Buyer of New Apartment May Not Get a Home if Developer Goes Bankrupt

Buyer of New Apartment May Not Get a Home if Developer Goes Bankrupt

Buyer protection guarantees offer some security but often fall short, especially when construction projects are abandoned halfway through. In the worst-case scenario, a builder’s bankruptcy can leave a new home buyer without a home and significant financial loss.

The construction industry has been grappling with a string of bankruptcies that have impacted companies of all sizes. Experts agree that the trickiest situation for a buyer is when a property developer goes bankrupt in the middle of construction. This can be incredibly complicated if the buyer has already made sizable payments for a property that has not been fully constructed.

In Finland, many new projects are RS properties or apartments sold during the construction phase. When a developer goes bankrupt during construction, it is theoretically possible for the project to be completed, but this rarely happens in practice.

Buyers may be left in the lurch, with the possibility of losing their investment. In some instances, they may have to shoulder the responsibility of completing the project, which will inevitably come with additional costs. The only security for buyers in this situation is the construction phase security, which is initially at least five percent of the contract price and later at least ten percent of the total amount of the trading prices of the shares sold.

Experts have pointed out that this security often falls short, particularly when there are significant repairs to be made. Even after construction is completed, defects may only become apparent years after the developer has filed for bankruptcy. In this case, the protection is a non-performance guarantee, which is essentially an insurance policy with a maximum compensation amount of 25 percent of the construction costs.

However, this too is often inadequate, particularly if major problems emerge in the housing association. There have been instances where no performance bond has been obtained for the housing company, although it is mandatory in new sites other than RS projects.

There are inherent risks in acquiring an apartment, and buyers can take steps to manage these risks. It is recommended to research the construction company’s background and financial situation before making a purchase, and to hire a construction observer to monitor the construction progress.

Experts also suggest that the current legislation needs to be revised to better protect building societies and shareholders in bankruptcy situations. Among other things, they propose increasing the amount of collateral during and after the construction phase, expanding the non-performance collateral to cover bankruptcy during the construction phase of a residential building, and making collateral more easily accessible. The law should also provide clarity on who takes over a construction project if the developer goes bankrupt midway.