In response to an earlier inquiry, a Renouncable Sales Contract [RSC] is defined as follows;
The RSC provides developers a means of qualifying for construction finance without having to pre-sell as many units as may otherwise be necessary to secure this finance.
This means the developer can shorten the holding period and can also sell completed apartments/units for those projects which lend themselves more to OTP [off-the-plan] marketing.
In the unlikely event that the contract is not rescinded by the developer/vendor, the investor is able to purchase the property [unsually a residential unit] at a significant discount to valuation [which may be more than 30 percent].
Even if the market softens during construction, the discount is normally considered sufficient to ensure the unit represents value buying and may enable the purchase to be fully funded from borrowings of 80 percent of valuation.
However, the discount provides the developer with a strong incentive to sell to someone prepared to pay more than the discounted price in which case the contract is rescinded. In this case the investor is well compensated by a high interest payment [i.e above 20 percent] from the developer plus interest from the cash management trust.
The RSC can, therefore, provide a win/win outcome for both developer and investor.
— Michael
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