by: Batula A. Adan & Joan Mbodze
Introduction
Off plan sale is an appealing option for many real estate investors, allowing them to purchase properties that are yet to be constructed. This method offers the advantage of securing a property below its market value at the outset, with the potential for significant appreciation by the time of completion. Developers, in turn, benefit from the early cash flow and commitment from purchasers, enabling them to fund their projects.
The allure of off-plan sale is undeniable as it includes the promise of acquiring a property at a discounted price, coupled with the potential for substantial appreciation. This has made it a popular investment strategy. However, the risks involved cannot be overstated. In simpler terms, a purchaser is essentially investing in the developer’s vision, plans and promises rather than a physical, ready-to-move-in apartment or town house.
Risks in Off-Plan Sales
Buying a property that exists only on paper requires a keen eye for detail and a healthy dose of caution. While the prospect of owning a brand-new property in a prime location is exciting, the journey to possession can be full of risks such as:
- Project Delays or Cancellations: There is a risk that the project may not commence or complete on time, often due to financial difficulties in securing loans or facing hurdles in obtaining construction approvals, which may hinder their ability to complete the project on time or at all.
- Incomplete Projects: Developers might deliver incomplete projects or fail to meet promised specifications. To be realistic, there is always a higher chance that the finished product will not fully match the plans and marketing materials that convinced the purchaser to invest in the property.
- Ownership Issues: Misrepresentation by developers about the legal ownership of the land can lead to disputes. Issues with the property’s title, such as undisclosed encumbrances, restrictions on land use, zoning regulations, or environmental concerns may limit the developer’s ability to build the planned project or affect its value. Disputes over property boundaries can also arise, leading to uncertainties and endless litigation.
- Possession Problems: Buyers might face threats of auction or fail to obtain clear titles upon project completion. Purchasers might face lack of quiet possession after project completion due to auction threats from financiers of the project. The developers may also fail to issue titles to purchasers at completion.
Need to mitigate the risks?
To mitigate these risks, thorough due diligence is paramount. Before committing to an off plan purchase, it is crucial to undertake rigorous due diligence, which includes the following:
- Developer’s Track Record: The purchaser needs to investigate the reputation and past performance of the developer. It generally involves scrutinizing the developer’s track record, financial stability, and project timeline.
- Project Team: Check the credentials of key personnel, including the architect, main contractor, and project manager.
- Litigation due diligence: Ensure the land title is clear and free from litigation, referring to reports like the Ndungu land report.
- Site Visit: Conduct a physical inspection of the project site. A visit to the construction site can provide valuable insights into the project’s progress and the developer’s commitment.
- Project Viability: Assess the project’s location and surrounding property values.
- Approvals and Licenses: Verify that all necessary approvals and licenses are in place, including those from NCA and NEMA.
- Expert Consultation: Seek advice from real estate experts to avoid costly mistakes. Additionally, seeking legal counsel to review the purchase contract is essential to protect one’s interests.
Kenya’s regulatory landscape has introduced safeguards for off-plan sales purchasers, such as escrow accounts and bank guarantees. While these measures offer a degree of protection, they are not foolproof. Ultimately, the success of an off-plan sales hinges on the purchaser’s ability to make informed decisions and manage the inherent risks. Noteworthy, as a purchaser, it is important to ensure that the there is a contract which protects their interest.
According to Sec 23(3) of the Law of Contract Act, contracts involving land disposition must be in writing. It is also a mandatory requirement that contracts must include offer, acceptance, and consideration. Accordingly, the contracts being put in writing must contain specific essential elements to ensure that both the interest of the developer and the purchaser are protected. Given the complexity of off-plan sales, it is essential to consult legal counsel to ensure all necessary clauses are included and accurately drafted to safeguard the parties’ interests.
For those willing to navigate the complexities, off-plan property can offer significant rewards. However, it is crucial to approach this investment with a balanced perspective and a clear understanding of the potential pitfalls.
Conclusion
Off plan sales offer an attractive investment opportunity but come with significant risks. It is essential for potential purchasers to conduct comprehensive due diligence, understand the legal governing framework, and ensure vital contract clauses are in place to safeguard their interest. With careful planning and adherence to regulatory guidelines, off plan investments can be a profitable enterprise.