Property investment dominates the day as of the time of this writing, until government has to step in to curb the speculators’ action (especially bulk buys, etc) by announcing various measures. The most recent (and perhaps “impactful”) is a new ruling (NOT guideline) to use the Net Selling Price of a Property as a benchmark for obtaining loans. And it applies to all property purchases – whether you are speculator or first time house buyer. “How?” you asked?
Basically, according to an article in TheStar HERE, under the new regime, a property with list price of RM 1 mil, rebate of 5% and 90% financing will require buyer to fork out a down payment of RM 95k.
Let me elaborate further.
Previously, you only need to fork out RM 50k, because 10% of RM 1 mil is RM 100k, but since you got a rebate of 5%, then it is 100k minus 50k rebate – balance of 50k.
However, the Net Selling Price under this new rule means Listing Price minus any rebates, which is 1 mil minus 5% – RM 950k. So the 90% LTV (Loan to Value) is based on 950k. You now need to cough up RM 95k down payment.
As a result, property developers are going to have to be transparent in the way they price their property by laying bare the details of the house, how much the house, legal fees, rebates, “free” gifts like the air-conditioning,etc put in by them, cost.
Quoted from this another article from TheStar – Banks mum on new housing loan structure
In the past, banks have been disbursing loans in the past based on the developers’ price which of course includes the renovation and add-ons put in and factored into the pricing by the developer .
Because without a valuer to assess if the price quoted by the developer is indeed the real market value of the property, the banks are essentially accepting the developer’s price (which includes all the extras) as the value.
In some cases, developers have even been “creative” in marking up a higher price in their sales and purchase agreements than what the buyer is actually paying.
That way, they hope to get higher prices for the other units in the project that have yet to be sold.
But it has other negative impact for the individual and banks because with a marked-up agreement, a qualified buyer is able to get a much higher loan than what the property is really worth.
Genuine house buyer will cry in agony. Investors (genuine or speculative) will feel the impact too. Those using speculative strategies like “No Money Down” – well, we got to ask some of them if this affects them 🙂
But what I am going to share with you today is a little known method used by someone I know when it comes to property investment. Like the title suggests, this is not layman stuff as what we all known – like “No Money Down” or the normal refinancing. This is much more advanced and it’s my pleasure to have the permission of this friend of mine to share this with you.
It is called Option to Purchase.
It is a bilateral contract between 2 parties to buy and sell a property which has obtained OC at a later date. The buyer pays the seller a one time lump sum premium to execute the SPA in the future. He has the Right, but Not the obligation to buy this property at a predetermined date and price in the future.
This is way better than waiting for properties under construction.
Now why a seller wants to offer such deal?
Because he wants to:
- Avoids the hassle and cost of refinancing
- Avoid RPGT should he sell the property now
- Cash out now instead of later to reinvest
Then here goes the best part. What is the benefits a buyer gets? It is actually a lot more than the seller BUT the seller must be smart enough to generate returns on his cash out monies.
- 5% guaranteed annual interest on the premium paid to the seller (that’s like FD but 2% higher)
- Not subject to the LTV<70% rule from banks because the seller offers is only, say, 20% of the pre-agreed future transaction price, say RM 600k on Dec 2016
- Not subject to DSR<70% rule by banks but you must have substantial hard cold cash
- Full refund of the premium paid should you decide not the execute the SPA in the future
- ….a few more….
Watch the video below for a better explanation on how this kind of deals works.
As a buyer on such “option to purchase” property, you will have questions to ask the seller, such as:
- What if the market price on Dec 2016 is higher than the pre-agreed transaction price – RM 600k?
- What are the potentials of the property in question appreciates up to RM 600k or more in 3-4 years time?
- Any valuation reports attached?
- What if the market price at Dec 2016 is lower than 600k?
I hope this article has shine some light on how very brilliant investors think and work (kind of people I have in my circle)- and probably apply this either you are a buyer or a seller.