Opinion     

Let buyer beware in real estate uproar

Shanghai Daily, December 21, 2011

• On October 22, more than 400 angry home owners convened in front of the Shanghai office of China Overseas Land and Investment Ltd, demanding a refund after prices dropped on their recently purchased properties in the Royal Riparian complex in the city's remote Kangqiao area.

  The heartache of these owners over the loss of hundreds of thousands of yuan almost overnight is not hard to imagine. For first home buyers whose entire life's savings had been sacrificed in the pursuit of a "Chinese Dream" - only to see a significant chunk of its value evaporate right before their eyes - it was a bitter bill to swallow.

  Some buyers told media that Royal Riparian's sales agent assured them earlier in the year that supply was scarce and prices were going up.

  If the claim is true, then aside from a considerable language barrier, the case bears a striking resemblance to the Zhang & Liu vs Sydney Advance Realty suit in Sydney, Australia, real estate back in 2009. At that time a Chinese immigrant couple successfully sued a downtown estate agency on the grounds of misleading conduct, and recouped their 10 percent deposit on an off-the-plan purchase priced at just over AUD$1 million (around US$1 million at the time).

  Money back

  Justice White ruled that although there was an element of speculation in the couple's decision to purchase the terrace home they could barely afford in Sydney's city fringe suburb of Zetland, taking into account their poor command of English and lack of previous property investment experiences, they should be given the permission to rescind the contract and get their money back.

  The estate agency, on the other hand, was ordered to pay damages for misquoting an outdated newspaper article, using non-substantiated pitch such as "the area has been acclaimed as the primary of three areas set to double in value within five years," "the hottest investment spot in Sydney," and so on, and lying to potential buyers about the number of properties available for sale.

  The judge's decision reflected Australia's custom of giving preferential treatment to a comparatively disadvantaged party, however, it hasn't by far set a legal precedent for other Australian property buyers wanting to walk away from their purchases, or those who consider it the developer's responsibility to compensate them by footing the price difference.

  In China, where most buyers are native speakers of Chinese - all literate, and many highly educated - skipping the "necessary evil" of thorough house-hunting homework, and putting "naive faith" in the boastful preaching of a lone estate agency, may be less likely to strike the same sympathetic chord in a Chinese judge.

  According to attorney Zhang Qianlin of Debund Law Offices, pricing variation on a new development is a completely lawful marketing avenue. A claim for compensation is unlikely to be supported by a court of law as long as the contract of sale does not contain an escape clause that allows buyers to seek compensation due to price fluctuations, the demand for a whole or partial refund, or any other peripheral benefits.

  Yang Hongxu, a senior researcher with Shanghai based estate agency E-house China, concurred that while selling homes at lower prices when the clock strikes midnight may be an unusual business tactic, there's nothing illegal about it.

  Binding contract

  In most developed economies, a contract of sale is a legally binding document, which should under no circumstances be signed on the spur of the moment, especially one that concerns residential real estate, since it is typically an average household's largest financial asset.

  Even in China, contracting no longer allows plenty of room for a party or parties to later excuse themselves from their commitment to a durable execution. To enter into a temporary agreement subject to modifications later, when circumstances change, is no longer acceptable, as it sometimes was in the past.

  Besides, the times when the poorly educated and ill-informed masses were kept in the perpetual dark about important changes or trends are long gone. In this day and age, essential information is often a simple mouse click away. New government policies, for example, seldom catch people by surprise because they have often been years in the making.

  The cooling of the property market in the first-tier cities of China was mainly the result of a series of stringent government control measures that aimed at bringing home prices down to a level appropriate for the average income of a typical household. This reflects the idea that a home should primarily be a place to live, not a product of mass speculation.

  Such measures have been ratcheted up quickly since December 2009. Despite some real estate gurus' public appearance of confidence in the market, signs of a slow but steady decline in its forward velocity were there for everyone to see. Furthermore, history has proven over and again that when a property market cools, the outer suburbs are usually among the first to feel the chill, as in the case of the Royal Riparian.

  While there may have been some truly innocent first home buyers who happened to have entered the market at an inopportune time, for speculators who were stung by their overnight debacle, the lesson here is obvious - investments should never be an imprudent gamble.

  Mere naivete or carelessness on the part of home buyers has not been, and will not in the foreseeable future, be sufficient to shift the blame to the developers or estate agencies whose selling tactics were questionable - buyers were not forced to rely solely on their representations in their decision to purchase.

  The author is a freelancer who now lives in Shanghai.

   

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