This is a complete guide on what to look out for prior to buying a house in Kenya. Taking this step is a major investment, therefore going into it armed with all the necessary information could literally save you from pouring your hard-earned money down the drain.
Cases of disgruntled home owners have been an ever-present feature in Kenya over the years, with shady developers fleecing millions from hardworking Kenyans.
A Civil Engineer by profession, Ochieng’ has worked in the real estate space around the world for over 15 years, and overseen landmark developments such as the Dubai Sports Complex (Dubai), The Palm Jumeirah (Dubai) and the Two Rivers (Nairobi).
“The first question anyone looking to buy a house/property asks is, why. Are you looking to secure a home for your family? Or are you looking at it from the point of view of an investor?” he elaborated.
It is vital to answer the ‘why‘, as the two options lead down separate paths in terms of things to consider prior to making a purchase.
For example, for an investor, potential returns take first priority while someone looking for a family is likely to prioritize the proximity to various social amenities such as schools, hospitals, retail and places of worship.
Once the ‘why‘ is answered, the next step is to identify the ideal property. This is subjective to individual preference, however, it is important for one to be able to identify the various red flags from the get-go, these warning signs will be tackled later on in the article.
“During the identification phase a buyer should consider factors such as; physical location vis a vis proximity to vital amenities such as health facilities, schools, access roads, church/mosque/temple, retail stores. A 45-minute travel radius to schools is considered ideal,” Ochieng’ explains.
Counting the costs
He further pointed out that it was important for any potential buyer to factor affordability during this phase. Is the property priced at a rate that he/she is able and willing to pay via whatever payment option is available?
Affordability is subjective and it simply means the ability to pay. A Ksh1 million house may not be affordable if it has to be paid within the construction duration, whereas a Ksh2 million house may be affordable to the same individual if it has favourable payment terms like lease/rent to own
If looking to make the purchase as an investment, it is vital for one to determine the actual valuation gains in addition to the rental yield the property is expected to achieve.
In simple terms, valuation gains can be defined as an estimate of gains based on the latest valuation. Specifically, they are the difference between the latest valuation and the valuation at the time of purchase.
For example, if an investor bought a bungalow in South C estate in 2013, priced at Ksh14 million and opted to take up a mortgage, he/she would end up paying dearly for the property at the end of the mortgage tenure. But if the same person pays in a period of 5 years as instalments he may end up paying approximately Ksh 16 million in the end.
Based on current market rates, high-end bungalows (4-bedrooms) in South C are currently priced at Ksh 21 million. If the investor then decided to sell the house, the valuation gain would be Ksh5 million but the investor will also have earned a rental yield.
“Many investors fall into this trap where they make a purchase without calculating the actual valuation gain, only to end up disgruntled in the end claiming there are no returns on real estate,” the professional developer pointed out.
Real Estate investment is a passive investment
An example of a good investment is investing in the affordable section of real estate. Instead of buying a Ksh21 million house in South C with a monthly rent of Ksh80,000, you would rather invest in a cluster of studios at Ksh1.2 million per unit with a monthly rental of Ksh 10,000 – Ksh 12,000.
How to Carry out Legal Due Diligence When Buying a House in Kenya
After the identification phase, due diligence is the next step and it is during this phase that most buyers end up in shady deals.
It is highly recommended that anyone looking to buy a house should employ the services of a competent lawyer for this particular stage.
The lawyer should then be tasked with carrying out the following tasks:
- Establish land ownership at the Ministry of Land, Housing, and Urban Development. It is at this juncture that the land registry title number is deemed necessary.
- Establish the legality of the development. This is done at the relevant county offices where one can easily access building permit approvals.
- Establish the credibility of the developer. A thorough background check on their track record. What other housing projects have they carried out and how successful were they?
- Establish the credibility of the contractor. It is important to note that this is not required by law. However, it is highly advised as some contractors have track records of walking out on projects midway.
- Ensure the developer owns the project land.
Red Flags to Look Out for When Buying a House in Kenya
Ochieng’ detailed common practices he has witnessed in Kenya’s real estate industry that, once spotted, should immediately raise a cause for concern.
- Seller using buyer’s money to develop the property (during an off-plan purchase scenario). If the developer lays out a series of scheduled mandatory payments (usually in incremental percentages) prior to breaking ground, the buyer is advised to pause and evaluate the viability of the purchase.
“A developer requires a deposit of 10-30% of the value of the property and some guarantees (usually a symbol of commitment) to arrange financial instruments and fund the development. Under such a setting, both parties are invested in guaranteeing delivery,” the developer stated.
In a scenario where the developer uses pre-sales to build, the buyer is mostly at risk because they don’t have the full picture of the developers financial plan.
“This is the sole reason mortgages are given once the units are commissioned, the banks do not want to participate in the construction risk,” he explained.
- A shady developer track record. If the developer in question raises any sort of red flags during the due diligence phase e.g. a tonne of lawsuits, it is advisable to simply walk away. The same applies in the case of a dubious contractor.
- Anomalies in land ownership. If legal title deeds and ownership cannot be established from the get go, run for the hills.
Several cases currently giving homeowners sleepless nights involve a land owner emerging from the shadows and laying claim to the parcel of land after a disagreement with the developer.
- Anomalies at the relevant county offices. If approved building permits cannot be found, one is highly advised to walk away to avoid any potential losses in future.
This could come in the form of a demolition in instances when the property in question was built on riparian land or a road reserve.
Once you go through the entire process detailed process and all boxes are ticked, you can then move to a sale agreement.
Once the sale agreement is signed by both parties, the deal becomes legally binding and enforceable under the law of contract. The buyer is required to pay a deposit of at least 10% of the purchase price (or such other amount as may be agreed by both parties) upon signing the sale agreement.
The deposit is held by the seller’s advocates as stakeholders pending completion of the transaction in accordance with the terms of the sale agreement.
Alternatively, the buyer and seller can mutually agree to open a joint escrow account mandating both advocates to oversee the purchase funds until completion of the sale.
“Real Estate is one, if not the only form of investment that can be termed as full proof. Anyone worth their weight in gold across the world has their hand in the real estate market. The reason is pretty simple. Shelter is a basic need,” Ochieng’ says.
The renowned developer is also the founder and CEO of Urban Feat Company Limited, a development and service solutions-based real estate entity.
He is an AFLI/Oxford University Tutu Fellow and won the Men Impacting Business Award in 2017.
Alongside his wife and siblings, Ochieng’ also runs the Forever Footsteps Foundation which empowers youth by providing education and healthcare through sports and arts.