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.
There are a number of competent developers in Phuket, both foreign and local, with plenty of expertise in the market. But no one is infallible.
Every company, even large corporations, can face difficulties if there are hiccups in the market. Unfortunately, if that happens and something goes wrong with a developer, every buyer assumes a corresponding personal risk.
What Can Go Wrong with a Developer?
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 range from small local and small foreign companies to large local and large foreign ones.
Some local developers are listed on the Thai stock exchange, while some international developers are listed on the exchanges of their home countries.
It is relatively easy to check the balance sheet of a listed company, but the fact that a foreign company has a solid balance sheet at home does not mean they would hesitate to pull the plug on an overseas venture that ran into trouble.
The finances of private companies are less easy to assess. But that is not to say that private companies are a bad choice. A good private company with audited accounts obviously has nothing to hide. Provided the accounts are in order, it is likely the company is well-run.
Nevertheless, size can make a difference, especially to local buyers. The projects of some major established Thai companies sell out very quickly purely because of the developer’s reputation. Such companies have no need to negotiate price because their projects tend to be in high demand.
This is also relevant for foreign buyers, given that 51% of any condominium must be Thai-owned. The strong demand and price inelasticity of projects from these established developers translates into a certain stability for foreign buyers or investors.
Public Listed Company or One Man Band?
A buyer is exposed to much less risk from established companies than from a “one man band” developer, especially one launching their first project.
Many developers rely on their reputation to attract new buyers for their future developments, and those who have built a solid reputation deserve the acclaim they receive.
But anyone can make mistakes, and the reasons developers may experience financial woes can range from the unforeseen to the self-inflicted to the unlucky.
A company could be feeding the personal habits of its shareholders, overextending itself with debt, or simply mismanaging a project.
A good developer might be unlucky in their choice of location, or with a changing regulatory or zoning assessment stopping a project at any stage of construction.
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 dealing with smaller developers is “Key Man” risk.
What happens if the managing director, senior partner or owner dies? Is there any insurance in place to cover the premature death of a “Key Man”?
The reality is that key people very rarely, if ever, make provisions to protect the company or the investors should anything happen to them. Buyers should ask about these provisions when dealing with a private company.
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.