Sunday, October 21, 2012

Homeseller Ignorance

The Sunday Gleaner recently published an article entitled Homebuyer Ignorance, addressing the costs involved in purchasing real estate and the failure of buyers to factor these costs and fees when planning to purchase their home. At Ashlaw we have written several posts here and here and also here on the chargeable costs on real estate transactions including the costs associated with mortgage financing, as we understand that purchasing real estate can be complicated and being informed is key. That is why we have recommended time and again that the parties - both vendor and purchaser - source reliable and separate legal representation so that they can get a good idea of the costs, the obligations and the technicalities involved in the process.

The question of  real estate costs is not only relevant to the purchaser. Sure the purchaser has to fork out more money but the vendor bears some costs too and so will net less sale proceeds the higher the costs payable.

Persons who are investing should bear in mind two things:
  1. Time is money, so the money you have today will not have the same purchasing power tomorrow, and
  2. Whether you are buying a house, stocks or even equipment for your businesses there will be costs over and above the purchase price. These figures must be added to your calculation in determining:
  • whether to make the investment and 
  • how long it will take for that investment to generate returns. 
Thus we were somewhat surprised when the National Housing Trust, the state-run organization whose Chairman is quoted in the above-mentioned Gleaner article, embarked on a frolic into the upscale housing market without apparently considering the implications.

In 2007 The Gleaner's business reporter informed the public about NHT's expensive experiment, stating,
The National Housing Trust (NHT), known generally to provide lower and lower-middle income housing solutions for Jamaicans, is to invest $280 million in the construction of 14 townhouses in upper St. Andrew, commencing September..
What does not surprise us however is the recent update advising that of the 14 units, 7 remain unsold. In an attempt to respond to the suggestion that the market has scoffed at its foray into upper income bracket, the Trust claims that the properties were put to market years after the announced scheduled completion date of September 2008. Accordingly they went to market  "in February 2011 in the case of Salisbury, and in September 2012 for Paddington." This invites one to ask the question why.  Why were the homes put on the market 3-4 years after the scheduled completion date?

  • Were there delays in completion of construction? 
  • Were there other considerations? In light of these delays or time overruns, were there also budget overruns? 
  • Was the original amount of $280 million exceeded? 
  • Were they waiting for the real estate market to improve and property values to increase? 
  • Have they increased the sale price to compensate for the delay?

Measuring the Return

Despite the NHT's mandate to provide housing solutions to low and middle income earners, the decision to engage in real estate construction and to sell property (whether to high or low income earners) ought not to be based on emotion but on financial measures. Whether it's the payback method, the discounting cash flow method or the internal rate of return method, the failure to sell 7 of the units represents zero (0) return to date on NHT's investment

As we have said above and elsewhere before, time is money and the longer the Vendor has to wait to collect the sale proceeds, the less present value that money has today and the lower the internal rate of return. This is compounded by the fact that there are no reports of the property generating income.

We remain perplexed as to the basis for NHT's actions which despite their explanation, suggest that they were affected by Homeseller Ignorance.