The unfinished building issue in the real estate sector in Henan province has been very serious, forcing a large number of people to become homeless. As reported by Sohu, one of the troubles related to rotten-tail buildings is the whereabouts of regulatory funds.

What are “rotten-tail buildings”?

The so-called unfinished or “rotten-tail” buildings refer to the projects that have started but were forced to stop for some reason. They usually have no electricity and no running water. Besides, the elevators and sewage system don’t work. This has become common in China’s real estate industry, making countless Chinese home buyers suffer for many years.

Tencent survey this year shows over 45% of homebuyers in mainland China suffer from unfinished building problems.

According to People’s Daily Online, the “Leadership Message Board” received nearly 7,500 complaints about unfinished buildings in 10 years from 2010. Henan ranked first with over 1,700.

What are supervisory funds?

Supervisory funds are the solution to unfinished building problems. The funds aim to prevent developers from running away with the home owner’s money. After the owner and the developer sign the purchase contract, the payment must be credited to a bank’s supervisory account. Therefore, developers cannot use the money directly.

Where do supervisory funds go?

Sina News reported on July 3 that Yongwei Xitang project in Henan was resumed after a 6-month suspension. The supervision funds of over $150 million, which shareholders of the project developer had misappropriated, have also been recovered. The management committee of Zhengzhou High-tech Zone will appoint a state-owned company to supervise the use of the project funds. It was set to be completed before December 10, 2023.

Previously, homeowners of the projects were anxious about the whereabouts of the supervision funds. After months of waiting, there is finally some hope.

However, many other projects are not as lucky as the Yongwei Xitang project.

For example, the owners of the Sunac Zhongyuan Grand View project pointed out some problems with the pre-sale payments of commercial properties and abnormalities in the supervision fund account. 

In the home-buying contract, the bank supervising the pre-sale fund was Zhengzhou Xianghu sub-branch of Zhongyuan Bank Co., Ltd. The buyer’s payment was deposited into the special account for pre-sale funds of Henan Zhongyong Real Estate Co., Ltd with a tail number of 9901.

However, in the loan contract, the funds went into the account name of Henan Zhongyong Real Estate and the account number ending in 9996 of Zheshang Bank, Zhengzhou Branch.

In other words, the pre-sale funds did not enter the supervisory account.

The project has been stopped since the end of 2021 and has not yet been fully resumed.

The owners of Zhengzhou Kangqiao Jiuxi Garden project have suffered from the same situation. The pre-sale funds did not enter the supervision account but other non-supervised accounts. Besides, the construction time and progress of the property do not match. The project got its start permit in April 2020. The owners found that the construction was slowly implemented. Since March 2022, it has been halted up to now.

As reported by Sohu, an insider said that the misappropriation of supervisory funds is common in the real estate industry. If land acquisition requires external borrowing, developers will inevitably incur related interest. If the pre-sale money is moved, it is equivalent to an “interest-free loan.” From the perspective of developers, pre-sale money is definitely a lucrative deal.

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