The National House Buyers Association is a non-profit, non-governmental, non-political organisation manned by volunteers. In response to the unfairness of some developer’s practice, they have published a article in Malaysia Business. Unfortunely, not many have read the article. The following is the whole content.
|Published in Malaysian Business – Housing & Property
01/07/2005 – By National House Buyers Association of MalaysiaCALL them what you like – leasebacks, buy-to-let, cash back,own-for-free – developers have come up with creative plans to woo investors withguaranteed rental returns (GRRs) on yet-to-be-built properties.
Developers would agree to pay buyers rentals ranging from 8% to 12% per annum or aproportion of the purchase price for a certain length of time.
This kind of purchase, which has become increasingly common judging from the press advertisements, sounds enticing to investors who do not want the trouble of managing their own investments. You buy the property, and you get the rental returns thrown in.
While GRRs could be very attractive, investors need to know that the scheme is not as simple as it seems, much like ads that appeal to our desire to lose weight quickly, get rich fast or strike the lottery.
* A typical mortgage lasts 20 years. If you have a guaranteed rental for just three years, what will happen for the next 17 years? You are left to sink or swim on your own.
* A typical table of returns will show potential buyers a surplus income. A potential investor has to take into account the cost of maintaining the property, the taxes that come with being a property owner, the cost of maintaining the mortgage and all other fees related to acquiring the property.
Under most GRRs scheme, you will need to buy a furniture package with the apartment and commit yourself to the management charges and sinking fund of the building, on top of the regulatory quit rent & assessment tax.
* GRRs are specifically aimed at selling units to investors, so you may see a situation of 500 apartments all going to the rental market rather than owner-occupiers at the end of the scheme. You will need to consider how many people will be chasing tenants at the end of the guarantee period and most particularly how many prospective tenants there are. In areas of high competition, landlords will have to reduce the rent to attract available tenants. Consequently, the market value of the properties will go down rather than up. If you decide to sell, you will also be limited to buyers who will also be mainly investors. Sellers will also find themselves competing with developers who are offering higher rental returns with new developments.
* Overpricing – When supply is more than demand, developers always look for ways to avoid having to reduce prices. While GRRs may offer attractive secure returns, it will be a false economy in the long run if the buyer ends up overpaying for the property.
* A guarantee is only as good as company who underwrites it. Even if the GRRs seem reasonable and are offered with honourable intentions, investors need to be sure that the developer would be able to sustain the returns if the rental or sales market were to take a turn for the worse. If developers were to default on the payments due to buyers, these buyers will likely default on their respective loan repayments, thereby setting off a chain of events with dire consequences.
* Terms and conditions in GRR agreements are not regulated by law. As such, the inexperienced investors may not understand that the fine prints are often written in the guarantors’ favour. Example of such clauses: “Provided always and it is hereby agreed between the contracting parties hereto that the Developer reserves its right to terminate the GRR agreement for any reason whatsoever by giving TWO (2) MONTHS written notice to the Purchaser wherein such a case the Developer’s obligation to pay the guaranteed return to the Purchaser shall cease from the date of such termination. Such notice is deemed to have been received within three (3) days from the date of the letter”
One Purchaser’s Nightmare
In another case reported in the local papers in April 2005, a group of investors filed a legal suit to claim from the developer whom they alleged had breached their agreements.
GRRs offered to investors should be checked carefully against the local market and competition. A simple survey within the location will give an investor a fair idea of the state of the local market. If market prices are lower than the proposed rent, incentives and discounts being offered to woo the buyers, then this are issues to be considered. If guarantees of rentals are higher than the existing market rate, then a rent decline after the end of the guarantee is likely. It is a classic case of caveat emptor – rental guarantees can sometimes guarantee investors nothing but heartache.
The National House Buyers Association is a non-profit, non-governmental, non-political organisation manned by volunteers. For more information, check out our website at http://www.hba.org.my or e-mail firstname.lastname@example.org