To Borrow or Not to Borrow?

I have actually met people who do not buy property because they do not want to be indebted to a bank. They wait until they can afford it, usually when they are close to retirement or even retired. They then withdraw their savings, gratuity and EPF to purchase a house. Not a wise move considering that the life expectancy for Malaysians is in the region of 75 years and they still need a considerable sum of money to retire on. There is such a thing as good debt and bad debt. Property loan certainly qualifies as good debt provided you are able to make your monthly obligations.

Now that you have made a decision to buy a property, the next step is to decide on a mortgage. For some there is a question of whether you should make a cash purchase or take on a mortgage. A cash purchase is fine if you are cash rich and the property is for your own stay. However, if you are buying a rental property as an investment or for your own business purpose, it is better to consider a mortgage for the following reasons:
1)   For cash flow
2)   For higher yield and leverage
3)   To  acquire  leverage  and enable you to buy more property in the near future.
When you place a large sum of money into one property it is an opportunity cost in the sense that you are unable to use the money for any other good investment, education expenses, medical expenses. You should also make sure you have at least 6 months  worth of mortgage in hand to pay for mortgage and property related expenses in the event the property is not rented out or if your business is not doing too well.
For example you purchase a property at RM 500,000. Legal fees, stamp duties and loan agreement will add up to about RM 50,000. This means that your total cost is RM 550,000.
If you rent it out at RM 1500, your yearly  income would be RM 18000.That would mean that you will be earning 3.6% on your capital of RM550,000. It would take 27.7 years to recoup your capital.
On the other hand if you took a loan for 90% your initial capital outlay will only add up to RM100,000. With the same rental you will be receiving a return of 18%.In addition you stand to gain from capital appreciation when you sell the property in the future. Assumption: the price of the property rises significantly enough to cover your capital outlay,mortgage and other holding costs.
As you can clearly see by taking a loan of 90% of the purchase price you are getting better returns on your property.
With the extra cash that you have in hand you can go ahead and buy another property and repeat the process of getting higher returns on your investment instead of cash purchase. By leveraging on other people’s money (OPM) you can invest in more properties.
However, be careful that you do not stretch yourself too thin. For every property that you buy you must set aside a reserve of about 6 months mortgage and property related expenses to tide you over in times when you do not have a tenant. For that reason also when buying a rental property only do so in areas that are easy to rent out. Not all properties for sale are worth the risk of purchasing and borrowing.

Is This a Good Time to Buy Property?

I have been asked this question a lot, especially in 2015.  Heck, even my tailor asked me to look out for a good property for him in his location of choice. He said that he trusted me not to hike the price up as other RENs sometimes do. I was flattered. Unfortunately, his location of choice was out of his budget. So I suggested some areas close to his place of work where he could get good value for money.

The property market in 2015 has been what industry experts call “cold”. What that means is that there have been fewer transactions. What does that mean?
It means that fewer people have been buying properties. The reasons are many: from not confident enough to speculate, loss of jobs, poor business, higher cost of living and therefore less money to take on a mortgage, lack of confidence in the way the country is run and   poor investor sentiments. I could write paragraphs about this but I think you get my drift.
I have also seen many properties being sold below market value because the owners can no longer afford to hold them. It could be because they were speculators who hoped the rental would help cover at least some of the mortgage. Neither could they sell the property at fair market value.So as a last resort they dropped the price. It is either drop the price or risk an auction.Not wanting to lose out on all payments made to date and wanting to save themselves the embarrassment of having a property auctioned, dropping the price seems like a good option.
Or they may have lost their job and can no longer afford to maintain one or more properties. Maybe they have to move in with the parents in order to meet all other financial obligations.
The fact remains that buying a property is a long term investment. As such you should clearly determine your purpose and budget. (Please refer to blog post on ‘Buying for your own stay or for investment” dated Nov. 11).
Yes, now is a good time to buy property if you can find one that suits your purpose as you are more likely to find one that is fairly priced or even below market value. Remember that property owners in choice locations have higher holding power and are not likely to lower their prices too much- only if they really need to sell.
Now is not a good time to sell your property as it is likely to stay on the market for a long time. Purchasers are likely to want to negotiate more too. But if Lady Luck is on your side   and you have a good property to sell, you might just get your asking price. All the best!

Buying From The Developer

Everyday our newspapers and magazine advertise all sorts of new property development. The pictures are colourful and glossy, the details perfect. If your attention was captured, you may care enough to go for the open day and visit the showroom. Refreshments and perhaps a barbecue await you. Friendly sales staff are there to attend to all your queries. The show unit is lovely, the furniture and décor just to your taste. Free legal fees are provided for your Sales and Purchase Agreement and mortgage officers eagerly await to give you a loan, if you qualify of course. What more can you ask for?
I hate to be the party pooper but really there is plenty to ask.
Here are some questions you may wish to ask when buying from the developer?

1) What are the actual dimensions of the show unit? Is it the same as the actual dimensions of the property on sale?
2) In the event that the property is not completed as scheduled, what is the compensation that you the purchaser is entitled to?

3) What is the value of the property according to a professional valuer? In this instance, you may wish to check the value of the property with an independent valuer, not one engaged by the developer. If the property has yet to be built, the valuer may use similar neighbouring properties for comparison before providing a value. Banks today ask for at least two valuers who should concur on the value of the property. It is better to be prudent then sorry as neither the bank nor the buyer should be dealing with loans on overvalued properties.
4) If free items such as kitchen cabinets, air conditioning units and zero moving cost have been provided by the developer, has the cost of these offer items been added to the price of the property?

5) If the price of the property is already higher than the provided by the value provided by the independent valuers , what are the chances of property price appreciation? Should the you decide to sell the property, will you make a profit after taking into account your payment for legal fees, stamp duties on both the S&P Agreement and the loan agreement, balance of mortgage payable to the bank and Real Estate Property Gain Tax(RPGT)?

6) If the you intend to rent out the property, will the rental be sufficient to cover mortgage payment, quit rent and assessment fees, maintenance and repair fees if any? If not how do you intend to meet your property expenses in addition to other financial obligations you might have?

7) If you intend to stay in the property, does the location, size and surroundings suit the needs of your family and your extended family if they intend to stay with you? Don’t by a property just because it is cheap of free gifts are given. You are better off renting until you find a property that meets your needs and budget.

Property developers are in the business of building to provide housing that meets the needs of the clients they serve. Good developers seek to provide quality buildings that are safe in a suitable pleasant environment. Unscrupulous property developers give you poor quality building in a location with poor access while promising you an access road and school in the future. However, both good developers or unscrupulous ones have something in common in that they seek a healthy profit margin. That is among the reasons why developers build three storey houses with special offers because they are able to charge the client a higher price for a larger built up space. A discerning buyer would ask himself if he would be able to climb up to the top floor of the house in his old age. He would also ask if the room on the ground floor is large enough for him or his aged parents. Is the maid ‘s room provided large enough for the live in maid to fit in a bed and a closet. Most of the maids’ rooms built in houses today are fit for brooms and mops and perhaps an ironing board. Maids are people too who deserve decent living quarters too.
In recent times there have suggestions by the developers to bring back the Developer Interest Bearing Scheme (DIBS) to make houses more affordable to first time house buyer. In reality the DIBS only serves to delay the time in which the purchaser starts making his first mortgage payment ,while the price of the property remains unaffordable. It is obvious to me just bring back the DIBS is not going to solve the question of affordability. Isn’t it obvious to you?

Buying Versus Selling Properties

Have you bought or sold a property? I have and it amazes me how you can be told things that are absolutely contrary when you are buying and selling.

My first property was a 2sty link house, leasehold numbered “4” and located by the cemetery. I bought it because it was affordable to me and I was not superstitious nor afraid of ghosts. I lived there for eight years with my family and had no problems except for a few incidents of attempted burglary. That was resolved by installing an alarm system.
After 8 years, my family and I decided it was time to move to be closer to the children’s school. Selling the property took a long time. I was not surprised that Malaysians are generally a superstitious lot. I engaged RENs to sell the property for me, one at a time and each time giving  them an exclusive listing. Each time I was told that the location and number were not good and that leasehold properties were difficult to sell. Thankfully the property was sold at double the price I paid for it as it was a good property, all things considered. In true Malaysian spirit it was sold by a Malay REA to a Chinese buyer. This buyer was a born again Christian who feared God more than ghosts and superstitions and rightfully so.
Since then I have enquired and purchased a few other properties and attempted to sell   a property or two. When I wanted to negotiate the price on a property that was leasehold, I was told that leasehold was no different than freehold properties and that the lease can be renewed upon expiry.
It should not matter to me or prospective buyers. When I pointed out that the property number was not favourable, I was told that I could make an application to change the house number. When I pointed out that the vacant land behind a certain property would create opportunities for burglars to enter I was told that I could build a high wall at the back of the wall. Changing the house number and building a wall should be made at my own expense and inconvenience with no discount in price.
I also learnt that a house buyer can demand any price he wants for his house simply because he overpaid for his purchase. It cannot possibly be sold below the developers price even though the actual valuation of the property is much less. And the RENs concur with him because he pays their fees.
The fact of the matter is the price of property is determined by location, supply and demand. Location plays a major part. Good location obviously commands a higher price. Quality of materials for the building do too. Nobody really cares about the renovations you have done as it may not be to their taste so it is really optional and adds some value but not much to the property.
The lease on the land where the property stands can be renewed in most cases unless the local government has earmarked the land for developmental purposes. This involves a premium to be paid. Therefore, this cost should be considered in the transaction price.
This and other information are not made clear. I don’t wish to assign blame. I merely seek honesty and professionalism when transacting properties.

Buying Properties for Investment or for Your Own Stay

In the book “The Richest Man in Babylon”, George Samuel Clason wrote the importance of owning the roof over your head. After that is achieved, a wise move would be to acquire rental properties to provide passive income. This wisdom holds true for the Babylonians on the banks of Mesopotamia as for us today in our modern homes.

My paternal grandparents were poor, illiterate immigrants who saw the potential or owning their business and investing in real estate. No longer poor and academically qualified, I humbly follow in their footsteps.
However, there is a difference in buying a house for your own occupancy and buying a house for  investment or rental purposes.
If you are buying a property for your own occupancy, the things to consider would be:
1) Affordability
Do consider your income and expenditures and liabilities and decide how much mortgage you can afford. Remember that in addition to the   asking price of the property, you would need to set aside another 5% of the price to cover costs of legal fees and stamp-duties. Then there is the cost of renovations, repairs and any extras such as landscaping that you might want to have. Buy the best house you can afford to meet your needs.
2) Location
Is the location convenient to you and your family in terms of access to your place of work or school, hospital, shops etc. I have seen enough people suffer because they chose to stay far away from the place of work or school that needs to be reached daily. Why do they do this? For some it is because houses in faraway places such as Rawang, Semenyih and Seremban are cheaper and therefore cheaper even though they may be working in the Klang Valley. Others choose to stay near their parents homes. Yet others prefer to stay near malls or entertainment outlets. Do consider travel time,petrol and toll costs when choosing the best location for you.
3)  Apartment or house
Again it depends on   your needs. Apartments/Condominium are typically preferred when security is a concern. When you need more space for a growing family, then a house is obviously better.
When buying a property for   investment, there are two types to look out for:
Category 1 : Properties that are likely to appreciate in value but with little or no rental income Category 2 :Properties that provide both rental income and capital appreciation.
A smart investor would choose   Category 2 and would not settle for less. Despite what  people may tell you, it is possible to find this type of investment. However, you must be prepared to do your own research   and negotiation or pay someone to do it for you.
Properties that fall into Category 2 more often than not are commercial properties. Not any commercial property but carefully selected commercial properties.
The commercial properties that generate good returns are often:
1)1/2/3 storey shops that do not need a lift
2) ground floor of a building
3) land that can be used as parking bay
4 )located in a densely populated area with limited commercial buildings
5) occupied by a business that is doing well.
Many property investor buy apartments/condominiums as they are cheaper. As I have mentioned before, buy value not price .It is better to save up and buy a property with good value that generates good returns than to buy just because it is cheaper. Furthermore, there is currently a glut in  apartments/condominiums that result in low rental or no occupancy.
This can be avoided by doing sufficient research before investing ,Property is an illiquid investment and the purpose, location, holding capacity  and returns have to be given due consideration.
Better to be prudent than sorry . . .

Real Estate Negotiators in Malaysia


I have dealt with many real estate negotiators (RENs) in Malaysia- to buy properties and to sell. I have also worked with a reputable real estate agency that adheres a high professional code of conduct. Sad   to say  a number of RENs, I have met are lacking professionalism and ethics. According to the Handbook on Real Estate Agency Standards published by The Board of Valuers,Appraisers and Estate Agents Malaysia (BOVEA) are merely sales people that are engaged by a registered Real Estate Agent.

Malaysian Estate Agency Standards (Standard 9)
9.1.1 Negotiators are not given explicit recognition in the Act or Rules but are informally recognised by the Board as assistants engaged by estate agents in their practice of estate agency. They are usually salespersons who themselves are   paid a fee or commission based upon conclusion of a successful estate agency transaction. Negotiators can also  be under the direct employment of estate agents and be paid salaries rather than fees of commissions
RENs  They are required to attend a 2 day course organised by MIEA which than enables them to be certified by BOVEA. Certification does not mean that they are registered professionals.
It just means that they have been taught real estate basics by some real estate professionals. They are not assessed to ascertain that learning has taken place. The course attendee then applies to join a registered real estate company where he is asked to pay a sum of money i.e. RM500 towards a business account. The money from this account is used to pay for business cards, “For Sale” banners, advertisements in the media of choice of the registered real estate agent/Principal of the agency. He is then required to procure listings of properties for sale/let with little or no help from the agency. Some RENs resort to buying list of property owners from developers who have sold properties. They know that this is illegal and a breach of privacy but they are desperate, you see. They then start making phone calls and ask property owners if they have a property to buy or let.
If he makes a sale or rents out a property, the Principal takes a cut and the balance is paid to the REN to cover his costs and whatever is left is his commission for the sale. In most real estate agencies he does not receive a salary but relies on his commission to cover business and living expenses.
Is it a surprise then that the REN resorts to
1) Procuring a property to sell or rent through whatever means, legal or illegal;
2) Promising the property owner a  higher than the market sale/rental price to encourage the owner to give him the right to list the property;
3) Advertises the property for a high sale/rental price regardless of the market value of the property;
4) Allowing the property to be on the market for a long time even if the owner needs to sell the property quickly;
5) Not presenting offers made by prospective buyers/renters if the RENs decide that their commission would be too low.
The lack of ethics and professionalism has led to high prices of properties that do not reflect the true value of a property. What is the true value of a property? The true value of a property is the price as determined by a professional valuer based on criteria such as location, building, size etc. It is not determined by bank mortgage officers that are keen on giving the buyer a loan as the values tend to be inflated.
It has also led to properties remaining unsold even though the owner needs to sell the property desperately. As a result if an owner defaults in his mortgage payments for 3 months or more, the lending bank will seize the property and put it up for auction.
Similarly, when a REN does not present to the owner offers for rental made by prospective tenants, the property remains vacant for some time even though the owner while wishing for the highest possible rental, is willing to accept a reasonable offer.
As I see it, the real estate industry in Malaysia does not need the services of a REN. What is needed are professional real estate agents who are registered with the BOVEA. Should a property owner or developer require the services of a real estate agent, they may approach them as they would approach a lawyer or doctor. This is how it is done in developed country and something that Malaysia should aspire towards.

Auction Properties


When John bought a single storey house at an auction, he thought that he had got a good bargain. He bought the property at 25% below the current market value and he did not have the headache of viewing and bargaining with any REN. Little did he anticipate the problems that ensued.  You see, when you buy a property at an auction there are a few things that you should be aware of:

1) The owner of the property could not keep up with his monthly mortgage payments. As a result the lending bank repossesses his property. When this happens, the bank is interested in recouping the loan amount. The bank is obliged to auction it of at fair market value. If at the fair market value there are no takers, the reserve price   will be lowered and will go through as many rounds of auctions needed to secure a purchaser. The reserve price will be lowered until there is a willing buyer. The bank then pays the auctioneer and other costs and recovers whatever is left of the selling price;
2) The bank is not responsible for the state of the property, unpaid water and electricity bills, quit rent and assessment bills;
3) The bank is not responsible for granting the purchaser vacant possession which means that the purchaser is responsible to ask the owner or tenant who is occupying the said property to leave so that the purchaser can occupy or rent it out;
4) The purchaser is normally given 3 to 4 months to settle the transaction and pay the bank the successful bid price. In that course of time, anyone i.e. a money lender, an estranged spouse or literally any Tom, Dick and Harry can place a caveat on the property to prevent the transfer of ownership on the property. If the purchaser has the funds to settle the property purchase in cash, he may do so and later proceed with the legal proceedings to have the remove the caveat at his own expense. If he is unable to settle the full purchase price the bank will cancel the sale and put the property up for auction again. The purchaser will lose the 10% deposit that he paid upon successful bidding for the property.
The extended period given to the purchaser  with interest payment in the transaction of secondary properties does not apply in the case of auction properties.
There have been instances when the owner of the house that has been auctioned off refuses to leave the house and engages a lawyer to find ways and means to allow him to stay longer. Then the purchaser counters by cutting off the electricity and water supply. This is not allowed although the purchaser is now the legal owner of the property. As a result the purchaser has now committed an offence can be sued. He would then  need to  engage a lawyer and pay a fine.
So you see, buying an auction property below market value need not necessarily be a good thing. It is a good idea to buy an auction property when:
1) You have inspected the property and found it to be vacant and in good condition;
2) You have sufficient cash reserves to pay up the purchase price of the property  in full in the event the bank loan does not come through in time due to technicalities;
3) You have the time and money for court proceedings should the need arise in the event of caveats placed and occupants who refuse to vacate the property .In the event the occupants do vacate the property, they may leave the property in a bad state just to spite you. That would mean additional expenses to   reinstate the property into a habitable state.
After considering all of the above and you decide that an auction property is the best way to invest in properties, then get yourself a good lawyer. You are right in buying a property below the market price because that is the mark of a good investor! Good luck and God Speed!