When buying real estate, choosing the right developer is obviously one of the most important factors which determine how happy you are with the final product.
Phuket has a number of reputable developers, both local Thai companies and foreign ones, each of them offering their own market expertise.
But no company is flawless.
If there is so much as a minor tremor in the market, any company, even a major corporation, can run into trouble. Unfortunately, if that happens and something does go wrong with a developer, every buyer assumes a parallel personal risk.
What Can Go Wrong with a Developer In Phuket?
It is certainly not unusual to hear of developers struggling financially. Some have to borrow heavily, while others barely survive from one sale to the next. There are even developers who fall in arrears with their commission payments to agents before a development is even finished.
Any form of financial difficulty is obviously worrying to potential investors. But the bigger the financial problems, and the more severe the mistakes made, the more chance there is of financial loss for buyers.
If at all possible, it is best to avoid any problems altogether by staying away from risk-heavy developers.
Small Local or Large Multinational?
Developers in Phuket can range from small foreign or small local companies to large foreign companies, and large well-known large Thai companies.
Among these local developers there are some which are even listed on the stock exchange in Thailand. Some of the international development companies are also listed on the stock exchange in the country they come from.
A listed company’s balance sheet may be easier to obtain. But Just because a corporation has a solid balance sheet back home, this does not guarantee they would continue to fund a project in Thailand which ran into difficulty.
Private company finances are a little more opaque, but that does not necessarily disqualify them from consideration. If a private company has their accounts properly audited they are probably not hiding anything. If the accounts add up, the company is most likely being run well.
For local buyers in Thailand, however, size does matter. Major Thai companies see their projects sell every unit very quickly purely because of the developer’s reputation. The high demand of such projects means these companies are unlikely to negotiate with you on price.
Because 51% Thai ownership is required in all condominiums, this carries a certain relevance for any foreign buyer. Because these projects from established Thai developers are in high demand, and because they are typically not willing drop their prices, it offers foreign investors a certain amount of confidence and stability.
Public Listed Company or One Man Band?
Buyers dealing with established companies expose themselves to less risk than someone dealing with a small developer. This is especially true if the project is the first one that a developer has ever launched.
When bringing new developments to market, the reputation of a developer can usually be relied on to bring in new buyers. A developer who earned a sound reputation deserves to be lauded for their continued success.
But mistakes can happen to even the best developers. They may be careless or prone to self-inflicted mistakes; they may be the result of unforeseen circumstance; or they may be just plain unlucky.
The company might have mismanaged a development, or become saddled with too much debt, or maybe the owners are funding expensive personal habits.
But they might also be a good developer whose location choice was unlucky, and became faced with regulatory or zoning changes which stopped the construction of their project in its tracks.
How To Avoid Risky Developers?
An experienced lawyer would be able to uncover previous wrongdoings, identify current mistakes or problems in the land or legal structure, and may even be aware of financial difficulties the developer may be facing.
In fact, sound legal representation is one of your best defenses against a potentially suspect developer.
Will I Get My Money Back?
Buyers who have paid deposits or a significant proportion of the purchase price often think they that will be the first to be reimbursed should the developer run into trouble.
However, the chances are that multiple parties are all waiting to get paid should anything go wrong. Obviously the best strategy is to avoid developers that may be overexposed to risk.
What Happens to My Investment If The Developer Dies?
Another risk that buyers could face when working with a smaller company is known as “Key Man Risk.” People don’t often ask about the contingency planning for the death of an owner, a senior partner, or a managing director.
It is a sad fact that such key individuals hardly ever make the necessary provisions to ensure the company or the investors are protected in the event of their death.
When dealing with a private company, you should ensure they have taken out insurance to protect against the death of someone who is crucial to the organization (i.e. a “Key Man”).
In summary, previous developments and reputation should not be the only criteria used when selecting a property.
Private developers potentially may expose buyers to greater risk, but this does not mean they should be discounted.
If thorough due diligence is conducted on a developer, the risk of anything going wrong is greatly diminished.
If an investigation of the developer still leaves you unsure, there is an old investment adage that applies: “If in doubt, stay out.”
This is an excerpt from the Thai Residential Phuket Property Guide 2019/20. To download your free copy, please click here.