Expert: liznarr - 4/20/2009

Question
QUESTION: hi mr. liznar,

 i refer to your expertise of buying and selling a home. I work as estate agent in the city of hyderabad, pakistan. In the city there has taken a trend of raising an apartment block or two, and selling its units.  therefore many builders and developers have come into market. And along the road, many booking offices have emerged.  The builder and developer later hire a staff in booking office, who books the apartment under booking amount/initial amount paid to developer. then under the schedule, apartment buyer keeps making the payments , sometimes installments, and sometimes, bigger amounts, The project can complete in 40 months. (a maximum time). My first question is that, while the booking staff books an apartment after receiving initial payment, what basic particulars of buyer, booking staff must obtain on booking forms/

secondly , what rule apply? when the buyer after paying booking amount, want to sell the apartment to other interested party, after he sees, that he is getting profit on it.

what can be the responsibility of that builder and developer in situation no.2 who owns the project? what addiional charges the builder must levy on the transfer of apartment in his books, or the builder should not at all levy any charges as part of courtesy?

in third situation, if no body is buying the apartment from the first buyer, and the first buyer does not want to make further fractional payments to builder and developer, but the first buyer wants to get his booking cancelled, what service charges should be deducted by the builder  from the paid amount by the first buyer in process of refund. i guess refund process should take place according to the time span, a builder has handled the buyer's file.

regards


munsif ali from pakistan

ANSWER: Hi Munsif,

If I’m reading your question correctly, I think you are asking about pre-construction sales of a condominium project.  I can give you examples of policies as they apply in the US, as I am not familiar with laws in Pakistan.

If the apartments will be sold as condominiums, prior to construction and/or sales of any units, laws relating to such a project are covered in the US under a Horizontal Property Act which require that a Horizontal Property Regime be set up.  You would need an attorney to draw up this document.  Here is a link to the laws on Horizontal Property Regimes in SC where I work: http://www.scstatehouse.gov/CODE/t27c031.htm     

On your first question, at the time of setting up the Horizontal Property Regime and prior to offering any units for sale and/or lease, this is when the developer/builder would also make decisions as to specifics as they relate to your questions.  Contract of Sale forms should be developed at this time, and language incorporating whatever contingencies the builder/developer wants to address can be included.  This way, when a buyer wants to make a purchase, he knows in advance what will happen in the event of “what if,” and when signing the Contract of Sale, the agreement is legally binding.

In addition to the above, the builder/developer should also establish the rules for the units:  What is permissible and what is not; what will the amount of the initial monthly fee assessments be for the common elements of the units (electricity for common areas; maintenance of green areas, common hallways, etc.).

On your second question, in simplified language and as an example, in the US if a Buyer were to enter into a Contract of Sale on a pre-construction unit; agree to make payments and then want to sell to another party for a profit (or in some cases a loss) prior to the 40-month completion period, AS LONG AS the Contract of Sale is assignable, the original buyer can take his profit or loss agreed on with a new buyer and simply ASSIGN his Contract to the new buyer.  The new buyer is then bound to all terms of the Contract just as the original Purchaser would be.  Note:  The builder/developer may want to require in a case of assignment that the new buyer be approved by the builder/developer in advance of any assignment as to the new buyer’s ability to complete the remaining payments.

An Addendum would be prepared on the assignment, and the new buyer simply “replaces” the original buyer.  A copy of the Addendum on the assignment would then be provided to the developer/builder, who would generally not charge for simply attaching the Addendum to the original Contract.  

As to your second question, ‘If the first buyer decides he does not want to make further payments to the builder/developer,’ the language in the Contract of Sale should spell out what happens.  In other words, this decision needs to be made up front and incorporated into the builder/developer’s Contract of Sale form.  In essence, whatever is decided upon by the builder/developer and signed off on in the Contract of Sale with a buyer  is what would prevail.  The buyer could lose all or only a portion of his payments to date in such an instance.  It would not be fair for the builder/developer to have taken the unit off the market for an extended period of time and refund all the money if the buyer simply changed his mind.  Market conditions could have gone either up or down, and the builder/developer could make a profit by such an instance – or he could incur a loss.  

In the US, if a buyer simply changes his mind, decides he does not want to purchase a condo, house or other property and decides to “back out,” the Contract has been breached.  Remedies for breach should also be spelled out in the Contract of Sale.  Many times, a Seller here would probably take all monies paid to date and release the buyer from the Contract of Sale in such an instance.  A “RELEASE” form would be prepared and executed in such an instance.

If a Contract is contingent upon a buyer obtaining a loan and is unable to secure a loan, then the earnest money is refunded.

I hope the above is helpful.  If I have not answered what you intended, please write again.

Good luck to you in your venture.

Regards,
Elizabeth

---------- FOLLOW-UP ----------

QUESTION: thank you very much for your high quality explaination, and particularly many newer business terms that you introduced for enriching my knowledge. The business plan which i discussed comes under horizontal prperty regime set-up.

frankly speaking, i do not favour suh a business plan.  first, it is very tedious, and what if more than 50 persons gather together to draw up horizontal property regime, creating a fund to buy first a piece of land, and then start pre-construction sales of condominium project, by obtaining loan from any financial institution.

1- how a certain initial payment from an apartment buyer will be distributed among more than 50 or 60 partners? wether , u.s. horizontal regime laws address or cover income sharing by partners.

2- wether horizonatl regime set-up laws also fix a margin of profit to be earned by such project owners?

for instance, 50 partners purchased a piece of land for one million u.s. dollars? estimated construction cost on a 40 units apartments project is 2 million u.s. dollars. , wether the project owners will fix the apartment sale price by themselves, or sale price will be fixed under u.s. horizonatl regime set-up laws.

 however, sometimes to earn more and more profit things are kept confidential.

 regards

munsif ali

ANSWER: Hi Munsif,

If you have more than 50 persons create a fund to buy land and start pre-construction sales, the 50+ persons should establish a corporation and formulate a business plan.  The Bylaws of the Corporation will set out the purpose of the corporation and state the basic rules of how the corporation is to be run.  The business plan will cover (among other things), how and when profits will be distributed.

In such an arrangement, partners should realize this could be a long-term arrangement, and profits might not be generated immediately.  When units are pre-sold, partners would not spend any of the pre-construction money advanced by a purchaser, but rather wait until the completion of the property and a transfer of ownership for the unit sold has occurred.

If you want confidentiality within the corporation, you can have all partners sign a confidentiality agreement.

The horizontal regime would neither fix a margin of profit nor set the apartment sales prices.  Profit margins would be determined by the difference in total construction cost of each unit to the investors, and the final sales price, less selling expenses to the investors.  Start-up costs will need to also be factored in.

The listing prices of the units offered for sale would be set according to market conditions by the use of comparable properties in the area that have sold recently.  In the US, the generally-accepted time used by appraisers for comparable sales is a maximum of one year.  

Here again, for proper legal advice, you should consult with a good attorney who can draft a business plan based on discussions and agreements reached by the partners.  There needs to be a binding business and compensation plan in place, because anytime you have two or more persons involved (and especially numbers as large as 50+), there will most certainly never be 100% agreement after-the-fact.  If all 50+ investors are to be equal partners, all should share equally in start-up costs.

If the 50+ persons cannot reach an initial consensus, then you might consider starting with a smaller number of managing partners, bringing in additional persons as partners after the initial plan is set up.  Your corporation Bylaws could make provision for such an arrangement.

I hope the above is helpful.  Good luck to you, and again, feel free to write again with any additional questions.

Regards,
Elizabeth

---------- FOLLOW-UP ----------

QUESTION: thank you onceagain for your lucid english explaination. i can never expect any such useful legal advice and thorough explaination from pakistani legal counsels.

miss elizabeth, I was looking forward to creating a business plan in such category of business, where i could have continual investors, and those continual investors can be termed as shareholders or investors to whom i will pay a fixed profit at the end of month. now the question is how it is possible. In this context, I created an imaginary company issueing investment certificates. But for this purpose, My created company should have proper documentation, the business plan was forulated as follows;

1- I should have one million u.s. dollars. 5,00000 u.s. dollars were deposited in a bank and offered as security.  On this saving i entered into an agreement, that I want to obtain monthly profit on it. with this I also want to obtain loan, which can be 80 percent or 70 percent of total deposited amount.

 I deposited 5,00000 u.s. dollars in current account to meet emergencies. My company titled " moomal builder's investment company gave an ad in the newspaper attracting general public, that they can invest a sum as low as 500 u.s. dollars to 1000 u.s. dollars in moomal builder investment company, over which our company will pay them monthly profit. after we started to have investors, coming in, to get investment certificates, we started to deposit people's money in the same bank, where we deposited our 5,00000 u.s. dollars.  This started to result in more loan to our company for productive purposes. Our one department of moomal builder investment company started to deal with investors, and issue them certificates, and the other department indulged in construction activities. Our construction activities would be fast paced, and the profit which we will earn, will alo be distributed among continual investors.

now all this i create according my rationl thinking. If i see that investor want to draw or pull back their funds, a current account cheque will be ready to meet any such emergencies.

however i am so grateful for your thorough explaination, and request in case if any such business plan is covered by u.s. laws, kindly let me know.

regards


munsif ali
pakistan

Answer
Hi Munsif,

The last question you asked would relate to securities.  I cannot advise you there, because I have no expertise in the securities and related market.  If there is such a model plan in the US, I am not aware.  That’s not to say that there is no such plan, just that I do not know.

Good luck to you in your venture.

Regards,
Elizabeth