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Evergrande sells apartments before they are built to fund construction, and the purchasers pay mortgages during the build. If the company has insufficient funds
by simonh 3y ago
Evergrande sells apartments before they are built to fund construction, and the purchasers pay mortgages during the build. If the company has insufficient funds to complete ongoing construction, which gets delayed, purchasers stop paying their mortgages and the company goes into a death spiral. Meanwhile purchasers get shafted, buildings stand uncompleted, and construction workers and materials suppliers see demand collapse.
- eweb101 3y agoThis creates a situation where developer and homeowner interests aren’t aligned. Once the developer receives the money, they are not incentivized to deliver the house on time or do quality construction. The other model, where investors fund development before the house is sold, aligns both parties. The developer/investor wants to produce a good product so that it will sell at a high price and the buyer has the chance to inspect the property before purchasing.
- curiousObject 3y ago>The developer/investor wants to produce a good product so that it will sell at a high price and the buyer has the chance to inspect the property before purchasing That should be a solution. But not usually that simple, sadly The developer/investor wants to produce a product that LOOKS good so that it will sell at a high price. Read the other comments about quality And, those investors often sell the property before it is finished or before it’s even started. So you have the same problem, with a longer chain of middlemen
- ryukoposting 3y agoThere's some truth to this, but the appearance of quality is far more important in the latter scenario than actual quality. The average buyer isn't a housing inspector. They may have googled some stuff beforehand, but that's not saying much. It's another incarnation of the "informed consumer" farce.
- aden1ne 3y agoNote this isn't merely a Chinese thing. A variation of this is in fact the default way new units get build and sold in the Netherlands, for example. Personal anecdote. I had a mortgage for 2 full years before being able to move in to my apartment because I bought it before a single stone was laid. The way this works here is that the money is held into an escrow account for most of time, with the construction company only receiving payments in installments (e.g. 'roof finished'). Lastly, the final 5% of the purchase amount is held back until 3 months after the unit is finished, which can be extended if large defects are found. Bankruptcy risk was covered with an insurance, which was a condition to the mortgage.
- Sakos 3y agoI would have to assume the company didn't use those payments to fund the building of properties for earlier mortgages. The Ponzi scheme nature of it is the Chinese thing (not that it has anything to do with being Chinese, it's just the reality of Chinese real estate today and of the past decades). Paying for the construction of a new home in installments is something done across the world.
- woooooo 3y agoIf previous poster's description is correct, they would have to, right? Or have a revolving fund of debt which is the same thing with extra steps. Builder doesn't get paid until after building things, the construction has to be paid for somehow. I guess the money being in escrow puts the risk on the builder instead of the buyer.
- Sakos 3y agoIirc, Evergrande took on debt to pay for construction and used the money paid by customers to service those debts. That's the missing step.
- soared 3y agoWhat’s the purpose of doing one of these? I’m not seeing the benefit on your side of paying for 2 years of mortgage but not living in the property.