Buying unbuilt houses? Observe due diligence, due diligence and due diligence

For many potential homeowners using the off-plan model, 2020 was a bad year.

As Covid-19 hurt people’s earnings and developers struggled, anxiety over off-plan developments heightened.

At the height of the pandemic, many established developers went under, raising questions about the validity of the off-plan model.

Nashon Okowa, a construction project manager, in his book Don’t Buy That House, says that greed has led to dishonesty in the real estate industry.

Many buyers are often given a raw deal. The complaints that flooded social media in 2020 alluded to this reality.

“...The urge for supernormal profits at the onset of the boom attracted many players, resulting in stiff competition. The resultant effect - unbridled greed,” writes Mr Okowa.

The main risk in this type of property purchase, says Mr Okowa, is that the buyer is uncertain they will get the house in the first place.

And if they get it, will it be the same one they wanted and paid for?

“For a country with an ethics deficit like ours, this concern can be magnified, and rightfully so. Putting money into what is not ready and sometimes what has not even begun is a risky venture. It is not only the enormous risks that face such a developer but also the force majeure risks - the acts of God - that could be outside the control of even the developer,” he says.

While an advocate of the off-plan model, Mr Okowa knows that buyers are at the mercy of unscrupulous developers.

This calls for more due diligence. Mr Okowa has mediated in disputes that have seen would-be buyers lose their money.

So what does it take to make sure that one closes the deal successfully?

Tireless due diligence, he says. But where does it start and where does it end? What kind of due diligence would one carry out on a project that only exists on paper?  

“The first step before deciding to buy a house off-plan has to be looking into the history of the developer,” says Mr Okowa.

“This has to be done even before you delve deeper into the other project details. You must always pay ruthless attention to history.”

Careless buyers have walked straight into the traps of cunning developers who have been at the game for years.

Buyers should be keen to check the registration status of the development company involved in an off-plan project.

Mr Okowa says this will reveal if the firm is properly registered under the Companies Act.

“People have lost huge sums of money buying houses from fake, non-existent companies,” he says.

“Considering what will be required of you in the subsequent due diligence steps, this is the easiest (step) and, of course, the most overlooked by many buyers. The spurious developers are well aware of these hidden gaps that most buyers will overlook.”

The buyers should also check if the company is registered with a known professional association, such as the Kenya Property Developers Association (KPDA).

“Such associations vet applications for membership before registration,” says Mr Okowa.

A close check into the profiles of the directors of a company, including the founding directors, also helps avoid falling into the hands of phoney dealers and proxies who may end up killing a buyer’s dream.

“You will find that more often than not, they do not hide their faces because they know most house buyers do not look into such details,” says Mr Okowa.

The history of some of these directors might just pop up on Google, with a quick search likely to inform if one goes ahead with the deal.

A regular change of directors in a company is a red flag. A company that is involved in underhand dealings will try to hide its identity as much as possible by ejecting directors who have been exposed.

“Unscrupulous developers have an obvious alacrity to change directors often,” says Mr Okowa.

The same happens with the company’s name; the more it changes, the more the cause for concern.

Many of the firms are often changing names to conceal identity as they run away from past misdeeds, including perennially incomplete projects and other forms of subterfuge.

A close look into a company’s past projects is also important. This allows you to know how many it has delivered and what the buyers had to say about them.

Mr Okowa also says many companies focus on marketing at the expense of delivering the project.

“Get down to know whether you are dealing with a novice developer or one that has been in the market,” he says.

“If the answer is the latter, begin by listing the projects they have done in the past.”

Buyers should also find out if professional consultants were involved during construction.

The names of the project managers, engineers and architects involved in the project also give credibility or lack of it.

Mr Okowa says a buyer should also consult previous buyers about the quality of their houses.

He says while seemingly a tedious task, conducting due diligence on a potential project is not something to be ignored.

“Whenever I have suggested this to the many buyers who seek my advice, the majority always seem to want to disregard it. You want to spend Sh10 million buying a house and you think simply making a background check on a developer or consulting past buyers is a lot of work?” quips Mr Okowa.

If, for example, all the buyers seem unhappy with the units they have bought, you can go ahead with the purchase.

Looking at other properties that the developer has put up gives an idea of the quality of work they are able to deliver.