Mortgage Financing: The Affordable Housing Challenge

A Zambian developer who works in the affordable housing industry in continental Africa has said:

“The problem with housing is not building it. We all know how to build houses. It’s not demand. There are plenty of people who want houses. The problem is allowing the people who want the houses the financing capacity to buy them.”

Nowhere is this statement truer than here in Madagascar.

Right now, there is an immediate need for 2 million homes in Madagascar, and the need increases by 100,000 homes per year. The demand is overwhelming, but both builders and potential buyers can't find the money. The unemployment rate is high, and many of the employed still don't make enough. To make matters worse, the average loan term has been 3 years with an average interest rate of 45 percent.

Fortunately, banks have recently started to offer better construction loans and mortgage financing, so we looked into the offers currently available to Trano Mirary and other potential buyers.

We found early success with a newly opened branch of the Bank of Africa. The local director formed a partnership with us, recognizing the good publicity and potential new clients that would come from working with an affordable housing company.

At first, the Bank of Africa could only offer us 10-year loans at 19 percent interest. That's better than the national average, but still not great. We checked with other local banks, including Bank Negara Indonesia, BFV-Societe Generale, and the Malagasy Bank of the Indian Ocean, and they couldn't do much better.

However, now that we knew our options, we were better equipped to go back and negotiate with the Bank of Africa. To our delight, they were willing to offer our clients a 15-year term and lower the interest rate to 13 percent. The lowest rate in Madagascar!

They also provided us with literature for our clients, to explain how the loans work. Anyone who has been employed for at least a year with a reputable business can take out a housing loan by setting up a bank account with a direct deposit from their employer. After four months, the bank verifies their income and they qualify for the 15-year mortgage with payments of up to one third of their monthly salary.

Another major hurdle was behind us, and we had the tools to educate buyers and provide them with an affordable option. Now on to the next step: buying land.

The Money Trail: A Foreigner's Guide to Bank Accounts in Madagascar

Now that Trano Mirary was official, the next order of business was to open a bank account. The only way to receive our winnings from the BYU social venture competition was to transfer them directly to an account in Madagascar. We couldn't get started without those funds.

We'd love to say that our ridiculous paperwork saga was over, but it was only the beginning. After months of signing hundreds of documents, we discovered that the bank required a notarized copy of all those same incorporation documents. To make matters worse, companies must provide copies of the owners' residency cards. Michael O'Day, the company's only foreign owner didn't have one, and residency cards are notoriously difficult to obtain.

A Resident Card in Madagascar requires a long-term VISA, which takes a significant amount of time in a third-world country. Even after the VISA is approved, a foreigner must assemble a pile of documents similar to the one we had just conquered to make Trano Mirary an official company. Michael's hands cramped at the very thought of going through that many signatures again. Even after all the documents are submitted and the application approved, the waiting process takes months, sometimes even up to a year.

We didn't have that kind of time.

Fortunately, bureaucracy worked in our favor – for once -- when we met the Prefecture of Police. After a three-year-long political crisis had cut off all foreign aid and seventy percent of the government budget, the disgruntled Prefecture of Police decided to start his own side-business expediting foreign VISAs and residency card applications. As with all such side-businesses, there was a large fee involved, but it was worth it because Michael had his Resident Card within a week.

With this last piece of the puzzle, we applied for a bank account with the Bank of Africa, which is much more efficient in processing applications. In less than an hour, we had an account and BYU was ready to transfer our funds. Then things slowed down again.

The transfer was initiated on a Friday, and Bank of Africa would normally require the entire following week to process the transfer. Not a problem, except that Monday was the 25th of June, Madagascar's Independence Day and a bank holiday. Between free concerts to celebrate the holiday, and annual protests demanding an overdue election, the banks decided to close an extra day, pushing out the date of our transfer even further. Then we discovered that all transfers must go through the country's central bank for approval, adding yet another day to the transfer process. And once it was ready we weren't able to make it to the bank until the next day.

Finally, two weeks after starting the transfer process, and six weeks after Michael O'Day arrived in Madagascar, the much needed funds were finally ready to use.

Another victory for Trano Mirary, but it's not time to celebrate yet. The next task: navigating the mortgage process.

Miles of Paper and Gallons of Ink: How Trano Mirary Became an Official Company

Trano Mirary's official certification with the government of Madagascar

 The nice thing about seeing other cultures is recognizing that for all our differences, we have so much in common. For instance, every culture has learned that good food will make any situation better, sports will unify communities and countries, and mountains of paperwork are the most basic requirement of any government service.

We discovered the last part first-hand recently. After winning BYU's social venture competition, the first step was to officially incorporate Trano Mirary as a company in Madagascar.

The legacy of the French colonial days was an antiquated and complicated system of creating businesses, so the Malagasy government tried to streamline the process with a "one-stop shop" for that very purpose. Unfortunately for us, it wasn't as simple as shopping and it certainly took more than one stop.

This one-stop shop gives aspiring business owners a stack of forms to fill out, all of which are in French with no instructions on how to complete them. Then the applicant must run all over the city to procure the needed documents.

Thus our partners found themselves traveling all over Antananarivo, desperately seeking the next item on the list, which included:

8 duplicates of bylaws
4 duplicates of each foreign partner's passport
3 duplicates of each partner's identity card
3 duplicates of each partner's Declaration of Morality
2 duplicates of each partner's original certificates of residence
2 duplicates of the Rental Agreement for Office Space
5 duplicates of the Declaration of Existence
1 copy of each partner's Declaration of Non-Criminal Activity
1 copy of each partner's Employee Identification Cards
1 copy of the partners' Declaration of Capital Contributions
1 copy of the partners' Declaration of Partners Relationship

Add in temperature and baking time and you have the world's most boring recipe.

Back in March, the Malagasy partners of Trano Mirary filled out and submitted eight duplicates of the 12-page bylaws, with each page individually signed by each partner. In the first week of April, the government informed them that even though Malagasy and English are official languages of the government, the bylaws would need to be resubmitted in French. To complicate matters, all the dates on our documents needed to match, meaning that we had to completely redo all the paperwork on our list as well.  

With a great deal of patience and plenty of hard work, our partners were able to re-sign and resubmit all the necessary documents by the end of April. Then came the next bombshell: Executive Director Michael O'Day's signature was faxed, not original, which meant it was all invalid. They would have to wait two weeks to have Michael sign all 96 pages in person. Again.

Patience is more than a virtue; it's a business strategy, and it paid off for us in the end. After four months of chasing government officials and signing our names until our fingers were blue, Trano Mirary's application was finally, officially, valid. Just two weeks later we received our official documentation of incorporation in Madagascar. It's official, at long last!

Now back to the original plan: Build some houses for those in need!

More proof that Trano Mirary exists

The Story of Trano Mirary

It could be said that Trano Mirary has been 5 years in the making. It all started when a 19-year-old young man embarked on the adventure of a lifetime, destination Madagascar. That young man was Michael O'Day, and his adventure was living in Madagascar for two years as a Christian missionary.

Anyone who has ever traveled to a third world country for the first time can relate to Michael's experience. Michael was shocked by the deplorable housing conditions he witnessed. Families with four, six, or even eight children all living in one bedroom makeshift huts without toilets, running water, or even electricity.

For the majority of his stay Michael assumed that these individuals must live in such horrible conditions simply because they couldn't afford to spend much of their income on rent. He was surprised when he learned that many Malagasy families spend 30-50% of their income each month to live in these horrible conditions. Michael wanted to do something about this, but he didn't know what could be done.

Michael was even more appalled when he learned that many of these individuals were actually paying rent to live in homes that they had built themselves. Lacking the money to buy land, and unable to find a place to rent, due to the housing shortage, many families are forced to build makeshift homes on plots that they rent from landlords. Each year landlords raise rent by 10-20% as mandated by Madagascar law. Eventually individuals can no longer afford to pay the rent on the home they built with their own money and they are evicted. The landlord then turns around and rents these makeshift huts to new families and the cycle continues.

One day Michael came across a family that lived in some of the worst conditions he had ever seen.

Most homes in Madagascar are at least made out of fired mud bricks, these homes were made up entirely of caked mud, the type of structures that collapse during rainy season, killing entire families while they sleep. Despite the fact that Michael had only two weeks left in Madagascar before his flight home, he decided to raise the money to build these families a suitable home, whatever the cost.

He was surprised to learn that construction in Madagascar is actually very affordable. He was able to construct a two-story, four bedroom home in two weeks for only $1,800.

A few months after returning to the States, he came across an interesting article while reading the Madagascar newspaper. The paper featured a government report on the housing situation in Madagascar. According to the report 87% of houses in the Capital City were unfit for human habitation. On top of this there was a housing shortage of 2 million units and there was a need for an additional 100-150,000 units to be built each year. The government was making a plea for international organizations to come to Madagascar and assist them in solving this massive problem. 

A few weeks later while reflecting on this Michael had an idea. What if individual's rent payments were mortgage payments, would they be able to afford a typical 30-year mortgage? After running some numbers he realized that these individuals didn't even need a 30-year mortgage. They were paying enough in rent to pay off the type of homes they were living in just a few short years even while paying a modest interest rate. So the question was why wasn't this option available to the Malagasy people? 

It turns out, that the answer is in the greed of the current landlords in Madagascar. There is so much money to be made in rent, that no one is ever interested in selling. Another part of the problem is the current banking system in Madagascar. The average interest rate charged on a loan is 45%, and the longest term most banks offer is just 3 years! So in order for this problem to be solved you need people who are willing to build houses to sell, not just to rent, and you need banks who are willing to offer longer term loans at more affordable rates.

While returning to Madagascar to do humanitarian work in the summer of 2011, Michael also spent time doing market research and putting together a business plan to tackle these problems. Michael knew he would need to involve experts in the housing market in Madagascar if he was to be successful. 

Finding partners proved much easier than expected. It was as if God was at the helm and directed Michael to the talented individuals needed to make Trano Mirary a reality. He was able to partner with a realtor, a businessman, an architect, a local banker, and a rezoning specialist; all natives of Madagascar passionate about providing affordable housing for the poor. 

But the issues of affordable financing still remained. Unable to hurdle this obstacle Trano Mirary hit the brakes.  It wasn't until months later when Michael returned to BYU that things again were set in motion. 

In December of 2011, Michael was working with his parents on their start-up business in Delaware, and he had no intention of returning for classes in the winter. But a week before classes started he just had a really strong feeling that BYU was the place he needed to be. So he registered for classes, booked a flight, and a week later was in Provo, UT looking for a job.

At first, Michael wasn't really sure why he needed to come back out to Provo. Nothing grand or remarkable happened his first week back. A month into the semester Michael was walking home when he noticed signs for the finals of the Business Model Competition. They were giving away some really great prizes so he decided to go check it out. It was while sitting through the finalist's presentations that he realized that his plan for Trano Mirary was good enough to compete. He resolved to enter the competition the following year.

The next day, while talking on the phone with one of his friends, he mentioned his experience. His friend told him of a few competitions, that were still open for submission, and encouraged him not to wait. It was upon this suggestion that Michael googled BYU's Social Venture Competition. It turned out that the submission deadline was just one week away. 

Michael spent the week scrounging together his submission and made the first cut. The weeks leading up to the semi-final round were spent toiling over research trying to learn the best strategies being used around the world to provide affordable housing. 

When the time came to pitch Trano Mirary in front of a panel of 5 judges he was ready. It was Michael's luck that one of the judges was Troy Holmberg, who works with Amani Village, a company that provides affordable housing in Kenya. Michael was able to get his contact information and connect up with their team on the ground to get some really invaluable advice. 

Michael was ecstatic when he heard the news that Trano Mirary was advancing to the finals and so were his business partners in Madagascar. With the new impetus this news brought, Trano Mirary was able to forge a new partnership with the Bank of Africa. As a result of this partnership, the Bank of Africa would now be providing 10 to 15-year housing loans at 19.5% APR, much less than the standard 45%. This removed the last major obstacle in Trano Mirary's path. 

The days leading up to the final event were spent in preparation, but this time Michael would be joined by his partner Lacee Curtis. Together they spent countless hours on their presentation and all the work paid off. Trano Mirary not only took 1st place in the competition, but they also won the Audience Choice Award, taking home $25,000 in total. 

But even better than the money were the connections Michael and Lacee made with the judges who volunteered their time for the competition. Individuals with connections to key players in the affordable housing market in Africa, and individuals with connections to potential investors. 

There is still much of Trano Mirary's story that is left untold, but only time can write the remaining chapters in this exciting tale. Stay tuned to our blog for many exciting updates to follow!