Property Investment Flow
1) Purpose of Buying.(Own stay/Investment)
- For own stay can buy lease hold property because it is cheaper than freehold property.
- For investment, it does not matter whether it is leasehold/freehold it depends on your budget for down-payment.
2) Investment Objectives.(Rental Yield/Capital Appreciation)
- For good rental yield can buy low/medium cost flat/apartments.
- For capital appreciation can buy landed/non landed residential properties especially those residential properties in high grow areas and are developed by reputable developers.
- To have both rental yield and capital appreciation can buy commercial and industrial properties and landed properties are more preferred.
3) Financial Due Diligent.(Cash Flow & Bank Loan)
- When decision have been made, then calculate your total cash in hand to see whether it is sufficient to cover for 10% to 20% initial payment, SPA legal fee, stamp duty on transfer, loan legal fee, stamp duty for loan agreement and interest monthly payment during construction for new properties (approximately 5%).
- For investors who buy existing/resale properties, they must also prepare to spare for 3 to 6 months installments money before renting out the properties; whereas for new properties usually need to spare for 8 to 12 months installments money. This is especially so when buying new properties in new development schemes say in phase 1 or phase 2. If you don’t have this spare money then you must buy existing or resale tenanted properties.
- After pre-qualified the above, buyers must check with his bankers (it is wise to check with more than 1 bank) how much does he/she qualify to secure the loan to end finance the intended purchase.
- At this stage, you roughly know what type of property and at what value that is feasible to buy. You either look up for yourself or engage a trust worthy property consultant to get 1 for you.
4) Market Survey.(Property Type & Location)
- If you engage a consultant then you can bypass this stage.
- If you find for yourself then you have to carry out market survey in your preferred areas or near-by areas to find out whether any of your choice property either existing or new one is put up for sale.
- Get the average selling price (at least on average of 3) within the same taman or adjacent tamans whereas for apartments/condos within the same building or compound, try to get this data for as many areas as possible or at least 3 near-by or similar areas for better choice selection.
- Focus on those properties fall within your budget.
- For new properties:
Generally compare selling price in term of $ (amount) per square feet with even or almost equal quality, developer’s reputation, free legal/transfer fee, any free built-in kitchen cabinet and other fittings, other facilities like guarded and gated, number of rooms and toilets, loan interest offered by panel bankers, leasehold/freehold, floor location or direction (don’t buy the highest floor or near highest floor/facing east is more preferred than facing west),the property is in what stage of the over-all development planning (don’t buy the last phase property, as the value may reach or near its top bracket which will give no or slow appreciation) , neighborhood, possible positive future development near-by etc. Compare land title status: Freehold vs Freehold, Leasehold vs Leasehold, and if it is leasehold, compare the lease period remaining when the new title is first issued. Restriction in interest on the title must also take into consideration. For apartment or condominium, always select the unit with at least 2 rooms with attached bathroom in master bedroom, and 2 car parks is preferred than 1 car park, availability of visitors car park is also an important consideration.
- For existing/resale properties:
Also compare the value of various choices in term of $ (amount) per square feet, number of rooms and toilets, existing conditions, location, car park availability, flood history, security condition, other amenities like pasar, shops, schools and public transport, accessibility, the extent renovation works required, quality of existing neighborhood, good “feng shui” factors etc. For landed properties: compare freehold with freehold; leasehold with leasehold. Don’t buy those landed residential properties with remaining lease period less than 50 years as it is difficult to obtain end finance from banks, restriction in interest must take note as well. For commercial shops, try just to buy 1 or 2 storey unit only as the higher floor is difficult to rent or can only fetch low rental. For apartments/condominium: compare units in almost same level/floor and also must compare the title within the same category, number of lifts, outside views, quality of building management, the amount of maintenance fee plus sinking fund. Unit with individual/strata title is more preferred as it is easier for ownership transfer and bank loan application. Those units more than 10 years old and still under master title are not preferred as transfer process may take longer time to complete and most banks are reluctant to provide end financing. For low cost flat or apartment, must find out whether, any special conditions like buyer must not own any residential house in the same state and his personal or family monthly income (if married) must not exceed certain bracket, imposed on the transfer of ownership; if it does then buyer is advise not to buy when he is not qualified by the imposed conditions as his transfer application will most likely be rejected by the state authority.
5) Physical Due Diligent on Selected Properties:
Criteria of selection:
A) Right property in right location.
i) Residential properties ( go for quiet, clean healthy environment. )
ii) Commercial properties ( go for busy and popular areas where crowded. )
iii) Industrial properties ( go for good accessibility to/from airport, seaports, warehouses, supporting merchants and the source of raw materials. )
B) Good “feng shui” factors: about 70% of property buyers in Malaysia do believe in feng shui; so it is important to avoid property with bad feng shui characteristic, otherwise you will have to exclude this 70% prospective tenants/buyers when you want to rent/sell in the future.
- Avoid house number with 4, 14, 24 if your prospective tenants/buyers is aim at Chinese population; but these numbers are alright with Malay population.
- Avoid residential properties facing T-junction; but it is good for commercial properties as it allow good visibility and publicity to the tenants and customers.
- Avoid houses facing river where the water is flowing away from the house; it means bad sign for wealth accumulation. However, if the water is flowing towards the house then it is consider good sign for the owner.
- Avoid buying properties with irregular or funny shape instead of normal rectangular or square in shape.
- Avoid property with low ceiling heights as the house will not be bright and airy enough.
- Avoid properties with staircases, the prefer width must be more than 3 feet.
- Avoid properties entrances facing tall objects/buildings, tall trees, sharp objects, corners or arrows.
- Avoid residential properties facing highways or industrial areas due to noise and environment pollution.
- Avoid properties very close to high tension cables due to potential or unknown health risk.
- Avoid properties facing or very near to places like shopping complexes, food hawker centers, pubs, karaoke centers, community halls, places of worship and etc. As these places will give rise to traffic flow and parking problems, noise pollution and etc.
- Avoid buying properties near land slide or flood prone areas. As these areas are unsafe, have low resale value and difficult to get bank loan.
- Avoid buying properties facing empty open spaces as you may not know what is going to build there; if bad structures like rubbish collection centers or sewerage ponds build there in the future, then it will bring down the value of your properties.
- Avoid water supply shortage areas.
- Buy properties facing lakes with beautiful greenery as these properties always have higher premium value over the others.
- Buy properties in areas where access roads/infrastructure have been upgraded or going to be upgraded. Once the accessibility is upgraded usually the property prices will go up.
C) Other consideration for buying apartments/condos.
- Avoid buying units located near rubbish chutes; as foul smell and uninvited guests such as mosquitoes, flies and other insects may come into the house.
- Avoid units near lifts and staircases as outside these units have heavy human traffic flow which may affect your privacy, cleanliness, security and sometimes even attract vandalism.
- Avoid buying top or top 2 floors due to low water pressure, very hot and water leakage problems.
- Avoid buying the biggest units / penthouses as these units are difficult to rent out or sell.
- Avoid high floors in walk-up apartments.
- Avoid buying ground floor units. As it is the most affected in flood areas and many people walking pass your house may affect your privacy. It may even give noise pollution if it is near car parks.
6)Purchase Process. (Booking/SPA/Bank Loan)
When you have finally selected your choice unit then you have to initiate the buying process:
For Existing/Sub sale Properties.
1) Deal directly with owner: negotiate to reach the agreed price then you have to make an offer to purchase the unit by paying a 2% or 3% of your offer price, in owner’s favor, as earnest deposit prior to the signing of sale and purchase agreement.
Important notes at this point:
- Before pay anything, make sure the person negotiating with you so far is the registered owner of the property by viewing his IC and property title.
- Prepare your offer to purchase agreement stipulating purchase price, amount of earnest deposit paid with cheque number stated, when SPA to be signed (normally 14 working days), its completion period (usually 3 months) and possible extension (1 to 2 months) and its penalty interest per annum (8% to 10%); seller and buyer must sign the agreement and it is better to get a third party to witness the signing. Secure a copy of seller’s IC and land title; if no land title yet then get a copy of the original SPA from the seller.
2) If deal through property agent, you should negotiate with the agent as he is representing the seller. When the purchase price is finally agreed by seller, the agent will explain to you the booking terms and condition and make you sign the offer to purchase form bearing his company’s name, logo and agency registered code number. In this case all paper work will be prepared by the agent and you just need to understand, agree and pay the earnest deposit. It is proper and safer to pay the deposit in favor to the property agency. It will hold the deposit sum until the seller has signed the form because you don’t know the seller yet and in case the offer is rejected or aborted it is much easier to ask for the refund from the agency as property agencies are registered and regulated by the Board of Valuer, Appraisal and Real Estate Agents.
3) Submit all these documents to your lawyer to prepare SPA for both buyer(sign first) and seller(sign last). Remind your lawyer the expiry date of your booking and make sure you sign the SPA before the expiry date, if not the seller has the right to cancel the sale and forfeit your earnest deposit. At this point you have to pay the balance of your 10% down payment to the lawyer and the legal fee; sometimes lawyer may ask you to pay also the transfer fee in advance, so it is better you make ready all these payments.
4) After both parties have signed the SPA, request a stamped copy of SPA and start bank loan application; actually you can start to apply bank loans by using your booking form/agreement in order to gain time, it’s better to apply more than 1 bank for comparison and choose the best offer bank loan.
5) Signing the loan offer letter and appoint lawyer for your loan documentation. You can appoint the same SPA lawyer to do this if the firm is the bank’s panel lawyer or else you can accept the lawyer recommended by the bank officer. You have to sign the loan agreement once it is ready and pay the loan legal fee and loan agreement stamping fee.
6) Following through your SPA and loan documentation process with your lawyer to make sure the deal can complete within the stipulated time or 3 months, else you will need more time to complete by which you will be charged for penalty base on 8% or 10% per annum.
7) If your loan amount approved is only 80% of your purchase price then you have to pay up the differential sum of 10% before bank will agree to release the balance purchase sum to the seller. This is an important point you must take note during your initial financial due diligent exercise so as to avoid cash flow problem when arrive at this stage.
8) Upon full settlement, arrange with the seller for vacant possession. if there is an existing tenant and you agree to continue with the tenancy, you can instruct your lawyer to do the assignment of tenancy right to your favor. You can also negotiate with the tenant to enter a new tenancy agreement with new terms and conditions agreed by both parties. Until this is done then you are the new owner of this property.
For New Properties From Developers.
1) Buyer pick the unit, pay the required deposits and sign on the booking form. The booking also requires the buyer to sign the SPA within 14 to 21 days, buyer normally has to use developer’s panel lawyer to execute the SPA as the legal cost is absorbed by the developer ( reimbursement cost is excluded ). Buyer has to pay the relevant balance sum upon signing the SPA.
2) Choose a bank from the panel end financing banks. Submit all the required financial documents for bank officer to verify and approve. Appoint bank panel lawyer to prepare your loan documentation and pay the legal fee, some banks with certain loan package may absorb the loan stamp duty otherwise buyer has to pay for the stamp duty at a flat rate of 0.5% of the loan amount.
For legal fees, even if they are absorbed by the developers and sometimes bank also, buyer still has to pay for the disbursement costs to be charged by lawyers and they are payable upon signing SPA and loan agreement. So buyer need to allocate this sum during his initial cash flow planning. Buying properties from developer is quite simple and straight forward. However there are many pros and cons as compare to the resale/sub sale market.
1) Low entry cost.
2) Good appreciation upon completion. The developer’s selling price is usually treated as floor price of the property after factor in the legal costs, stamp duties interest paid during construction plus profit the property can sell at a much higher price upon keys handing over.
3) If can arrange with friends or investor club members to go for bulk purchase can get special discount of 5% to 10%,this will enhance profit margin for resale.
4) Can pick your choice unit with brand new condition.
5) For residential properties developers under the requirement of HDA have to guarantee the defect liability for at least 18 months from the date of handing over. A retention of 5% of purchase price as earnest money by the SPA lawyer is required as a contingency plan to protect the buyer.
6) Buyers have many attractive and innovative marketing packages to choose.
- Low down payment, free legal fees, free stamp duty and disbursement cost.
- Free service and maintenance charges for first two years.
- Other freebies such as free toilet renovation, free air-conds, kitchen cabinets, bedroom wardrobes.
- Rental Guarantee and etc.
1) Project abandoned and developer became bankrupt.
This is the biggest risk as buyers buy property before it is built and have to commit financial liability in advance before the property he/she bought is practically completed and duly delivered. If this were to happen, buyer will lose all the money paid so far and it is very difficult to recover the money from a bankrupt company. The situation will become more serious when bank has released partial payment to the developer before its bankruptcy and buyer has to serve monthly loan interest continuously until the matter is resolved, worst still bank may recall the loan at any point of time. So if the buyer is cash tight he will be caught and not able to buy another property for his family or he may even facing financial difficulty when bank call back the loan.
2) Delays in commencement and completion date.
This could due to various factors that are beyond the buyers’ control:
- Delay in getting approvals from the Government.
- Delay due to labor or materials shortage during construction.
- Low or poor take up rate by the market due to bad marketing strategy or bad past records of the developer.
- Poor financial planning and management that lead to cash flow problems and affect the progress of construction works.
3) Property completed in sub-standard quality and not follow the agreed specification. Sometimes even the promised facilities such as landscaping, garden and jogging track are missing.
4) For high-rise apartments/condos, the procurement of strata titles is normally delayed or even never done. The owner will find difficulty to resell his property later because new buyer would not like to buy property without strata title due to inconvenience and bank loan problem. This is more true when the property is completed more than 10 years and still without strata title.
The quality and efficiency of the management body is also unknown. if the maintenance of the common facilities is poor, it will have negative impact on the expected living standard in the community and this will certainly bring down the value of the property.
5) For new development, buyers are actually buying into the future. By the time the property is handed over to the buyer and the economic environment may be bad. If you plan to sell it off for cash flow reason, you may be disappointed and may be trapped for quite some time.
Furthermore many unknown future developments nearby or next to your unit would be completed after sometime. These unwelcomed structures or buildings like oxidation ponds, rubbish collection centers, monsoon drains and etc which are purposely left out in the sales advertisement and catalogue will again affect the resale value of your property.
6) Competition with many new units for rent/sale.
Upon completion, all the units in the same development will be handed over to the buyers at almost the same time. This means you are competing with many other units for rent/sale and the result of which is you may take many months to rent out or sell your unit, sometimes the waiting time may take up to 12 months if there are too many units come into the market at the same time.
7) Difficulty in selling your unit during construction.
When you need to sell the property for cash flow reason it is difficult to do so during the construction because the legal documentation is complicated at this stage and most of the developers will be reluctant to grant you the consent to sell.
8) Negative cash flow during construction and waiting period.
The moment your end financier has made the first payment release to the developer, you have to start to serve the loan interest on the following and every subsequent month until your unit is practically completed. This put on extra burden on your monthly cash flow planning. For investors who still have to pay for monthly installments until his units is taken up by the tenant, sometimes he/she has to wait for 6 to 8 months to rent out the unit. If he/she buys existing tenanted property, he/she can have the rental income straight away right from when the property is fully settled and handed over to him.
In conclusion, the RISKS of buying from developers are extremely HIGH. Therefore buyers have to analyze themselves whether the benefits they may gain can justify with the risks taken!