Buying a house is an important decision and is often considered one of the biggest investments of a lifetime. However, the real estate market is not always stable and transparent. Purchasing a house through a capital contribution contract is a common but rather risky method. In this article, TNTP will present to our readers an analysis of “The risks of purchasing a house through a capital contribution contract”.
1. What is a Capital contribution contract?
• A capital contribution contract can be understood as an agreement between parties to jointly contribute money or assets to collaborate on a certain task. In this case, the capital contribution contract is an agreement between the buyer and the investor, in which the buyer commits to contribute capital to a real estate project in exchange for the right to purchase a house in the future. Typically, this contract is signed before the project is completed, or even before the project is licensed for construction.
• Practically, many enterprises use the capital contribution contract when the project is still undergoing legal procedures. The terms in the capital contribution contract are often negotiated directly between the investor and the capital contributor. Currently, there is no specific and detailed legal document regulating capital contribution contracts. Therefore, the rights and obligations of the parties involved in the capital contribution are not firmly established.
2. Risks of Buying a House through a Capital contribution contract
As mentioned above, buying a house through a capital contribution contract is not tightly regulated by law, leading to several risks for buyers, including:
a. Legal Insecurity
• Project not meeting sale conditions: For a project to meet sale conditions, it must fulfill all legal requirements (e.g., the investor must have an approved housing construction investment project documents; the housing construction investment project must have completed site clearance according to the approved project schedule; there must be a handover record of the project’s boundary markers; and there must be a notice of eligibility to raise capital from the Department of Construction). However, many investors “circumvent the law” by selling the projects before these conditions are met.
There are also many cases where when a project meets the conditions for opening, the investor sues the customers themselves to request that the signed capital contribution contracts be declared void and returned the money to the customers. They can then resell it to other customers at many times the price at the time of capital raise.
• Unclear contracts: Investors often draft capital contribution contracts with vague, non-transparent terms, making it difficult for buyers to claim their rights in case of disputes.
b. Construction-related Risks
Delay or halt in the project due to the investor’s financial issues is one of the biggest risks when buying a house through a capital contribution contract.
• Construction progress risk: If the investor lacks funds or faces financial difficulties during construction, the project often cannot meet the initial construction schedule. In this case, buyers usually have to wait or might not be able to reclaim the money they have paid.
• Misuse of capital: In some cases, investors raise funds but use the capital for unintended purposes, or for other housing development projects.
• Design changes: Investors may alter the design or project quality without prior notice, resulting in buyers receiving a product that does not meet their expectations.
c. Ownership Risks
A capital contribution contract does not guarantee house ownership for the buyer. The project may be incomplete, or unlicensed, or the investor may encounter financial issues, making it unlikely for the buyer to obtain the house.
• Lack of ownership certificates: Buyers might find that the project does not receive ownership certificates due to legal inadequacies, such as the project’s land not being converted for the intended use or incomplete paperwork.
• Ownership disputes: There are cases where the investor has mortgaged the property or sold it to multiple buyers, leading to ownership disputes. In such scenarios, buyers not only lose ownership but also face difficulties reclaiming their investment.
3. Solutions
• Buyers should research the investor, project, and related legal regulations before signing a capital contribution contract. Verify if the project has been licensed for construction and complies with legal regulations.
• Seek assistance from lawyers or legal experts to review the contract and provide advice before signing. This can help buyers identify unclear or potentially risky terms.
• Regularly check the project’s progress and maintain communication with the investor for updates. If there are any unusual actions, consult a lawyer or legal expert immediately.
Buying a house through a capital contribution contract can be beneficial if the project proceeds smoothly but lies many risks behind it. Buyers need to understand these risks and take preventive measures to protect their rights. Being cautious and thoroughly investigating before making a final decision is the key.
This article on ” The risks of purchasing a house through a capital contribution contract” is provided by TNTP for our readers. Should you have any questions, please contact TNTP for further assistance.
