Buying a Property: The first time developers

February 1 2010 Categories: Property General Issues, Thailand Property No comments yet

Should you purchase off plan?

From experience, we know that most problems occur when buyers purchase property “off plan”. Whether or not the transaction has a favorable outcome will depend solely upon one single factor: Did the buyer purchase from a reliable developer or not? Truth be told, purchasing off plan is no more dangerous when purchasing offshore than in your home country, as long as you are purchasing from a reliable developer who operates in the country where you are purchasing.

Top developers VS First time developers

Briefly, developers in any country may be separated into two main categories.

On the one hand, you have what I call Top Developers. These are mostly public companies listed on the stock exchange, such as in Thailand Raimon Land, Natural Park, Sansiri, Golden Land Property and Land & House to name only a few. These companies have substantial capital, access to financing and a track record of success.

Purchasing off plan from one of these developers is nearly risk–free, because these developers are concerned about their reputations. What’s more, when they do make a mistake (no one is perfect), they will endeavor to do their very best in honoring their contractual commitments and delivering the properties purchased to their customers. If they cannot deliver the property to the buyers, then they will reimburse them in full. Moreover, Top Developers are also known to honor their warrantee commitments.

On the other hand, you have small- or medium-sized developers. Here again, these are mainly reliable and professional, but the difficulty is there are also many unprofessional ones.

Who are the first time developers?

They are mostly investors who may or may not have previously worked in the real estate sector who wake up one day having finally found their true calling. They become land developers over night. In the rest of the book, I will refer to these people as “First-Time Developers”.

Are all first developers bad?

Not all First-Time Developers are bad, and some of today’s start-ups will become the Microsofts of tomorrow. Bill Gates was not born the chairperson and owner of Microsoft. He started his business from scratch with minimal capital, a company newly registered and with no prior accomplishments. He got to where he is today through dedication and sheer hard work. Therefore, it is possible to be new in a business sector and also be successful.

Why are first time developers a risk

However, the common denominator of all start-up businesses, including First-Time Developers, is that they are doing business against the odds. First-Time Developers nearly always launch their projects in spite of the odds against them. Generally speaking, First-Time Developers have no previous record of success in real estate development; or if they have a record, they were employees of a company involved in real estate only in their home countries.

First-Time Developers are often foreign investors newly arrived in the country where you are making your purchase. When they are foreigners (as many First-Time Developers unfortunately are), and even if they have experience in this kind of business, they will unable to refer to their accomplishments when developing their project in their newly adopted country because their experience was gained in a completely different context.

When they are foreigners, they are rarely able to speak, much less read, the local language and will have only a superficial understanding of the laws applicable to land development.

How does a first time developer run his project?

The average cycle of project developments by First-Time Developers will take place as follows: In most cases, the First-Time Developer has enough capital to purchase project land (They are First-Time Developers who start a project without even owning the land on which the project is developed.

Generally, they’ll have paid a deposit and agreed on payments by installment with the landowner) and to hire an architect to do some drawings and a master plan )In some cases, they will have enough capital to start the construction of a show house and laying the ground work for the utilities, but rarely more.

Their First-Time Developer status will make it hard or impossible for them to access commercial loans for financing their projects. De facto, the First-Time Developer has no other options. Once the original capital has been spent, continued financing for the construction and development of the project will come out of the pockets of clients.

First-Time Developers will easily sell the first five to ten units of their projects (10% to 20% of the whole project) to family members and close friends as they commence the construction in earnest. However, the level of sales will soon drop and/or the developer will begin to encounter problems dividing the land, and/or will have used part of the payments made by the customers to build their houses and market the project…

Whatever the cause, the time will come when the First-Time Developer begins to encounter financial difficulties as cash flow is less than anticipated, or the project construction will begin to suffer more and more delays as a result of unwise spending. After a time, those few existing customers will stop making payments and this is when the project fails.

First-Time Developers are not generally dishonest and they seldom start their projects with the intent of cheating or harming their customers. They firmly believe in what they are doing and, while they do not have the capital to fully finance their projects, they generally invest all of their savings in the projects and will end up broke if they fail. First-Time Developers hold little prospect of success and their projects are likely to fail as the elements of insufficient experience, knowledge and capital combine for the only outcome possible in most purchases from First-Time Developers, and that is failure.

Purchasing against the odds

From a buyer’s perspective, purchasing from a First-Time Developer means purchasing against the odds. I will, of course, provide you with the tools necessary for helping you separate the wheat from the chaff and distinguish reliable developers from the unreliable ones.

However, providing you the tools to recognize good developers is not enough. Experience has taught me that once a buyer has set his mind on a house and on a developer, there is not a lot that can be done to dissuade him from purchasing because, as I explained in the introduction, the decision to purchase an offshore property is usually an irrational and emotional decision.

Why do buyers purchase from first developers?

What makes First-Time Developers so successful yet dangerous is that they are most often people with outstanding personalities. You cannot help but like them, especially after they conclude the sale with a “nice guy” sales pitch and invite you to dinner at home where you will meet the family.

These dinners will often be unpretentious, a barbecue by the pool in an exotic garden and that’s it. You’re living the dream. You can’t imagine anyone else building your dream house and you’ll throw all caution to the wind as you refuse to listen to any prudent advice.

The second characteristic that makes First-Time Developers so seductive is that mainstream developers often built generic projects without a soul. While most real estate projects have a theme, they become aseptic at the end of the day and are built to please the greatest number of buyers possible.

Now, those who purchase real estate overseas want more than a plain mainstream architectural concept and First-Time Developers’ projects are often more attractive than big developers’ projects, because First-Time Developers, despite all their other failings, will put their hearts into their projects. These projects often look brilliant on paper and have great potential, but for the fact that they are most often developed against all odds.

How to find out if the developers you are purchasing is a first time developer?

I developed a test called the Rene Philippe Developer Test that is a unique and easy “Do it Yourself Test” that allows buyers of real estate to check the reliability of the developer they are purchasing from.

Because I have problems of formating every time I insert a table into a post I invite you to read more about the Rene Philippe Developer Test at http://www.renephilippe.com/developer-test.html

Note: This post is an excerpt of Rene Philippe Dubout first book: “How to Purchase Real Estate Offshore Safely: The Case of Thailand” published in february 2009.

About the Author:

The author Rene-Philippe DUBOUT is a lawyer since 1990 when he was admitted to Geneva bar (Switzerland). He practiced as a litigator there for 10 years until he moved to Thailand in 1999. In 2002 he founded with a group of Thai lawyers Rene Philippe & Partners Ltd a local law firm that specialized in Cross Borders Investments and Real Estate. He has been lecturing in several Thai Universities and a speaker to numerous conferences and seminars. He is the author of a must read book:”How to Purchase Real Estate Offshore Safely: The Case of Thailand”.

http//:www.renephilippe.com

Originally posted 2009-08-10 06:01:41.

Doing Business in Thailand