Some developers build apartments without using investment loans. We explain what this situation means for apartment buyers.
In developers’ advertising folders, you can sometimes find information that apartments are built without loans (using only the investor’s own funds). This situation applies primarily to some small and medium-sized development companies that do not need external financing.
These include companies that relatively rarely start new investments. These companies can afford not to use a bank loan because the funds accumulated during the sale of premises and houses from previous projects allow them to start a new investment themselves. Good Finance experts decided to explain the difference between buying an apartment and a developer who does not have loans for construction.
The level of customer protection does not depend on the loan …
As a preliminary point, it is worth emphasizing that the use of client security solutions, such as, for example, housing trust accounts, does not depend on whether the developer has taken out an investment loan.
The development act (the Act of 16 September 2011 on the protection of the rights of buyers of a dwelling or a single-family house – Journal of Laws 2011 No. 232 item 1377) does not allow for the differentiation of buyer protection measures for a new house or flat depending on the investment financing.
The current development act does not devote more attention to issues related to the possession of an investment loan by the developer. The aforementioned legal act only requires the investor to include in the information form and the development contract a mention of the consent of the bank financing the investment for the non-encumbered separation of residential premises or the non-encumbered sale of a plot of land with a house (after paying the full price).
Such consent of the bank is necessary so that the flat sold does not have in its land and mortgage register a mortgage-related to the investment loan.
This bank statement will obviously not be needed if the investment is financed exclusively from the developer’s own resources. You can find out how to finance a development project from the information form. In addition to the loan’s share of construction costs, the developer must also provide the name of the bank financing the investment.
The amendment to the development act will introduce changes
With reference to the Development Act, it is worth discussing the important changes that the planned amendment foresees. Amendments to the Act of September 16, 2011, which is currently being pushed by the Office of Competition and Consumer Protection, assume, among others, that the developer will have to obtain the bank’s consent before the sale commences for an unencumbered separation of apartments and commercial premises.
Such mandatory consent of the bank will also have to apply to the non-encumbered sale of plots built up with single-family houses. These consents are to be a mandatory annex to the development contract. Their absence will entitle you to withdraw from the contract with the developer.
At present, early obtaining of the bank’s consent to the load-free sale of homes and premises is standard. Nevertheless, the amended Development Act, due to the introduction of an additional obligation for developers, is to better secure the interests of buyers of premises and houses from the investment financed by a bank loan.
An investment without a loan does not always have to be “cheaper”
Development projects that are not financed by a bank loan are sometimes advertised as more secure. In this context, it is worth noting that the mere possession of investment loans is not one determinant of the financial condition of a housing investor. Sometimes it may turn out that during construction it will need financial support from the bank. This situation will be quite problematic in the context of the amended Development Act.
From a theoretical point of view, development investments built without an investment loan may be slightly “cheaper” than similar projects that arise from bank financing. The reason for such a possible difference is the costs of interest and credit commissions, which the developer is at least partly trying to “pass on” to the customer.
It is worth remembering, however, that the investor also sets the level of satisfactory margin on the sale of apartments. That is why an investment created only with the use of own financing does not necessarily have to be “cheaper”.