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Tuesday, August 2, 2011

Real Estate Tip: Beware of fly-by-night developers


Real Estate Story

Real Estate Tip: Beware of fly-by-night developers
Sometime in the early 90s, Mr. Macario invested in a subdivision lot somewhere in Cavite, since the developer's plan in that area looked promising. The development project was a master planned community with all the amenities that one could imagine. Many investors reserved for their chosen lots and the sales agent pressed Mr. Macario to reserve for a lot, since the place was almost sold out. Not wanting to be left out in the dream subdivision, Mr. Macario placed his hard-earned money in a lot in the said project, because the lot was at the pre-selling stage. The agent was very convincing and there were television advertisements for the project.

When Mr. Macario bought this lot, the developer was still financially stable, but then the Asian crisis came in 1997 and the developer fell into the hard times since it over extended itself with many other ongoing projects. The development stopped and Mr. Macario was not able to get the refund for his payment even to the present.

The developer made all sorts of assurances to the other buyers and investors that there would be foreign investors willing to take over the project, but all the said investors eventually backed out due to the unfavorable economic and political situation in the country. Other buyers sued the developer in court.

Since Mr. Macario paid for the lot in full, the developer insisted that Mr. Macario transfer the title to his name, to which Mr. Macario declined, since he did not want to pay for the real estate taxes. The developer and their project is now under receivership from the SEC, so it will take a very long time for Mr. Macario to get his money back. Mr. Macario has not yet filed a complaint at the HLURB, since a legal case may cost him a lot of time and additional cash outlay without any assurance that he will be paid back in full. Compared to the other investors, Mr. Macario could still count himself very lucky, since at the pre-selling stage, other investors bought whole blocks of subdivision lots in the said project which could easily amount to many millions of pesos.

Real Estate Tip

There is no guarantee that a project will be finished, even if the project is done by a reputable developer, person, or business group behind the project. There is always a risk involved in buying a lot during the early stages of development, especially if the positive economic projections do not turn out as they were forecast.

Many buyers and investors are misled into buying projects at the pre-development stages because of the track record of the developer. The reputable developer usually has some completed condominium projects or other residential projects. Some of the developers also have other business interests that have withstood the test of time.

Some of the risks in buying at the pre-selling stage of the project:
  • Fake agents and brokers
  • Fly-by-night developers
  • The developer did not obtain the necessary permits and licenses for the project
  • The project could violate some ordinances or restrictions by the local government
  • The ownership of the property could be in question
  • The mother title or individual titles could be mortgaged to a bank
  • The development might be delayed due to financial problems of the developer
  • The finished development might not look as it was presented in the glossy sales brochure
  • The association dues are very high
  • Use of substandard materials in the project
  • Unforeseen heavy flooding/ landslides
  • Utilities are not complete
  • The project might not be finished and even be abandoned by the developer due to financial difficulties
  • The bank might foreclose the property if the developer could not pay
  • The developer may not be licensed to sell club shares in the case of development of leisure clubs

In these cases, the investors or direct buyers will have a very hard time to get a refund back for their hard-earned money. In most cases, the investors and buyers would not be able to get a refund for the simple reason that the developers do not have anymore money and that their creditors are their first obligation.

To reduce their risks, buyers who are looking for a house to move in could scout for repossessed properties or used properties in the market. One difficulty is the need to look at the numerous lists of properties available for sale. The buyer has to actually see the numerous properties and check the papers that one thinks are right for him. It will take some time before they will be able to find the right place for them.

Another problem is the costly foreclosed and second-hand properties. On top of it, the buyer has to spend for the renovation. The prices of foreclosed properties are based on the appraised value which sometimes is even higher than the market value in the area. Hardly does one find a bargain, since everyone wants to make a profit in the sale of properties. With the burgeoning population, sellers are thinking that sooner or later there will be a buyer for their foreclosed or second-hand property.

Finally, a buyer should be wary of second hand properties or raw lands; the title of the property may be a fake.
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AboutStephen De La Rosa

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