The Housing Development (Control & Licensing) Act 1966 currently provides two systems of selling and buying residential properties in West Malaysia. First, the sell- then-build (STB) system.  Second, the build-then-sell (10:90 variant) (BTS) system.

Under the STB system, the homebuyer pays the purchase price of the property according to progressive stages of work done. The first 10 per cent is paid when the contract of sale is signed and the remainder 90 per cent is paid according to the stages of work done as stated in the schedule of payment.

Under the BTS system, the homebuyer pays the purchase price of the property in two stages: the first 10 per cent is paid when the contract of sale is signed and the remainder 90 per cent is paid when the property is delivered with vacant possession supported by the certificate of completion and compliance issued by the developer’s architect

Developers prefer the STB system. Homebuyers prefer the BTS system. Why are the parties’ preferences different?

To answer this question, let us consider the scenario from each parties’ view. Let us imagine for a moment that we are housing developers.

The housing developer

As housing developers, we know that the housing development business is risky. The risk we take is using and losing our huge capital to fund the development. In other words, there is no guarantee of completion. We may lose a lot of our money.

In this light, the STB system is a blessing. Under the system, our risk is transferred to another party, namely, the homebuyers. We use homebuyers’ money to build the houses. In business terms, we use OPM (other people’s i.e. homebuyers’ money) to make money. This OPM is good money because it is bank interest free.

Furthermore, our profit need not be shared with the homebuyers. It goes straight into our company’s coffers. It pays for the Mercedes Benz, the overseas vacations and the million RM bungalow home we always wanted. That is a great deal!

Sometimes, we would hear of another housing developer abandoning or stalling its housing project. Despite that, we observe that all would not seem so bleak for the company and its directors. The worst scenario would be that the company is wound up. Its directors are protected by the corporate veil rule that says the company and its directors are separate persons. So, the company is sued and finally wound up. But the directors may avoid liability for the stalled project.

In fact, we also observe that some of the directors would form another company under a another name and develop a new housing project. The project may be later abandoned or stalled. The new company may be wound up. And the same story is retold.

That is amazing! As a housing developer, we get to use OPM to make money. The OPM is interest free. If we are successful, we make big money. If we are unsuccessful, our company is wound up. Our directors would not have to bear the company’s losses or be held accountable to the homebuyers.

What happens to the losses? Who bears them?

Because we are using homebuyers’ money to complete the houses, the homebuyers will share the losses. Naturally, homebuyers will cry foul and ask the government for help. Due to its social obligations to the rakyat, the government authorities will find a white-knight to complete the project. Often, the homebuyers may be asked to pay a top-up to get their houses completed by the white-knight.

By then, our company would be wound up. As the saying goes, life moves on and after a few years, the ugly episode of the bad housing development is conveniently forgotten.

As developers, we say: We want the STB system. We will fight tooth and nail to keep the STB system alive. We have grown accustomed to using OPM. We will oppose any party that wants to change the system!

The homebuyers

We have considered the developer’s preference for the STB system. Let us now imagine we are the homebuyers. What would be our view?

Under the STB system, we, as a homebuyer, are paying a lot of money, be it from our EPF or family savings, before getting our houses. What if the developer is unsuccessful? We may lose all our money!

Suddenly a developer interjects and shouts, “If you don’t trust the developers, do not buy from us. Buy from the secondary market”. 

Calmly, we say, “Yes, we would not buy from you. Be rest assured of that.”

“But we know our friends may miss getting a chance to read this article. We know that you will persuade them to buy your STB properties. You will print colourful pictures and use enticing words to woo them. You will use sale gimmicks and smooth talk to persuade them to accept your business risks under the STB system.”

Then, we ask, “What happens if the BTS system becomes law as has happened in some other countries? Will this mean there would be fewer houses to buy? Will house prices soar? Will people be without roofs over their heads?” 

House prices have been increasing even with the STB system in place. A 1,200 sq ft apartment in Petaling Jaya may now easily cost RM260,000 or even more. And mind you, that is the price under the STB system. That is the price developers ask for although there is no guarantee of completion and delivery of vacant possession.

Suddenly, a developer interjects and shouts again, “But under a BTS system, the price will be RM300,000!”.

We are dumb founded. Probably by the silliness of the remark. We ask, “What if no one buys your property at that price?”

Due to lack of demand, some developers have offered completed houses launched under the STB system at near the original purchase price. These developers changed their marketing slogans: ‘Build Then Sell! 100% completed! All units must go!’

By using the words ‘Build Then Sell! 100% completed!’ in the advertisements, the message you send seems to be BTS is a good deal.

As rational homebuyers, we wonder. If we and our friends and colleagues only buy BTS properties, can developers continue building STB properties?  Logically, if developers do so, it is silly.

Instead, they will build BTS properties. The property prices have to be competitive to encourage sales. Building quality and workmanship standards would improve to avoid rejection by homebuyers. These are good improvements for the housing development industry in the country.

We repeat: We, homebuyers, want the BTS system. Why? Because we are risk averse to the STB system. We empathise with the recent dilemma of an unlucky group of homebuyers in the KlangValley. Their apartments were sold under the STB system. The homebuyers paid substantially for the purchase price. The apartments were practically complete but without an access road. They failed to get delivery of vacant possession of their apartments. They have to pay the bank interest for the money paid to the developer. Indeed, they are unlucky. Had the apartments been sold under a BTS system, the homebuyers would not have had this problem. Why should we share the developer’s business risk in the STB system? Give us the BTS system! Give it to us NOW!

Conclusion

We have considered opposing views on the housing development systems in West Malaysia. Clearly, the parties’ preferences to the systems differ. Will BTS become mandatory? We hope so. Under the BTS system, homebuyers can avoid being scapegoats to the developer’s business goals and profit margin.

By Robert Tan
Author of Buying Property From Developers: What You Need To Know And Do published by Sweet & Maxwell Asia (ISBN 978-967-5040-33-7) and a volunteer lawyer with the National Housebuyers Association.

The National House Buyers Association (HBA) is a non-profit, non-governmental, non-political organisation manned by volunteers. For more information, check out its website at www.hba.org.my or email info@hba.org.my