Hong Kong’s experience shows that under reasonable rule design, it is possible to use the pre-sale funds in advance and control the risk of unfinished business.
Since July, the turmoil of unfinished buildings and the protests of owners stopping loans have made the pre-sale system of commercial housing a hot topic of public opinion. People discuss, what happened to the pre-sale system? Should the pre-sale system be stopped?
Looking at the mature markets around the world, the pre-sale system is the standard configuration of real estate transactions, and the pre-sale system itself has no original sin. The key lies in how to predict which links have loopholes under the framework of the pre-sale system, and design the rules in advance.
In this regard, the practice of Hong Kong, China can be used as a reference.
Under the pre-sale system, the core of preventing unfinished buildings is to manage the pre-sale fees. The biggest feature of Hong Kong in this regard is that the main body of supervision of pre-sale funds is not banks, but law firms.
Before the pre-sale of the project starts, developers in Hong Kong must first entrust a law firm to handle the legal documents for the pre-sale on behalf of the developer. All the pre-sale money generated before the handover, whether it is the down payment paid out of the buyer’s own pocket or the mortgage loan issued by the bank, must be transferred to the special account under the name of the law firm, and the law firm acts as the deposit keeper Hold and supervise.
In contrast, the pre-sale gold supervision account in the Mainland is established in the name of the developer. Therefore, it is very convenient for mainland developers to embezzle the pre-sale funds. As long as the bank is negligent for a while and does not keep a close eye on it, or the bank turns a blind eye and “passively cooperates”, the developer can transfer the money away.
But in Hong Kong, if you want to withdraw the pre-sale money in violation of regulations, you need a law firm to take the initiative and transfer the money to the developer. Violations are obviously more difficult, and evidence of violations can be easily fixed.
Before handover, Hong Kong rules allow pre-sale money to be withdrawn in advance for construction. How to ensure that money will not be abused or misappropriated? There are two important points here.
First of all, if the developer wants to withdraw the pre-sale fee, the primary purpose must be for building construction, and it must be paid. To prove this, they have to be signed by an independent third party Accredited Person (a title of architect in Hong Kong, conferred by the Hong Kong Government Buildings Department). After verification by the law firm, the money was directly transferred to the builder’s account, but it was not in the hands of the developer.
In addition, the withdrawal rule for construction funds is to do the work first and pay later. The builder must first complete a certain percentage of the progress of the project, and then apply for the corresponding construction payment with the supporting materials.
These two rules almost blocked the possibility of abuse of pre-sale funds. The money doesn’t go through the developer’s account, and if they want to cheat, they can only find the cooperation of the builder, but the builder has no incentive to do so.
The model of working first and paying later also prevents the pre-sale money from being overdrawn due to any “miscalculation”.
Lawyer Jiang Ruifu, chief partner of Jin Law Firm in Hong Kong, said that in Hong Kong rules, the use of pre-sale funds is divided into three levels according to priority. Construction funds rank first, with the highest priority. Under the premise that the construction funds and the remaining construction costs are guaranteed, the developer can use the pre-sale funds to repay the mortgage loan of the project in the bank. Because the developer mortgaged the project land to the bank, the house can only be handed over to the buyer if the mortgage is released first. After the above two items are met, if there is room left, the developer can use the pre-sale funds for new projects.
Hong Kong’s experience shows that under reasonable rule design, it is possible to use the pre-sale funds in advance and control the risk of unfinished business. No need to block money in escrow accounts.
