Up and down our great country, real estate developers and land subdividing and onward selling agencies thrive by capturing the dreams and ambitions of Kenyans from all walks of life.
Unlike Americans with stock equities, the British with pensions, or the former Soviet republics with precious metals, property serves as the main store of value among Kenyans.
Our optimism and visionary imagining of land banking in far-flung regions with expectations for future area development as well as buying into off-plan developments in urban areas creates opportunities for thousands to enter the ranks of property ownership in new ways.
While several high profile land agency and off-plan debacles gripped national attention as famous builders with flashy billboards throughout urban areas got exposed as Ponzi scheme con artists swindling innocent Kenyans, both property agents creating estates dozens of kilometres from other development and builders selling apartments before breaking ground still proliferate.
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Even during coronavirus times, advertising and direct marketing of such projects continues from credible real estate companies.
Cash payment plans feature as one typical option for buyers in off plan developments like Tsavo and their 20 percent deposit down payment requirement or celebrity endorsed Riruta Gardens also with 20percent upfront.
Remote subdivided land parcel purchases also require deposits when purchasing direct from the subdividing agencies on payment plans with Optiven requiring 38 percent to UIP Properties with 28 percent to Username Properties and their 10 percent and Safaricom Investment Cooperative fluctuating deposit requirements.
What are the benefits and drawbacks of requiring down payment deposits while offering long-term payment plans?
Research by Austin Kelly shows that deposit down payments on real estate purchases lowers mortgage loan default risk.
However, developers or land agencies with their own payment plans to their buyers do not face the same risk of loss in the event of default because losses stand remarkably low since buyer property possession does not occur until payment completion and the property can easily be sold to another investor without need for lengthy court
processes, auctioneers, name it.
Unfortunately, often developers of off-plan projects with inadequate financing use the deposits to launch or push their project further.
If a developer is adequately financed and does not need to rely on the deposit down payments to build their off-plan project, and thus put the overall completion into long-term doubt, then allowing investors to just start off on monthly payments without requiring a large upfront deposit would yield them considerably more customers.
Longstanding research by Gary Engelhardt shows much lower real estate purchases commensurate with higher deposit requirements due to challenges in raising so much capital at one time instead of over time for people who need payment plans in the first place.
Deposit requirements also particularly slow the uptake of off-plan estate and apartment purchases.
Notwithstanding investor cash constraints, upfront payments for off-plan developments raise buyer fear that they will lose their deposits as they are less sure that the project will continue. But consumers hold fewer reservations about making the monthly payments because they can see construction progresses as they make their regular payments.
A separate Gary Engelhardt study found that even slight increases in real estate deposit requirements held commensurate large measurable declines in buyer intentions to purchase a particular property.
Land subdividing agencies may exist as the most perplexing as to why they require deposit down payments upfront if many do not even subdivide, make land improvements, or pay the original owners until receiving most of the investors’ monthly payments.
Putting artificial barriers that reduce quantity of investors but gets more cash faster from a few is the classic high
margins with low volumes versus low margins with high volumes argument. But in remote land purchases, margins can still remain enormously high for the land subdividing agencies, but just several extra months longer to get full payments.
In low demand areas or slow uptake projects that offer direct payment plans, eliminating deposit upfront down payments proves a logical consumer satisfaction and customer acquisition strategic choice with negligible risk.
Dr Scott may be reached on scott@ScottProfessor.com or on @ScottProfessor
