Flat denial

Why homeowners are tearing up sales contracts

A sales agent waits for customer in front of the model of a property development at the 5th China (Shenzhen) Real Estate Fair, in the southern Chinese city of Shenzhen

To broker or to break a deal?

Just over a year ago, those looking to sell their property in China couldn’t wait for the ink to dry on the contracts. Now, many are instead reneging on sales agreements.

Southern Metropolis Daily reports that back in March, Xie Guoyi, a seller in Shenzhen, put his apartment on the market. He eventually agreed to sell it for Rmb3.5 million ($564,520).

The problem: home prices in Shenzhen have since gone from strength to strength. Xie was shocked to find out two months later that the market value of his home had gone up to Rmb4.8 million. So he called the banks to cancel the deal and told the purchaser he’d had a change of heart.

Needless to say, the buyer was less than pleased. They eventually agreed to pay a bit more but a fight broke out between the two parties when they met up at Xie’s place to discuss the terms. A local policeman had to intervene using pepper spray to break up the brawl. The main casualty was the buyer’s baby, who almost choked on the pepper spray.

Similar cases have become increasingly common in Shenzhen, where home prices have been going up for six consecutive months. The average price of new homes in Shenzhen reached Rmb31,865 per square metre as of the end of May, 21% higher than in January.

Analysts attribute the resurgence to a series of supporting measures from the central government, including the State Council’s lowering of the downpayment ratio for second homes to 40% from 60%. The secondary housing market also received a boost with a policy that exempted individuals from taxes if they had owned their property for more than two years. (Previously, sellers were exempted from such taxes only if they owned the houses for at least five years.)

With the secondary housing market heating up, the number of legal disputes has also been on the rise as sellers back away from deals. According to the Shenzhen People’s Court the number of disputes about second-hand properties has more than doubled over the past year.

Yi Yucheng, a lawyer in Guangdong province, told the CBN newspaper that the volume of cases he’s seeing of sellers backing out on contracts has gone up over 10 times. Cancelling the deal means not only returning the deposit – typically 10% of the agreed purchase price – but also paying the same amount to the buyer as a penalty for pulling out. Then again, many sellers still think it is worth it, given the price rises that have ensued.

“Many sellers are breaching the contract because the increase in price on the property has far exceeded the amount of penalty stipulated in the contract,” says Yi.

But Southern Metropolis Daily reckons that property agents have also been fanning the flames. Many unscrupulous agents have gone as far as to get a ‘fake’ buyer to submit a bid for the house and convincing the seller to accept the offer. When the property price goes up, the agent talks the seller into breaching the contract and selling to a real buyer. The rogue agent and their partner pocket the 10% penalty payment.

Take the experience of a woman surnamed Cheng. Originally she sold her flat to a buyer for Rmb2.4 million. Even though it was less than what she was expecting, she told the newspaper that the agent kept pressuring her to take the deal. Eventually she relented and accepted a deposit of Rmb50,000, which was less than the 10% standard (the ‘buyer’ claimed that he was in the middle of selling his old house so it was all he could afford).

After she accepted the cheque, the agent continued to bring other buyers to view the apartment till one offered her Rmb2.6 million. Tempted by the price increase, Cheng decided to back away from the existing offer. It wasn’t until the deal closed that she began to suspect that she might have fallen victim to the agent’s elaborate set-up.

“The fact that the agent continues to bring people to look at the apartment means that he clearly knows the first buyer has no plan to ever go through with the deal. And if property prices continue to go up, the price difference between the two doesn’t affect his commission too much. This way [betting that the seller would break the contract], he makes even more money,” Cheng surmises.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.