Should buyers put cash on table before house is built?

One person in the industry says "it's a Cork thing generally", as if she was talking about eating drisheen and drinking Murphy's. But staged payments, where home buyers stagger their payment for a new house over the course of its construction, have been popular in Co Cork for about 30 years, according to the director of the Irish Home Builders Association (IHBA), Michael Goggins. The system is also prevalent in Carlow, Kilkenny and Galway.

The IHBA recently published its "Home Purchase Protection Pledge" (PPP) code of practice, which introduced the concept of "interim payments", or staged payments, to members unaccustomed to operating such a scheme.

On the face of it, it is to the builder's advantage, and the Law Society, along with the EBS Building Society, say it is in the developer's favour. They say it provides the builder with his capital costs while the project is under way, puts the purchaser under pressure to have more finance ready sooner, and generally changes the balance of the transaction. It is also complex to the lender to administrate.

Ken Murphy, director general of the Law Society, says the purchaser "is fronting the builder's cash flow". "It becomes a question of perspective of how fair you think that is," he says.

The standard contract as developed by the society's conveyancing committee "hits a correct balance of rights and responsibilities between the purchaser and the builder". He believes the code distorts that balance and has been introduced now because builders have "an excess of market power". But Mr Goggins says the scheme has helped keep house prices down in Cork, Kilkenny and Carlow. "It has served both sides of the transaction well down the years. It helps to fund the builder's working capital, it brings certainty into the transaction at a much earlier stage, and it brings certainty of price."

It has not helped prices in Galway, but, according to Mr Goggins, that is because it is not as widespread as in other areas.

Before being published in January, the PPP code was flagged as a self-regulatory measure which would discourage gazumping, the practice whereby, after accepting a deposit, a builder will, quite legally, renege on a house sale before a contract is signed and increase the price, often leaving the prospective purchaser's financial arrangements in tatters. The code provides the sanctions of expelling the member from the IHBA and publishing the notice of the expulsion.

Mr Goggins says that the stage payments scheme, introduced as part of the code, prevents gazumping, which has attracted adverse publicity for the industry following a few high profile cases. Under stage payments, a builder advertises the property, takes a booking deposit from a prospective purchaser, and issues a contract. Only then can he look for stage payments.

"There is no better anti-gazumping device than stage payments. The cases where gazumping have occurred are where lengthy times have elapsed from the time when the contract was issued and when it was signed," Mr Goggins says.

Martin Walsh, head of lending at the EBS, rejects this attribute of the scheme, saying the placing of an additional financial burden on purchasers is not the way to solve the practice. "The issue should be that the contract is issued by the builder within a very short period after a deposit is paid," he says.

A recent District Court case fought over the issue of paying interest on late payment of stage payments provided solace to both sides in the debate. Kenny Homes of Limerick sued John Leahy of Mallow and the EBS for non-payment of £3,952.86 in interest.

The court ruled that payment of 90 per cent of the cost of the house was unfair when 90 per cent of the work had not been completed. However it said stage payments were not unfair in principle - a stance welcomed by the IHBA for being an acknowledgement by the judiciary that stage payments are a legitimate way of doing business.

Mr Goggins says that in business, the scheme is used for purchases of, for example, a £100,000 machine or if somebody is having a house built on a site he has purchased. "There is no difference in that and a builder building a house that you buy. For any major capital transaction, it is quite commonplace. We would not make any distinction," he says.

But Mr Walsh describes the IHBA's move as "a big consumer issue" and says there is a lack of transparency in pricing. Under stage payments, he says there is the hidden cost of the builder's development finance. "It is the law of the land that excessive stage payments is illegal. At this point, in order that the situation be clarified, action is required by the Director of Consumer Affairs," he says.

Mr Walsh says individual house purchasers are being put at "inordinate risk" and, especially in the case of owning a half-finished apartment in a block of apartments, would face the grim task of retrieving the real value from the wreckage of the deal. However, the PPP code of practice stipulates that the cumulative value of interim payments should not outweigh the value of the work done.

"Where there is exposure is when a builder exceeds recommended percentages and we would not condone that," says Mr Goggins. The scheme provides for up to 65 per cent of the house cost being paid before the roof has gone on, a further 25 per cent at internal plastering stage, and the final 10 per cent as a completion payment.

The Law Society argues that if a builder goes bust, the most the HomeBond insurance scheme will pay is 50 per cent of the purchase price, or £50,000, whichever is the lesser, which can leave the purchaser exposed.

"Essentially, if the builder, for whatever reason, collapses and fails to complete the houses, the purchaser is exposed to a far greater extent than they would be normally," Mr Murphy says.