Off-plan buying makes for great savings

With real estate development currently taking a thorough beating from the high interest rates, there is little hope that housing prices will come down any time soon, which is bad news for prospective home buyers.

Those who want to buy a house through mortgages will be praying that the interest rates go down so that they can get loans at fairer rates, but they will also be praying that when the rates come down, developers will sell houses at “reasonable” prices.

Whether this happens or not, “savvy” buyers, who know how to clinch bargain deals can still get their dream houses at considerably lower prices and end up paying relatively lower mortgage rates.

The secret is in understanding how the Kenyan developer and the country’s housing market generally operate.

One of the best ways a buyer can get a house at a substantially lower price is through a pre-sale or off-plan arrangement.

Most developers are selling houses long before the foundation has even been laid. The reasons for this range from the need by the developer to raise construction capital to testing the project’s “viability”.

If executed well, off-plan buying benefits both the buyer and the developer. Of course, there are drawbacks.

For the developer, off-plan or pre-sale arrangements can lead to massive losses, especially when the cost of construction shoots up before completion, either because of rising cost of building materials or a need to re-do sections of the project.

For the buyer, off-plan buying is nothing short of a gamble. Yes, the buyer can ensure that the pre-sale agreement he or she signs is foolproof (so that there is no room for the seller to increase the price on completion, for instance), but there are many factors the buyer cannot control, even when dealing with a reputable developer.

For instance, the project could delay, or stall altogether, because of a court case, insufficient funds, illness, or even death of the developer.

But considering the huge savings a buyer makes, perhaps it is a gamble worth taking. Off-plan houses usually sell at much lower prices than when they are completed.

In some cases, they go for half what the house would fetch when sold after completion. There is for example, this home buyer who decided to go the off-plan way and ended up saving millions in discount.

The house, a three-bedroom apartment in Embakasi, was going for Sh3.5 million. When the construction started in October 2007, she paid a 20 per cent deposit.

As the project was nearing completion, she raised over 50 per cent of the money from her own sources and then cleared the 30 per cent balance through an employer mortgage scheme.

Those who bought similar units after their completion in 2009 paid Sh6.5 million. This means that in a span of less than two years, this woman had made Sh3 million while doing nothing, literally.

For a mortgage taker, this should be significant. Pre-sale arrangements normally lower the monthly repayment instalments by a big margin.

For instance, if the woman mentioned above was to pay the whole Sh3.5 million through a mortgage at a 13.5 per cent interest rate for 15 years, she would be paying Sh45,441 a month.

Those who bought their units for Sh6.5 million would be repaying Sh84,391 a month in mortgage instalments for the same period and at the same interest rate.

Such a huge saving does not only make economic sense, but it also makes pre-sale buying one of the best ways to encourage home ownership.

It is a method that is increasingly gaining currency, especially at a time when most developers are under financial pressure due to the high cost of borrowing.

Pre-sale deposits are an excellent way through which developers can raise construction finances.

For the buyer, the key thing is to ensure that the developer you are dealing with has clear and transparent guarantees and a good track record.

Make sure, with the help of a lawyer, that the pre-sale agreement you are signing is foolproof and does not leave room for changes, such as alteration of prices.