Real estate is undoubtedly one of the most lucrative investments, owing to its diversification potential and the numerous benefits investors derive from it. Real estate investors enjoy passive income, predictable cash flow, and excellent returns through rental income, appreciation and profits generated as well as tax advantages. More so, they can build lasting equity and wealth through carefully chosen assets/investment property as real estate tends to have a hedge against inflation.
However, the emergence of several risk factors such as past failed investment schemes poses real threat to real estate investment and the reputation of companies that have several investment portfolios.
There are records of instances when subscribers to home ownership and other real estate investment plans in several countries, Nigeria inclusive, paid huge sums without getting the properties or apartments paid for. The investors were left to regret their investment decisions and devise means to get their monies back.
Whenever real estate investments crumble, it often means that the real estate companies fail to fulfil their terms of the contractual agreements and live up to the expectations of the investors.
So, the question is, what can make a real estate investment/company fail? The TOP reasons are discussed in the section below.
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Failure to do due diligence before selling property: Most real estate developers acquire large properties and start selling it to builders, investors or individual home owners for building and/or redevelopment without doing the layout plans and survey.
A layout plan helps to identify the division or proposed division of land into plots, roads, open spaces, amenities and other necessary details. It shows all the major features and structures on a piece of property such as the location of all buildings, porches and landscaping features.
And in Nigeria where Land Use Act 1978 vests the ownership of all land in the governor of each state, owners of plots from 10,000sqm and above must prepare the layout before applying for necessary approvals such as C of O, Governor’s Consent and other Titles. This ensures that developments of/on such land conform to the state’s town planning standards in terms of plot delineation, provision and reservation of roads, and drainages.
In the same vein, survey plan is very important since land ownership is dependent on borders and boundaries. Land survey marks aspects of the property such as elevation changes, and other features that cannot be gleaned by simply looking at the physical property. It shows the size and shape of the property, the location of rights of ways and easements, dimensions and distances to the boundary of houses, sheds, fences, utilities and any features of importance to the landowner as well as other things.
However, these developers often fail to do these before advertising their property to potential investors/homeowners. The effect of this is that it will be difficult to know the number of plots available on the land and the boundaries of each building that will be on it. Before they know it, the land will be over-subscribed beyond the plots available. This will then make it difficult for the companies to meet the expectations of the investors who will be left stranded for several months or years expecting their land allocation.
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Poor/Mis-allocation: Real estate investments also fail at times because the properties paid for are not properly and adequately allocated to the subscribers. This happens when many investors/subscribers pay to buy purchase different plots on a land but in the process of allocation, grave errors are made. The errors can happen in many forms and occur because the subscriptions are probably more than what the company initially prepared for. It can happen that the company allocates a portion that is less than the required measurement of a plot to subscribers.
Failure eventually happens when there are too many complaints beyond what the real estate company can cope with; when the company is unable to reconcile the errors made and settle the investors.
Problems with Finance
Inaccurate cost estimation/Poor budgeting: Most real estate investments fail because the real estate developers/companies in charge either underestimate or overestimate the costs of the construction projects. This is true of most developers who engage in developments or redevelopments and sell out units to investors or homeowners.
Cost estimation and budgeting is essential to the success of any construction project as it provides an in-depth description of the project and its expenditures. The technical, economical, physiological and political factors must also be put into consideration when preparing budgeting for a construction project. The cost of a project can change drastically overtime by technical and economic factors such as unexpected ground condition, design changes, poor project management, land acquisition cost, inflation and relative price changes, force majeure, shortages of material, exchange rate, inappropriate contractors, and funding problems. Hence, all the factors must be taken into consideration when preparing the budgeting of a project before its commencement.
Apart from having a direct impact on the profitability of the project, inaccurate estimation of construction projects cost leads to loss of reputation and credibility of project stakeholders, risk exposure, financial loss, and eventual failure of the project if the situation is not savaged. This is why most investors are not able to get their housing units or apartments after months or years of paying for it.
Mismanagement/Diversion of funds: Some real estate developers/companies do due diligence in cost estimation/budgeting but when it comes to proper management of funds, they fumble. There also others who execute multiple projects at the same time and fail to plan the finance of each of these projects separately.
The resultant effects of this is that the developers tend to divert the funds meant for a project to another project they perceive is not doing well or whose progress is not satisfactory to them.
They also divert the funds meant for a project that has been fully subscribed to another project with the rather wrong projection that they will get the money when investors start paying for the other project. By the time they realize that their projection is wrong, it will be too late.
Another reason for mismanagement of project funds is the use of one bank account for multiple projects. Developers who use a single account for many projects and run all at the same time often fall into problems. For financial accountability and appropriation, an account should be wholly devoted to a project.
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Lack of Quality Control
Poor mass production of housing units: There is nothing wrong in developing mass housing units or executing mass real estate projects at the same time because mass housing/projects programme is one of the ways to address housing deficit and bridge infrastructural gap in a country.
However, when it is done without proper supervision that can engender quality control, the outcome will be disastrous. Quality is one of the essential elements in construction. Quality assurance is thus needed to ensure the safety, durability and functionality of a project among other things.
Quality deviations come in form of lack of supervision, non-compliance to requirements and safety guideline, shoddy implementation of design and plan, employment of unqualified workmanship, use of outdated methodologies as well as purchase and use of sub-standard materials for temporary gains or to cut cost.
When quality control is not professionally done on a project, quality and standards are compromised, causing disruption of work on the project and structural defects which will definitely require increased and constant maintenance.
More so, poor quality control may result in structural failure or building collapse. This in turn leads to injury or death of construction workers if the project fails in the process of construction. After construction, the same fate may befall the occupants or users of the project.
When this happens, the investors run at great loss, the investments fail and the reputation of the developers as well as the contractors and others involved in the construction is at stake. The investors suffer more in that it will be difficult to retrieve their money if the developer of the project is among the casualties of the building collapse and the project is not insured. Even if the project is insured, it is not easy to get the insurance claims when the developer is not alive.
Project abandonment: Another reason why most real estate investments fail is abrupt abandonment of project.
Some of the causes of project abandonment are within the control of the developer while others are not. The ones that can be guided against by the developer include incorrect estimation, lack of available skilled personnel, choice of wrong location, inadequate planning, poor risk management, incompetent contractors, misunderstanding of the work requirement, and corruption and communication gap among the personnel. Those not under the developer’s control are inconsistent government policies, lack of accountability, high level of corruption, and unavailability of building materials, lack of utilities or infrastructural facilities.
The antidote to all these causes/factors is still proper planning, quality control and adherence to stringent standards and norms.
When project is abruptly abandoned and there is no hope that it will be revived, it leads to failure which puts the investments of those who subscribed to the projects at risk.
[READ FURTHER: 10 Things to Expect from Your Real Estate Agent when Buying a Home]
Real estate investments are rewarding if handled by a competent, qualified and diligent real estate company/developer. It can fail and cause the investors loss of money if not handled properly. The above are the major reasons why real estate investments fail. Read them as an investor in order not to lose your investments. If required, contact us for professional advice and consultation.