Developer Extended Payment Terms are better and easier to get than Philippine Bank Loans

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Permalink Reply by Mike on December 25, 2008 at 9:11am

Hi Beth,

Are you talking about the developer financing the whole purchase price less down payment or just financing the down payment and the buyer eventually gets a loan from the bank?

I know interest rates in Philippine banks are way higher compared to US banks. Current rates here in the US for a 30-year fixed loan is around 4.5-5.25%.

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Permalink Reply by Beth Collingz on December 25, 2008 at 9:13am

100 % developer "In-House" payment term financing, no banks involved

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Permalink Reply by Mike on December 25, 2008 at 9:30am

When you say 100% in-house financing, do you mean zero down payment or simply no bank involved?

Some developers I know offer zero interest for the down payment financing. Then the balance of the purchase price will be financed by the developer.

The advantage I can see with this approach is it eliminates the buyer qualifying for a bank loan. Now when it comes to the interest rate and terms of the loan, I am not sure if developers are better than banks.

Like you mentioned on one of our threads, there are no disclosure laws in the Philippines. Is it the same for financing? Are banks and developers required to provide complete and detailed disclosures upfront to prospective borrowers?

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Permalink Reply by Alvah Buckmore on December 25, 2008 at 9:48am

Dear Mike & Beth:

As I understand it, when a developer finances a loan for a buyer for either a house or lot, or both, he actually gets the money from a bank, or some financial institution,
and then forwards it to the buyer plus a little extra interest for himself.

So, in addition to his selling his property to the buyer and making a quick profit out of it, he makes an additional quick profit when he finances the loan for the buyer.

As an example, he offers a loan to the buyer for -- say 12 percent -- and then gets the loan from his bank for a lessor interest -- say 11 to 11.5 percent -- and keeps the difference as his profit.

In some places in the United States that is illegal. Though it makes a loan more readily available to the buyer, particularly one with poor credit and limited experience buying expensive things, it makes money very expensive for him.

Sometimes, when an inexperienced buyer finally learns of his naivety in this transaction and the high interest rate of his loan, he will re-finance his mortgage through a bank if and when he qualifies for it. Then, for the next few years, he will tell every "Tom, Dick and Harry" about his experience with a dishonest and greedy developer.

Respectfully,

Alvah

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Permalink Reply by Beth Collingz on December 25, 2008 at 3:19pm

Unfortunately, the reality is that developers in the Philippines are compelled to offer extended payment terms and 'In-House' financing for their clients simply because 80% of house buyers in the Philippines do not even qualify for a mortgage or loan with Philippine Banks due to the very basic [1] Nationality requirement [2] Philippine residence requirements [3] Age limitations [4] Proof of Income [5] Submission of 3 years consecutive Income Tax Returns ... to mention but a few requirements. Moreover, in actuality, Philippine Banks require an extremely high cash equity which in some cases runs to more than 50% of the selling price of the house or condo.

Most developers such as ourselves offer no prequalification 6 year payment terms with or without down payment and without interest for buyers of condotel units. We also offer a longer 12 year in-house payment plan with or without down payment. Examples of such extended payment plans can be found on our Web: http://www.condotel-sales.com [Lancaster Atrium Manila]

As for Bank loans or mortages there really is a very limited window within the extremely conservative Philippine Banking system.

Banco De Oro (BDO) a commercial Bank in Metro Manila recently approved a buyer's financing or mortgage plans for Lancaster Suites Tower I Manila Condotel units. The new financing scheme, a first providing Philippine Mortgages to Foreign Nationals married to Filipinos residing overseas for the purchase of Condotel units in the Philippines, is now available to unit owners (Filipinos, Filipino-Americans and Foreign Nationals married to Filipinos) whom are looking to purchase a Condo Hotel Suite or refinance their investments through BDO's Home Loan. However, the only reason buyers qualifiy is because this is a full recourse financing where the developer is actually a guarantor on the loan. Web: http://www.lancastersuites.com/index.php?option=com_remository&...

If a developer is extending 'In-House' financing and charging a fixed rate of interest they are required to state the effective annual percentage rate for the loan. Developers are in fact acting as a 'Quasi-Banking' operation in this case. With regards the higher interest rate, as the developer is extending a financing service and should be compensated, the buyer has the choice to buy or not.

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Permalink Reply by Beth Collingz on December 25, 2008 at 2:38pm

Unfortunately there are no disclosure laws in the Philippines. This is why buyers should only deal with reputable developers and companies in good standing.

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Permalink Reply by Mike on December 26, 2008 at 3:32am

Wow! I think I am now tempted to create an online grading or review system where consumers can rate banks, brokers and developers. This might help consumers find better deals and expose the bad ones.

What do you think?

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Permalink Reply by Alvah Buckmore on December 27, 2008 at 7:08am

Dear Mike:

I would, if I were you and in your present position, create an online grading system for banks, brokers and developers. It might very well open up a lot of opportunities and, at the same time, air out the dirty laundry.

I think you have an excellent suggestion. I like it.

Alvah

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Permalink Reply by Mike on December 27, 2008 at 7:26am

Thanks Alvah. I think we can raise the funds to build it but the biggest challenge will be...

Will the real estate and banking community support it, ignore it or kill it?

Let's now hear from the brokers and developers especially the ones who keep saying "professionalize" the industry.

Can someone start a new discussion for this?

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Permalink Reply by Beth Collingz on December 27, 2008 at 8:07am

Excellent idea and the subsequent comment threads will promote lively discussion !

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Permalink Reply by Alvah Buckmore on December 26, 2008 at 12:51am

Dear Beth:

I can't agree with you. You are attempting to rationalize greed and incompetence in the real-estate and banking industry.

The average Filipino's reason for not qualifying for a bank loan has nothing to with "[1] Nationality requirement [2] Philippine residence requirements [3] Age limitations [4] Proof of Income [5] Submission of 3 years consecutive Income Tax Returns ..." American banks have basically the same requirements.

Actually, the real reason the average Filipino can not afford his own house is: (1) His income is grossly unrealistic in relation to the cost of living and: (2) Money is too expensive to borrow from a bank.

Average income needs to be at least several times higher than its present level and the banks have got to be more realistic and honest in their rules and regulations. A 11.5 to 21 percent interest over a payment plan of 5, 10 or 15 years is insanely unrealistic, almost psychotic. Something is wrong in Denmark.
This policy does not match the average reality of the average Filipino citizen.

"Most developers such as ourselves offer no prequalification 6 year payment terms with or without down payment and without interest for buyers of condotel units."

Tell me something, Beth. How many Filipinos can afford to purchase a condotel unit with a 6 year payment plan -- with or without interest? Actually, I am a little suspicious about your statement "with or without interest." That doesn't ring with human reality around here. If your Company doesn't charge interest for this loan it only means it is getting its profit from a higher initial charge it conceals in the final price of the condotel. If true, that is illegal in the United States.

After looking at literally hundreds of houses, lots, apartments and condos in the Philippines, it has become painfully obvious to me that most of them are seriously over-priced for the average Filipino. There is no way he can afford it. Only the people from outside of the Philippines can afford them.


Respectfully,

Alvah Buckmore, Jr.,

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Permalink Reply by Beth Collingz on December 26, 2008 at 5:45am

Thousands of overseas and local Filipinos have purchased and continue to purchase housing, condotel or condo units in the Philippines where prices are similar to the purchase of a decent car. There are more than 200 high rise buildings under construction in Metro Manila alone where at least 60% of the units are pre-sold even before ground breaking. Several developers are launching new low and high end projects this month as the Philippine market remains robust amidst the global credit crisis. It is the fiscal policies of Philippine Banks that have so far shielded the real estate sector from the crisis evident in the US and elsewhere.

We do not have any problems with buyers for our developments. Our completed and now operational Lancaster Suites Tower 1 Condo Hotel was sold out in less than 18 months with only few remaining units available on resale basis whilst Lancaster Atrium Tower A is already 85% sold and under construction. We will open Tower B for sale towards the 3rd quarter 2009.

The gist of my comment regarding financing and mortgage loans in Philippines was aimed at both local and overseas Filipino and foreign prospective buyers of real estate in the Philippines such as yourself where, unfortunately, the reality is that developers are compelled to offer extended payment terms and 'In-House' financing for their clients whom do not qualify for a mortgage or loan with Philippine Banks due to basic [1] Nationality requirement [2] Philippine residence requirements [3] Age limitations [4] Proof of Income [5] Submission of 3 years consecutive Income Tax Returns ...

If the developer charges interest for this extended payment option and is getting its profit from a higher initial selling price there is nothing immoral or illegal about it. And there is definitely no greed attached. Alternatively, if a buyer pays a down payment or purchases the unit in cash he is entitled to a cash discount.

The socio economics of housing in the Philippines is yet another topic.

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