bargain-Hunting Series, Off-Plan Investing Series, Property Market Advisory Series, Real Estate Market Intelligence | 0 comments

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 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!

The Risks and Benefits to Buying Property Off-Plan

by | Aug 15, 2018 | Off-Plan Investing Series, Property Market Advisory Series, Real Estate Market Intelligence | 0 comments

Buying Property Off-Plan allows home buyers and property investors to acquire property before the development is commenced. The property developer might be able to demonstrate access to vacant land on which the property will be built and has proposed architectural plans for the development. In addition, the property developer may also have approved development plans and built partnerships (consortium) towards executing the property development. The project is moot at the time the off-plan scheme is created – merely a conceptual or theoretical plan.

Risks and Benefits to Buying Property Off-Plan

In effect, subscribers to these schemes become the original or initial financiers of a project that needs to demonstrate its “bankability” in order for it to take off.

Depending on the size of the project and the capacity of the property developer, the initial off-plan sales allow the developer to demonstrate sufficient appetite (viability) for further open market sales and also demonstrate the bankability of the project. This, in turn, allows the developer to source any additional financing requirements to execute the project.

In the vast majority of instances, the full disclosure of all commercial interests in the project, or their actual nature, are rarely disclosed to prospective buyers. And therein lies one of the issues ailing the market for off-plan housing in Kenya.

Buying Property Off-Plan: Profitability is Key

Of course, while much of the off-plan scheme will have been developed with the market in mind, the other obvious determinant in developing the off-plan scheme will be its profitability to the developer. Developers are, after all, in the real estate business for the profits they can generate from the business and maximize the wealth of their shareholders/owners.

The uptake of the scheme will be determined by how well the developer has thought through it from conceptualization to implementation; and ultimately, how healthy the appetite is for the scheme proposed. To spur interest in their offering, developers will naturally engage in an intense marketing effort to sell the property, especially because the property is nonexistent and any potential subscribers to the scheme will likely have to be wooed without any physical, visual structures in place. This is where the plot is either won or lost.

Buying Property Off-Plan: Why Buy Into Something That Doesn’t Exist?

For the most part, because it meets a need or expectation that you have and ultimately because you believe (or are convinced?) that once it comes into existence, that need or expectation shall be met. The savviest of property developers will be able to titillate you into visualizing the experience of meeting that need or expectation. They will know just what to say to entice you into buying in and they achieve this through powerful visuals and a package of benefits you may find irresistible including:

  • Concessional prices for early adopters: The key benefit to buying off-plan property is the presumably low price. I say presumably because it is arguable considering that the developer offers lower-than-average prices based on current market values and not necessarily on the total cost of construction with a markup (the two values may be as distinct as chalk and cheese!). Nonetheless, it’s still a deal! At the offer price, a buyer can potentially shave off up to 35% off the value of a property when construction is complete. The savvy investor uses this concession in price along with a combination of other investment strategies to make massive profits on off-plan schemes, making them one of the most lucrative investment tools for real estate investors.
  • Myriad delightful features of the development: To attract especially home buyers, off-plan developments  come packaged with lifestyle goodies include sports, entertainment, shopping, health and fitness facilities  (gyms, swimming pools, clubhouses and so on), additional (non-standard) security features, special memberships and as many more as the developers creativity can accommodate.
  • Customized Touches: As a buyer/investor under an off-plan scheme, the developer will provide the option of small customized finishes, nuanced touches that will give homeowners an added layer of pride in owning the property. Because structural and design changes may have a significant bearing on the cost of construction, developers usually include this as a time-limited offer.
  • Attractive, flexible terms and payment plans including an early right to ownership privileges which real estate investors can apply to make profits from the off-plan schemes even before the development is completed.
  • A host of other generous inclusions including exclusive club memberships as well as discounted travel, home insurance, furnishing offers and so on.

Buying Property Off-Plan: Benefits of  Off-Plan Schemes.

Additionally, property investors who get in early are able to negotiate higher discounts, particularly where they are able to leverage the terms of the off-plan scheme so that they are able to reserve several units with deposits that are just sufficient to tide them over into the rights of ownership.

At the time of the launch when developers are seeking early adopters, the savvy investor can also negotiate for the right to sell the property at any time during construction having paid just the agreed deposit or some other agreed percentage of the price. This allows the cash-rich, savvy investor to strategically position themselves in the development and to clear strong capital gains even before the project is completed as the prices of unsold inventory keep going up.

For individuals who are self-employed or are business owners, buying off-plan makes financial sense because it allows for a “finance-free” option to beat mortgage lenders in the acquisition of the property. It allows this cadre of individuals the opportunity to acquire property by paying a deposit out of their savings and gradually pay off the balance through periodic lump sums.

Buying Property Off-Plan: Risks Associated With Off-Plan Schemes

Any astute property investor will tell you that, done right, buying property off-plan is a great investment strategy that can yield very high returns. They will also tell you that any investment that offers high returns also carries with it significant risk and as such should be well-analyzed before being entered into. Risks may be attributable to the property developer, market occurrences or even fundamental internal risks with the scheme itself. For both home buyers and property investors, the most common of these are:

  • Project delivery delays. A good way to mitigate this risk is to check with the property developer whether they have any financing options in place prior to commencing the project.
  • The delivered property falls below expectations. Usually as a result of structural defects or failures and invariably as a result of non-compliance with building codes or, simply, that they do not meet with the preferences and tastes of the buyer.
  • Complete failure of the project due to reasons outside of the control of the property developer, usually legal, political, environmental reasons.

For property investors, purchasing off-plan in a market with a high saturation of specific types of properties, especially commercial spaces, there will be exposure to significant market risks as the property may not be suited to the market and this may, in turn, lower returns on investments.

Arguably, in Kenya today, for instance, there are a high number of new office spaces that experience low occupancy rates owing to the unsustainable rental charges they command. This is uncommon where indicative property surveys have been properly conducted prior to the conception of the off-plan scheme and also because property values generally tend to increase even before the completion of the project.

Buying Property Off-Plan: Disclosure, Understanding Off-Plan Property Acquisition

Savvy property developers not only understand their proposition keenly but will also have a very intimate understanding of the market and of their potential subscribers. Often, they will limit disclosure while simultaneously embellishing their offering. Based entirely on the nature of the questions posed by prospective subscribers, a property developer can easily determine the elements of the project to underplay and those to sensationalize in order to elicit a sale.

They will understand how to navigate the conversations with prospective subscribers and will have anticipated questions from home buyers and investors well in advance as well as their responses. They will be able to distinguish between enquiries by prospective home buyers and those by property investors, and therefore how to manage each prospect with the aim of making a sale.

Knowing what you want to hear is great. Knowing what you need to hear may be even more important. By asking the relevant questions, demanding written disclosure and most importantly taking the time to understand off-plan acquisitions, home buyers and property investors can make informed decisions and determine if the off-plan scheme is a good fit for them. Possession of full and accurate information enhances the experience for both parties and ensures that both the developer and the buyer/investor are satisfied with the transaction.

Get The Six Keys To Buying Property Off-Plan

Buying Property Off-Plan: Get Advice to Manage Risk

Whether you are a home buyer or a prospective investor who cannot seem to arrive at a fair assessment of the off-plan scheme under consideration, it would be sound advice to always solicit the assistance of independent professionals to guide your decision making and screen out any potential false marketing.

Property developers will often create a rosy, blissful picture to obfuscate any shortcomings in their off-plan schemes in order to get your buy-in. Consider your decision outside of the emotional high that owning your dream would give you and instead focus on getting satisfactory answers to the hard questions.

Get all the information you require to make clear, incisive decisions. Often that information won’t necessarily be in plain sight. Or in plain language either. Hence the term “fine print”. Don’t be fooled though, it’s often a deliberate ploy. Get knowledgeable about the property development industry to understand the strategies they use to sell to you so that you can separate the wheat from the chaff and strike a good deal for yourself.

Buying Property Off-Plan: Conclusion

  • Off-plan schemes are a great way to acquire property. Only if they are executed well.
  • Developers are in the real estate business to make a profit. If in the process they offer you some convenience or financial benefit, understand that it is still motivated by the developer’s goal – to make a profit.
  • As a rule, if you plan to put down money into a real estate purchase, exercise diligence unwaveringly.
  • If you opt to acquire property through an off-plan scheme, understand that you are financing the development of property at zero cost to the property developer. This is why he will love you. In spite of the fact that you are not a bank to levy high fees and onerous conditions, you should drive as hard a bargain as you can and negotiate your way to the best deal possible on the acquisition.
  • Take your emotion out of the decision! We all love a bargain but look before you leap. Or at least get help to figure it out!
  • Aggressively Research the Market, get to know the developer intimately and understand the potential risks of the decision you need to make.
  • Read the Fine Print: Inform yourself on all the finer details of the off-plan scheme, in particular on your rights in the eventuality that project risks mature. This is particularly important when the project experiences failure.
  • Seek the assistance of professionals and people in your networks, who have had prior experience with off-plan schemes and, even better, with the developer you intend to work with, should be solicited. Nobody has absolute or perfect knowledge of all market conditions. But experts can help you make informed decisions, or steer you away from really bad ones!

Why Off‑Plan Schemes Still Reign Supreme in Kenya’s Property Market

by | Aug 8, 2018 | Off-Plan Investing Series, Property Market Advisory Series, Real Estate Market Intelligence | 0 comments

  • Understanding Off-Plan Schemes: A Path to Homeownership

  • Why Off-Plan Schemes Are Popular with Property Developers

  • A Deeper Look: Do Buyers Truly Benefit from Off-Plan Schemes?

  • The Appeal of Off-Plan Schemes for Homebuyers and Investors

  • My Take: Why the Risks of Off-Plan Schemes Often Outweigh the Benefits for Retail Buyers

  • Unpopular Opinion: Off-Plan Schemes? Go with the Chinese

  • Navigating the Risks: What Buyers Should Know

  • Final Thoughts: Can Off-Plan Schemes Still Be Trusted?

Off-plan Schemes: A Developer’s Favourite Tune

Off-plan schemes are to property developers what music is to the soul! If you put any number of developers in a room to discuss off-plan real estate schemes, the consensus will be that they are the next best thing to sliced bread. And homebuyers and property investors are bound to concur.

Understanding Off-plan Schemes

Off-plan schemes are typically arrangements in which a property buyer or investor contracts a developer for the acquisition of a property that has yet to be constructed.

The buyer begins payment before and during construction, with the expectation that by the time construction is completed, the full purchase price will have been settled.

These schemes are often used for residential or commercial developments—estates, gated communities, or apartment blocks—where the properties are sold in phases.

Early adopters are rewarded with lower prices than later buyers, essentially receiving a discount for taking on the perceived higher risk of investing in a conceptual project.

The Risks and Benefits to Buying Property Off-Plan

Why Developers Love Off-plan Schemes

For developers, off-plan schemes are more than just a financing method—they’re a strategic play. They enable developers to demonstrate market interest to financiers and use buyer deposits to prove the project’s viability.

With enough buyers on board early, the project becomes “bankable.”

Executed well, an off-plan acquisition can yield immediate equity for the buyer on handover, higher than if the buyer had purchased at completion. But the success hinges entirely on the developer’s ability to deliver both quality and timeliness.

The Hidden Risks in Off-plan Schemes

While the upside appears enticing, buyers need to understand that off-plan schemes are essentially just unregulated financial tools that give developers access to cost-free, risk-free capital.

  • Unregulated: Developers aren’t required to float conventional financial instruments or comply with oversight that other capital-raising sectors are required to meet.

  • Cost-free: Deposits made by buyers are interest-free and the “discounts” are defined by the developer—not the market. When the project experiences an overrun on delivery, for example, the homebuyer will still have to finance their accommodation elsewhere.

  • Risk-free (to the developer): All financial risk rests with the buyer or lender, giving developers maximum upside with minimal exposure.

While developers argue that buyers earn their reward through discounts and equity, it is more accurate to say that the buyer is rewarded by the market, not the developer. The market acknowledges the buyer’s risk with capital gains, not the developer’s goodwill.

So, Why are Off-plan Schemes so Popular with Buyers

Off-plan schemes are also incredibly appealing to homebuyers and small-scale investors, especially those in the informal sector who struggle to qualify for mortgages. Compared to mortgage financing, off-plan schemes offer:

  • Flexible payment terms (bulk payments over time)

  • Easier access for self-employed individuals

  • Lower entry prices for early adopters

The alternative—mortgages—remains a complex, mistrusted option, plagued by high interest rates and tedious approval processes.

For many, off-plan is simply the more achievable route to homeownership.

My Take: Who Really Benefits?

Where the Real Power Lies

Despite their popularity, the reality is that retail buyers often shoulder the greatest risk in off-plan schemes. While these schemes appear inclusive, the true benefits accrue to wholesale buyers—institutional investors or high-net-worth individuals—who can negotiate for:

  • Better pricing (due to volume discounts)

  • Customised payment terms

  • Influence over project timelines and design elements

These buyers possess leverage. Retail buyers, by contrast, sign standardised contracts with limited negotiation room and little recourse if things go wrong.

In my view, developers benefit the most, followed by bulk buyers. Retail buyers are often enticed by the dream of early equity but bear the brunt of execution risk.

    Unpopular Opinion: Go With the Chinese

    This may be a controversial opinion, but I must confess a bias towards non-indigenous developers, particularly Chinese firms.

    On average, these developers have demonstrated exceptional project management discipline. In my observation, they tend to:

    • Deliver within the promised timeline
    • Offer more flexible terms with the ability to customize payment plans
    • Stay within budget
    • Maintain better structural and architectural standards

    I am in no way suggesting that all local developers are incapable or that all Chinese firms are perfect. But my observation is that these firms have “cracked a nut” and are far more reliable for the enterprise of off-plan schemes, with a history of timely completions in comparisson to local firms.

    Read into this what you will.

    That said, buyers must always conduct their due diligence, irrespective of the developer’s origin.

    Conclusion: Proceed with Caution, Not Fear

    Despite their flaws, off-plan schemes are here to stay. They fill a vital gap in Kenya’s property market, especially for buyers locked out of traditional financing. But they require caution.

    Before entering into any off-plan agreement:

    • Research the developer’s track record
    • Consult professionals (lawyers, architects, quantity surveyors)
    • Cross-check the reputation of the developer from their professional associations and the reputations of their leadership, in particular any past directorships in other property development firms.

    Regulation needs to catch up with the realities of off-plan financing. Until then, buyers must bear the burden of risk. But with insight and prudence, off-plan schemes can still be a viable path to homeownership, just not one to be walked blindly.