Buying a Property – dealing with issues caused by price fluctuations.

——  February 13, 2020

In previous posts, we have looked at property acquisition strategies, we have likewise given some tips to follow when looking at acquiring property either through purchase or construction and also discussed the need to properly ascertain title before jumping onto the property acquisition train. In examining further possible pitfalls even if all the foregoing have been carefully followed, we have discussed material price fluctuations and how these can affect real estate development projects.

In the event price fluctuations do arise on a project however, how does one respond to this? As many may have read or perhaps heard about, quite a few buyers/subscribers have been left frustrated despite having paid huge sums of money towards the purchase of their dream home or a seemingly great-looking real estate investment opportunity, only for such a project to either never materialize without any credible explanations or plans for redress, or to be delivered several months or years beyond the agreed delivery date. It could even be a double whammy situation whereby a potential buyer pays an additional sum and the project still gets delivered a year after the actual delivery date.  Also, some developers in response to price fluctuation reduce the quality of materials used which could eventually lead to a collapse in the long run. This could indeed make the house-buying process a gruesome one. 

Some of the issues that material price fluctuations can lead to in an ongoing real estate project include;

(1) Prolonged delay in delivery of project,
(2) Upward review of agreed sale price whilst project is ongoing or when completed,
(3) Abandonment of the project by its developer,
(4) Substandard quality of end-product, and many more.

Whilst the discussion below may not outline all possible steps available in dealing with or avoiding issues caused by price fluctuations, they do provide some guidance for potential buyers in mitigating their risks;

1. Research the Developer’s project history and seek testimonials.
Such research should provide valuable information regarding the Developer’s track record and whether he/she has a history of defaulting or delivering. Testimonials should also give an insight into what previous clients of the developers think of the company and should immediately throw up Red flags if these are largely unfavourable

2. Conduct regular physical inspections
Potential buyers should understand that the brochure and plans sent to them by a developer are intended to cast the Project in the most favourable light, however, nothing can replace physical inspection of the project once it has commenced. If the Buyer is not resident in Nigeria, the subscriber can ask family or friends that are resident in the country to help carry out such inspections. Through regular inspections, a subscriber can spot imminent issues early enough. For example, a situation where there is a possibility of the project being abandoned by the developer due to little or no progress in work for a considerable period of time can be spotted early upon inspection. At this point, the subscriber can then weigh the options available, based on the sale terms of the project which could include withdrawal from the scheme early and getting a refund, putting pressure on the developer to deliver, preparing to pay a reasonable agreed amount as additional sum above the sale price or in really bad cases, seek legal redress.

3. Make contingency provision for possible additional payments.
As highlighted in a previous blog, potential buyers may also look at making some additional contingency sum available over the agreed sale price to cater for possible price variations in the course of the project. Though it seems a hard pill to swallow, in some cases where these type of issue(s) arise, there might be very genuine reasons for such review in the sale price. Whilst experienced developers allow for possible price fluctuations on an ongoing project, nothing could have prepared many developers well enough for the sharp increase in forex rate experienced in Nigeria in 2016. Though some experienced developers still weathered the storm, it was a really tough one as many could not, with the Dollar ($) to Naira (N) exchange rate rising from N344 to a dollar, to N498 in the space of less than Six months, and further leading to an equally sharp increase in cost of construction materials.

4. Consider a review of the project sales terms
In the case where price fluctuations on an ongoing project tend towards the developer’s inability to deliver the project, either at all or within the projected time, potential subscribers can pull out of such projects and diligently search for a more reliable developer to partner with. The error in such a case may have been made right from selection of the developer. Schemes that are seemingly priced low are not necessarily a favourable option, so in a case whereby the potential subscriber has made a mistake in selection of a developer but has the option to withdraw from the scheme based on the options available in the sales offer, it is best to take this step as soon as possible.

In the words of the former U.S President – Theodore Roosevelt, “Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth.” Many potential real estate buyers that have been faced with issues of prolonged project delivery, non-delivery of the project and much more tend to become afraid of getting into real estate investment at any level. The good news is, it does not have to be so once you have the right knowledge.

Written by Babajide Aloba