Why pre-selling property is fast gathering speed

By Harold Ayodo

Today, more Kenyans are buying homes and offices straight from the floor plans and months, even years, before they are constructed. To many people, especially middle-income earners, this is the best opportunity towards finally owning a home because this plan gives them more time to organise themselves and seek funding via mortgages, loans, increased business or heightened savings. All that is needed to book a house off the plan is payment of the stipulated deposit, which often ranges between 10 per cent and 50 per cent.

Another advantage of pre-buying, which is particularly attractive to speculators, is that prices of estate homes that are still on plan but are not yet under construction are a lot cheaper than when construction begins. Prices progressively escalate during construction such that, by the time a house is complete, its selling price could appreciate to more than 100 per cent from its original price.

Brooklyn Paradise pre-sale apartments in Kilimani Nairobi. Photo: Lenny Taabu/Standard

Real estate experts concur that the quest to invest in houses and offices has enabled those unable to buy property in cash embrace the plan. In essence, buyers review the architectural drawings and discuss the proposed development with either a developer or estate agent before a payment plan is rolled out. This is especially true of Nairobi and its environs.

For the developers, pre-selling units allows them to accumulate funds in instalments, thus reducing their risk as they do not inject all their monies into the housing or commercial projects. As a result, investors in the property market are raking in millions of shillings from pre-sales thanks to the ever-appreciating value of real estate.

Big discounts

Kenya Private Developers Association (KPDA) chairperson, Dr Laila Macharia, says the value of a unit can increase by over Sh1 million on completion. "You can buy a house at Sh5 million before completion but the increase in property value makes it cost Sh6 million after construction," she says.

Villa Care managing director, Daniel Ojijo, concurs. According to him, over 80 per cent of property sales in Nairobi are pre-sales with most developments selling out long before completion. "Pre-sale purchasers get very high discounts as initial prices are at times half that of final sale price when complete," he says.

Villa Care marketing Manager Chesbil Ochieng (right) and Marketing Executive Goretti Ouko show Louis Agili, a client, a pre-plan of Lavington Pride. Photo: Evans Habil/Standard

Ojijo adds that some developers allow structured payments during construction enabling prospective investors manage their cash flows more effectively.

AMS Properties’ corporate development director, Ronal Samani, says investors prefer buying property off-plan to maximise profits. "Major benefits for potential purchasers is the capital growth that accumulates from the off-plan stage to physical completion of the property," he explains.

Capital growth

AMS Properties have sold most of their properties, including Five Star Estate, Chester Court, Hampton Court, Venice Court and Carlton Court, off plan. "Reserving a property at off plan stage entails having the architects floor and site plans, elevations and specifications before someone decides to buy," says Samani. "Off-plan buyers gain from their decision as there will be more demand once the property is completed."

Most desired plots in a development are those that will benefit from greater gains in capital growth. Several off-plan investors also secure plots in areas that will maximise their rental return and minimise void periods.

Developers selling their properties off plan offer discounts on the price list to pre-sale buyers. However, not all property buyers are comfortable with the idea of investing on a house or office that they cannot see and physically inspect. In addition, buyers must be careful when dealing with developers as some have disappeared after receiving down payments.

Informal developers

The rule of demand and supply applies in the property market in the wake of sensitisation on investment. "There is a high demand for property and supply is inadequate," Ojijo says. "This has made the option for pre-sales more attractive due to the perceived appreciation of sale prices."

Ronal Saman, Corporate development director, AMS Properties Ltd

Macharia agrees that pre-sales give prospective investors the benefit of changing the design for an individual house while construction is ongoing. She believes the advantages of pre-sales outweigh disadvantages because the developer cannot inflate the prices to benefit from increase of property value.

"The buyer signs a sale agreement with the developer that determines the sale price before the property exchanges hands," she says.

She, however, warns that investors should be careful before committing their fortunes because over 80 per cent of developers in Nairobi are informal. "Buyers must make sure they are dealing with formal developers because our registered members adhere to a code of conduct," she says.

Mortgage companies extend loan facilities to help clients purchase homes after confirming that the contracts are valid. Savings and Loans’ (S&L) head of business development, Joram Kiarie, says clients have to settle 20 per cent of the sale price before they step in.

"Our condition is mainly that the buyer shows that he/she can pay 20 per cent of the purchase price before we pay the balance," he says.

Villa Care has been involved in several successful pre-sale projects from small, medium to high-density residential estates. "Five Star, Diamond Park, Valley View Park, Water Front Gardens, Oak Valley and Muringa Court are among our successful projects," Ojijo says.

Construction delays

Some dreams have, however, turned into nightmare after either the investor or the developer failed to deliver their part of the bargain as contracted. Tim Mbugua is one investor who paid deposits running into millions of shillings for units along Mombasa Road that never materialised.

"I purchased 15 houses off plan and paid deposits for all of them," he narrated. "They were due for completion within one year but that never happened."

The properties comprised three bedroom houses costing Sh3.2 million and four bedroom houses selling at Sh4.1 million. Mbugua says the developer of the real estate firm planned to put up 400 houses in the area.

"At one time I was told the construction had slowed down following a delay to obtain a certificate from the National Environmental Management Authority," he recalls. "I struggled with the developer until I got some of my money back but I believe others have not."

Architects say a myriad factors lead to delays in erecting apartments. Peter Wasilwa, an architect, says a professionally constructed four-storied apartment should take about five months to complete. Delays arise when developers struggle to gain adequate financing and obtain legal permits from the City Council and the environmental authority. Other delays include poor project management and regulatory framework.

Down-payment

"Pre-sale is a concept where the developer finalises the design and documentation before he constructs a show house," Wasilwa says. "A show house is a sample of a house or office that is shown in the plan of the developer to attract prospective investors."

Prospective homeowners choose their preferred units and commit after payment of the agreed down payment (which is a percentage of the sale price). Macharia says KPDA welcomes complaints about their members from unsatisfied investors.