Sailing through your home purchase

RESEARCH CRUCIAL: For the unwary, there are many pitfalls to buying your home. NST RED discusses some of the issues and how to make it a smooth-sailing experience

Cash buyer beware

Soh Chit Ting (not his real name) had a shock when he received a lawyer’s notice to foreclose on his condominium unit which he bought a year ago. He had paid cash for the unit and thought that there was a mistake somehow. After much enquiring, he discovered that the developer’s bank or bridging financier indeed had a right to foreclose on his property. What went wrong for him?

He neglected to hire his own lawyer and had depended on the developer’s lawyer to deal with the purchase. The said lawyer, who obviously acted for the developer had neglected to inform him to get a Letter of Disclaimer cum Redemption from the developer’s bridging financier to exclude his unit in the event of foreclosure. The said letter would have stated the redemption amount which the developer should have paid up from the purchase price.

How could the lawyer do that? Isn’t the lawyer supposed to act for Soh? The sad answer is “No”, the lawyer can only act for one party and since the developer is the one paying him his legal fees, he could only act for the developer. Such heart-breaking stories illustrate how crucial it is for buyers not to be ‘penny wise but pound foolish’. The only solution for the cash buyer is to immediately seek legal redress through the courts.

The developer’s bank can still foreclose on the cash buyer’s property even though the buyer has paid in full. This is because the developer has not used the purchase price to redeem the property from their bridging financier, thus in the eyes of the said financier, the property is still not free from the developer’s bridging loan.

In the case of other kinds of dispute with the developer, thankfully it’s still not too late for the buyer to engage another lawyer to represent him to enforce his rights under the standard Housing Developer’s Act 1966 (HDA) Sale and Purchase Agreement (SPA).

But if the buyer had bought directly from another house owner, then it might be too late as the buyer would be bound by the SPA that he signed. Unless the buyer can prove that he is mentally unsound, or that he was forced to sign the SPA, or somehow proves that there was misrepresentation by the seller or the sub-sale was in some way illegal, he cannot now get out from the SPA. Under the law, every sane person is deemed to have understood every document that he signs, even if he is blind. So, the rule of thumb is to hire a lawyer right from the start in a sub-sale scenario, even before you sign the dotted lines.

There are no ‘free legal fees’ as such, says the National House Buyers Association (HBA), unless the buyer “receives legal representation and does not have to pay for it“.

“The solicitors on the developer‘s panel may be acting for it (the developer) and not the buyer. So the fees due are to be paid by the developer and not the purchaser. Therefore there is nothing free about it as far as the buyer is concerned. We must admit that the strategy (of ‘free legal fees’) is indeed a gimmick to entice buyers,” the HBA asserts.

Hire a property lawyer: All property owners have to face the law – both in a good and bad way. Laws are there to protect house buyers, for example, the SPA especially the standard one when one buys directly from developers, is governed under the HDA which as Pretam Singh Darshan Singh, a property lawyer says, is a piece of social legislation enacted to protect house buyers.

One can say the law is the foundation of property purchase as all sales of land which includes property have to be evidenced in writing under the laws of Malaysia and practically most other jurisdictions in the world. This is both good and bad. The good is that property buyers are protected when the terms of the SPA favour them as in the standard SPA under the HDA.


The bad is when the terms favour the other party as can happen in a sub-sale situation where the buyer purchases a property from another house owner in the secondary market. This is where property or conveyancing lawyers come in to protect both the interest of the buyer and seller.

In Malaysia, the law stipulates that each party in a sale of property transaction must hire their own lawyer. Lawyers cannot represent both the buyer and the seller simultaneously. The rationale is that the lawyer would only protect the interest of their pay master, and not the other party. Common sense tells you that it would be a conflict of interest for the lawyer to represent both the buyer and seller as their interests are opposed to each other.

Consequently, the prevalent practice where buyers do not engage their own lawyer but use the developer’s lawyer when purchasing from the developer works against the buyer should there be a dispute between them.

Brochure prevails: Having presented the SPA as the conclusive document evidencing the sale and purchase transaction, it comes as a surprise that should there be a dispute between what is represented in the sales brochure and what is stated in the SPA, the brochure prevails.

According to Pretam Singh, the former Vice-Chairman of the Tribunal for Homebuyers Claims, the developer’s brochure amounts to an undertaking or solemn efforts by the developer to “convey a distinct mental image to the prospective purchaser to persuade them to make not only a mere booking but a commitment to purchase by paying the first 10 per cent of the purchase price”.

As such, it makes sense to keep the developer’s brochure for record purposes in case you need to refer to it in the event of a dispute.

Background checks: Relying on the brochure or SPA is however not enough. Many abandoned housing projects start off with both documents standing up to scrutiny. Without more research on the developer and the land the property will be built on, everything looks hunky dory and the loan is then disbursed by the purchaser’s bank (end-financier). And then disaster strikes.

This is where HBA, with its many years of dealing with house buyers’ complaints, has compiled a list of things to look out for before you put down that deposit.

The list is quite exhaustive for those who are thinking of buying “yet-to-be-built“ property direct from the developer. The association recommends that you check out the developer’s headquarters or its branches where you can do the following:

a) Ascertain whether the developerhas a valid developer license as well as a permit to advertise and sell properties, which is issued by the Ministry of Housing and Local Government. After that, you should check with the ministry on the validity periods of both documents; and

b) Check the financial status of a developer; its directors and its audited financial statements.
 
It is compulsory for a developer to display such information at its headquarters and branch offices as stipulated under Section 7(b) of the HDA.

Usually, after the deposit is paid and before the SPA is signed, the buyer’s lawyer would do a title search at the relevant Land Office. But, the HBA recommends that even before the deposit is paid, the buyer should himself check out the title from the Land Office/State Registrar‘s office.

The checks at these two offices can reveal:
a) A land’s proprietor;
b) The land‘s usage and any restrictions-in-interest it might possess;
c) The land title, and whether the tenure is freehold or leasehold, and if the latter, the date of its expiry; and
d) Whether the land is mortgaged to a financial institution
 
To find out more about the plans that have been approved by the local council, check out the local council and/or other local authorities.
Details that can be viewed include:
a) A project’s approved plans;
b) Its approved overall layout plan;
c) Its approved building plan; and
d) The developer’s submission of Borang “E”, which is the application for Certificate of Fitness for Occupation.

(The current Certificate of Compliance and Completion (CCC) issued by architects and/or engineers are now applicable for new developments.)
 
To complete your pre-deposit research, have a look at the Ministry of Housing and Local Government‘s website(http://www.kpkt.gov.my) where you can have access to:
a) A developer’s details;
b) A project’s details;
c) Progress details;
d) Statistics; and
e) A host of frequently asked questions on purchasing and related problems.

 
When sizing up a developer, be aware that it may be a subsidiary of a big developer. It is common practice for many developers to form a separate private limited company for every project that they undertake. As such, you have to find out the name of the bigger entity in order to check its reliability.

Strata titles: In the case of strata titles, HBA recommends that you get your lawyer to review all related documents including the ‘deed of covenants’, bylaws, rules and regulations etc. Check whether the strata title fees have been paid before the commencement of construction by the developer.

Be alert to any references to building repairs, defects and special funds (sinking fund) where you may have to make additional payments.

Get familiar with the formation of the Joint Management Body (JMB) or Management Corporation (MC) as the quality of the strata title property you buy and, thus, the continuing value of your unit, will be significantly influenced by how well the MC performs its duties, says the HBA.

A guidebook on Management Corporation can be downloaded from the website of the Ministry of Natural Resources and Environment (www.nre.gov.my). Additionally, you could go to the HBA website at http://www.hba.org.my/archive/focus/records.htm to see the names of developers and their projects that have failed to apply for strata titles for years.

Mortgage research: The other big homework to do before you even put down the downpayment is to find out the margin of financing you are eligible for. Not all banks give the same margin of financing and some banks will decline your application while others might approve it. So again, you have to find out which banks’ package suits you the best assuming you have already found out which are the ones that will approve your application.

“Borrowers need to do fundamental research before plunging into the mortgage market. You need to understand how the mortgage industry works, the different types of loan packages available, the roles of credit rating agencies and how banks determine
credit approval.

“Unfortunately, most people don’t conduct even basic mortgage planning, let alone having a medium to long term strategy. They should shop around for the best mortgage that fits their requirements and reduces their financial risks,” says Michael Yeoh, who has over 15 years of experience in mortgage financing with various banks.

As can be seen above, buying a property is not just about paying the downpayment for your dream home and then getting a loan after signing the SPA. It entails a lot of research, such as background checks on the developer, land title, and financing in addition to verifications of approvals.

The more well-prepared you are, the less heartbreak you will encounter along the way, not to mention avoiding unnecessary loss of money. And when you become more familiar with the process, you can start hunting for your second home, third home and so on, eventually graduating into a full-fledged property investor.

 

 

 

1 / 3