Red Flags To Watch For When Buying Investment Property In Kenya

Kenya’s real estate sector has undergone remarkable growth in the past few decades, with reports indicating an annual growth rate of about 6-8%. This growth is primarily fueled by urbanization, population growth, and increasing demand for commercial and residential properties. Further, according to a report by the Kenya Mortgage Refinance Company, the real estate sector contributes significantly to Kenya’s Gross Domestic Product (GDP), accounting for about 7-10% of the country’s GDP.

With these figures in mind, it’s no surprise that many buyers are keen on securing their share of the Kenyan property market. However, in your pursuit of real estate ownership, there are certain things you should not overlook because doing so will have you paying a heavy price. This article explores red flags to watch out for when buying investment property in Kenya. 

Legal Red Flags When Buying Investment Property In Kenya

Documentation is typically one of the first things to verify when buying investment property. Your chosen property’s legal documentation makes all the difference in determining whether or not you are on the wrong side of the law. These are the legal red flags you should look out for when buying investment property in Kenya:

• Unverifiable Title Deed: Any property whose ownership cannot be verified is an immediate warning sign. A title search not only helps verify the property’s ownership, but also identifies any outstanding claims and property liens that may be present. You should be able to verify the property’s title deed through an official search at the Lands Registry or online via the E-citizen platform. Reject any attempts by the seller to present alternative documentation as a substitute for the title deed.
• Lack Of Government Approvals: This is especially important when purchasing off-plan investment property. Building in Kenya requires certain permits before construction begins: County Government Planning Permission (for architectural and structural plans), environmental clearance from NEMA, and NCA Project Registration. Avoid buying investment property without these permits because chances are, it is an illegal development.
• No Occupation Certificate: This is a certificate issued by the county government that ascertains a complete building has been inspected and meets the requirements for habitation. A building on sale without an occupation certificate means it is not fit for people to live in. This poses serious future risks as it could be a symptom of underlying structural issues. 

The best investment properties have proper and verifiable legal documentation that clearly indicates the ownership, history, and necessary government approvals. Legal documents are critical in preventing you from inheriting any unsettled disputes by the previous owner.

Financial Red Flags When Buying Investment Property In Kenya

Pricing That Doesn’t Match The Market 

A property’s pricing can reveal a lot about its value and the seller’s intentions. Investment property that is priced significantly below the market average for similar properties within the same area, without a clear explanation, is a glaring red flag. Below-market prices can be a sign that the property was illegally obtained, is locked in court disputes, or has serious structural defects. 

However, not all low-priced property is negative. The explanation for the pricing may be legitimate. For instance, a seller in dire need of immediate cash due to financial hardship, or developers offering discounts for off-plan projects and projects nearing completion. These explanations still require elaborate evidence and verification, instead of mere assumption.

Unusual Transaction Terms & Methods

A standard property transaction in Kenya takes about 30 to 90 days to complete and requires several key steps: due diligence, signing a sale agreement with an initial 10% deposit, clearing statutory rates, paying stamp duty, and registering the new title. Further, payments are typically handled via bank transfer to the seller’s advocate’s client account, held as stakeholder pending completion of the transaction in accordance with the terms of the sale agreement. 

Alternatively, the buyer and seller can mutually agree to open a joint escrow account mandating both their advocates to oversee the purchase funds until completion of the sale. Anything that falls outside of these frameworks, such as direct cash payments to the seller, transactions to a personal mobile money account, or an unscrupulous third party, is cause for suspicion. 

Red Flags When Buying Investment Property In Kenya: Poor Location Fundamentals

When it comes to real estate investing, location is a key determinant of how well your investment will perform. It’s imperative to find investment properties that are in the right location because a nice-looking apartment in the wrong neighbourhood may appreciate slowly, attract fewer tenants, or remain vacant for extended periods. Here are key location factors that every investor should evaluate when buying investment property in Kenya:

• Low Rental Demand: The best investment properties are located in areas where people want to live and work. Watch out for property situated in high vacancy areas with low commercial activity. Low demand often translates to high vacancy periods and little to no rental income.
• Limited Infrastructural Development: Infrastructure is one of the biggest indicators of real estate value and growth. Avoid investment property located in areas with unreliable transport networks, poor accessibility, and inadequate access to utilities such as water and electricity. Areas that lack infrastructural growth often miss out on property appreciation.
• Limited Proximity To Amenities: People don’t just buy homes. They buy the lifestyle that comes with living in certain neighbourhoods as well. Property that is away from everyday conveniences such as shopping malls, schools, hospitals and recreational facilities is unappealing to tenants and is a sure sign that you will struggle with low occupancy. 

Physical Red Flags When Buying Investment Property In Kenya

Before you purchase any investment property, you need to undertake a physical inspection of not only your preferred unit but also the entire building. This will help you get a clear picture of the property’s overall maintenance. Consider the following factors:

The Property’s Condition

Thoroughly inspect the property’s overall condition. Look out for the following:

• Structural Integrity: Inspect the building for any cracks, leaks, and signs of water damage.
• Condition of Fixtures: Check the roofing, doors, windows, and interior finishes to ensure they are in good condition. 
• Functionality of Systems: Inspect the plumbing, electrical wiring, heating, and cooling systems to confirm they are working properly. Look out for any outdated components that may need to be replaced particularly in older homes.

Discrepancies Between Approved Plans & Final Product

Every building in Kenya is required to obtain a permit from the local county government that approves the architectural and structural plans for the project. Any additional floors, units and altered layouts means that these changes have been carried out outside of the approved plans, posing great structural risk. 

Through a legal representative, request copies of the approved plans and compare them to the physical building as part of your due diligence process. Additionally, your sales agreement should clearly address any anticipated structural changes and state the consequences in case of a breach. 

Zoning Compliance

Zoning in Kenya is governed by the Physical and Land Use Planning Act of 2019, and managed by the respective County Governments and the National Land Commission. It regulates land use into distinct categories: residential, commercial, industrial, mixed-use, and agricultural. These categories dictate what you can build and how your investment property can be utilized. For instance, if you are purchasing an apartment, ensure that it is located in a designated residential zone. This will help you avoid legal issues and unanticipated limitations on usage.

Proximity To High-Risk Infrastructure

Certain infrastructure in Kenya’s urban environment creates proximity risks that affect both the quality of life and the long-term value of nearby properties. Property that is adjacent to potential sources of pollution like factories, dumpsites, or open-sewer and drainage systems and high-voltage electricity transmission lines is a no-go zone. 

Conclusion

Kenya’s growing real estate sector presents strong opportunities for property investment. However, buyers still have a duty to be cautious of the potential red flags that exist when buying property as they make the difference between a smart investment and a costly mistake. 

Frequently Asked Questions (FAQs)