Buying a home in Kenya: With many people’s eager to own their own homes, some are willing to pay for a house even before it is built. This arrangement, known as a pre-sale, allows the buyer to pay a small deposit and then pay the balance when moving in.
However, players in the construction industry caution that there are certain risks which buyers should watch out for.
Mr Wachira Hiuhu, the principal architect at architectural firm Apt Associates, says the major challenge with pre-sales is the developer’s ability to complete the project. He advises that potential buyers scrutinise the developer’s record to find out how many projects they have completed.
“Interrogate the profile of the company closely,” he says. “You might book what looks good on paper, but delivery becomes an issue.”
Mr Hiuhu says the buyer should compare what a developer says will deliver with what they have delivered in the past. “If the difference is huge, abandon the purchase,” he advises.
Meanwhile, Mr David Gaitho, the vice-president of the eastern region of the Africa Association of Quantity Surveyors, notes that many pre-sale purchases in Kenya have ended in disappointment because the developers either did not have enough money, or lacked the requisite approvals.
Mr Gaitho says: “Before you commit, ask the developer about the financing of the project. If I am paying you 10 per cent [deposit], where are you getting the 90 per cent?”
As an additional measure Mr Gaitho advises buyers to have a non-completion penalty clause in the agreements with the seller.
“Don’t be excited by the offer price,” he says. “Ensure that the agreement has a clause on non-completion-on- time penalty because if you are not protected and the project stalls, you lose,” he says.
Mr Daniel Kamau, the executive director of real estate at Fusion Capital, a real estate developer and private equity firm, says that before embarking on a project, a developer should complete all due diligence processes, mainly statutory and legislative clearances. He/she should get planning and building permits from the local authorities, as well as environmental approvals from the relevant bodies.
“More often than not, these statutory and regulatory pre-development clearances are beyond the developer’s control in terms of time,” Mr Kamau says, “so it is prudent to undertake them early in the life of the project and only begin work after getting all the necessary permits.”
Mr Kamau says a developer should identify any risks that might arise and come up with appropriate mitigation strategies. For instance, the risk of exceeding the budget should be factored in at the capital budgeting and financial forecast stage, he says
“It is important to be as accurate as possible in budgeting for the costing of the project in the early stages,” he says.
. “Adequate contingency provisions ranging between five and 10 per cent should always be made to take care of any eventualities,” he adds.
“The profile of the company delivering the project is very important,” he said. “If a company has not delivered similar or almost similar projects, the project could fail.”