The build then sell is the new delivery system that implemented and introduced in April 2007 by the Malaysia government. This system was proposed by the previous Malaysia Prime Minister, Tun Abdullah Bin Ahmad Badawi as a way to an attempt to promote better quality housing and provide greater protection for home buyers. In addition, this system also to solve the problem of abandoned project once and for all.
The government announced that the build the sell concept will be executed together with the sell then build concept during two years of transition period in year 2006. Thus, the further evaluation and review within two years. Under the build the sell system, buyers are able to examine the finished houses and the surroundings before deciding to buy (House Buyers Association, 2003).
There are several countries implemented this concept such as United Kingdom, United State and others. Thus, the Malaysian government are trying to adapt the same concept to solve the issues such as abandoned housing or delay projects. There are the summary of build then sell system in Malaysia from years 1980 until 2006.
Definitions Of Build Then Sell Concept (Bts).
There are many definition of the build then sell system define by several parties. According to (Zulkfli Ahmad, 1999), selling of completed property with Certificate of Fitness for Occupation (CFO). A system where the developers are required to build and complete their housing project first before selling the completed houses to the house buyers (House Buyers Association, 2005). There are two variants of build then sell system applied which is completed build then sell 0:100 and partial build then sell 10:90.
Under the completed build then sell, the developer only sell the houses when it is fully completed and ready for occupied with the issuance of the Certificate of Compliance and Completion (CCC) (National House Buyers Association, 2004). The developers can only sell the houses development project after the total of construction works together with CCC.
Whereas for build then sell 10:90, the house buyers will pay 10% deposit upon signing the Sale and Purchase Agreement with the developer and the balance of 90% is made upon the completion of the houses or with the issuance of Certificate of CC. The partial build then sell 10:90 was implemented in Malaysia since 1 December 2007 and the Housing Development (Control and Licensing) Act 1966 and Regulation was amended to accommodate the new delivery system.
Financing Of Build Then Sell System.
In the build the sell system, the developers will not get the financial or progressive payment made by the house buyers to developers during or before the construction stage. Under the BTS scenario, a few developers used their own money or funding from financial institutions or bank to carry out project development without other sources of financing from house buyers or end financiers (Rehda, 2004).
Therefore, the developers will have to apply more financing from the financial institutions or used their own capital or both to cover all the costs in the development project. The bank should play an important role by providing the additional financing up to the stage of completion in order to make sure the build then sell system smoothly work. On the other hand, there is no progressive payment from house buyers. It means that developers required higher bridging loans in order to finance the project. Therefore, the financial institution or bank increases the higher risk. The higher risk means that the bank or financial institution will increase the loan pricing.
Under the build-then-sell system developers and bankers have to bear the overall development risks as they are investors. Thus, both of the parties have to understand the housing market before embarking into any development and would be cautious into committing speculative projects and developers are to re-engineer their business operation of project development.
There are difficulties to financing the loans under bridging finance because the financial institution or banks will give the loans only to the experienced developers who have required good track record and adequate financial strength. However, it can be disadvantages to the smaller developer who are weak in financial and track record to construct the build then sell project. The relationship of house buyers, bank and developers in the build the sell system are shown in Figure 1.
Figure 1: Relationship between House Buyers, Bank and Developer in Financing of Build the Sell System. (Source: Raymond, 1981)
From the figure 1, it shown that the relationship between three parties involved in financing of build then sell system. Each of the parties have their own responsible such as bank give bridging loan to the developers to carried out the development while end finance loan to the house buyers to purchase the properties. In addition, upon signing the Sale and Purchase Agreement the house buyers can pay 10% of selling price and not need to make any more payment after the Certificate of Completion Compliance for the houses has been issued. The balance of 90% will be paid after the completion of project. This way can avoid problems that are associated with the Certificate of Fitness before this where the house buyers get house keys but cannot move in because the Certificate of Fitness has not been issued.
The Differences Of Build The Sell Concept Malaysia And Others Countries
The differences of build then sell system in Malaysia and other countries based on the model or variant of build then sell that implemented and the characteristic of the model. Each of the characteristic sometime gives advantages or disadvantages to the house buyers, banker and developer on these countries such as United Kingdom, Thailand, USA, Singapore and others. In Malaysia, the variant build then sell system that implemented is partial 10:90 where upon signing the Sale and Purchase Agreement, the 10% of selling price was paid and the balance of 90% payment will only payable upon due the completion of houses with the issuance of CCC. This system also not involve of progressive payment made by house buyers during or before the construction stage and all the construction cost will bears by the developer with the finance of bridging loan from bank or financial institution.
However, there are three group of countries implemented the three variant of build the sell system such as completed 0:100, BTS variant (10:90, 15:85, 20:80, 30:70 and 40:60) and build then sell variant. United Kingdom, USA, Thailand and Netherland implement the complete BTS. The characteristics of this variant are the purchasers buy the house only when the house is fully completed and there will be no collection of payment from purchasers and house buyers before completion of the project. In addition, the developers obtain the financing from banks or use their own fund to finance their project and the development cost involves an element of risk which is borne by the developers and banks.
For the BTS (10:90, 15:85, 20:80, 30:70 and 40:60), Thailand, Singapore, Australia, Taiwan, Netherlands, UK and US. Under this model, the purchasers pay deposits ranging from 10% to 40%. The deposit aims to lock in the purchaser at the beginning of the development for housing process. The financial aspects also similar with complete build then sell where the developers finance their project with own fund and banks besides using the purchaser’s deposit. Different with China, Hong Kong and England, the developers build the houses first and in certain required time, the developers can start selling the houses.
Implication Of Build Then Sell - Advantages
Build then sell system usually have advantages and disadvantages to the house buyers, bank and developers. The main advantages of build then sell system to avoid the project from abandoned and delay. Firstly, build then sell system give advantage to the house buyers during purchase the houses. The house buyers can get to view the completed housing before paying any money to the developer. Apart from that, the house buyers can examine the quality and workmanship of the developer in construction the housing project. So that, the house buyers can avoid from being cheated especially through advertisement. This is because the advertisement sometimes not gives accurate impression such as design, layout and specifications of the property.
In the financial aspect, the house buyers only pay when the property issuance with the CCC because the developer responsible for financing the construction until the completion of the project. The developers can get benefit from exempted given by government in build then sell system. The developers also get to be paid the loans lump sum of the full purchase price. The developers which have good track record and strength in the development also get benefit to construct and manage the build then sell project. On the other hand, the banks also get advantage through given high financing to the developers.
Implication Of Build Then Sell â€" Disadvantages
One of the most disadvantages of build then sell concept is the industry will be control by only big developers who dictate the cost and pricing of the properties. Therefore, only a few developers can carry out this build then sell concept because of financial capacity. On the other hand, the costs of funding increase and this will be transfer to the purchasers and the selling price of property also higher. This is because the developers add the development cost in the selling price. Some of the developers will undertake housing development in more access location. This will cause the lower income groups of buying the properties even though the properties are low or medium cost.
The bankers also fund higher bridging loans and difficulties to the developers to borrow that loan. Under build then sell concept, it allows purchasers to pay the initial 10% deposit and not pay a single cent until the project is completed. The absence of progressive payments from the house buyers means that the developers would most likely require a higher bridge-financing from the banks to develop the project. At the same time, there is lack of assurance that the purchasers will take ownership of the property upon project completion. (Datuk Alan Tong, 2012). Other than that, in any business, there should be a binding agreement between buyer and seller to ensure the deal is fair for both parties, and neither party should take advantage of the other.
The Incentives By Government
The way that government to attract the developers to implement the build then sell concept with given the incentives. Generally, the purposes of giving the incentives to the developer to encourage them involve in the development project and help them to decrease the financial. Under build then sell concept, the government have provided four types of incentives to the developers which involve in the development project. The first incentive is the tax exemption on interest income. This tax exemption is given by banking institutions to the rescuing contractor or developer. Apart from that, rescuing developer be given a double deduction on interest paid and all direct costs incurred in obtaining loans.
Another incentive provides which is stamp duty exemption. This exemption means that all instruments executed for the purpose of transfer of land or houses are exempted. So that, rescuing the developers in term of stamps duty. Apart from that, exemption of stamp duty also given to the original house buyer in the abandoned project such as on all instruments executed for the purpose of obtaining additional finance and the transfer of the house. All the incentives provide by government usually give benefit to the three parties such as developers, bankers and also housing buyers involves in build then sell concept.
