Buying Below Market Value Deals: Points to Note

Buying Below Market Value Deals: Points to Note

One man’s loss is another man’s gain. With the sluggish economy, rising cost of living and tighter bank guidelines, home repossessions are on the rise. 

While there is no official data available, agents specialising in below market value (BMV) properties  are enjoying brisk business as the supply of such homes come on stream. From Johor to Kuala Lumpur, homes that come under the hammer at public auctions have become ubiquitous.

BMV properties are typically those in the low and medium cost segments.

However, of late, there have been cases of high-end homes being auctioned off. In Iskandar Malaysia, for example, one agent recently sold a 1,800 sq ft condominium in Danga Bay for RM395 per sq ft.

Located within a stone throw’s away from Istana Bukit Serene and Country Garden, that said property was selling at around RM1,000 per sq ft at the peak of the market in 2012.

With R&F Princess Cove’s and Country Garden’s units expected to flood the market this year, the number of auctioned properties are set to rise further.

The combination of an oversupply situation, the lack of rent-seekers in the market and the likelihood of a technical recession in Singapore will possibly see many investors bite the dust, as such homes in Iskandar Malaysia are mainly driven by foreign purchasers.

A recently set up company, BMV Property Link LLP, has about 100 distressed properties in their inventory which was sold at some 30-50% below market value. This presents a very good buying opportunity for the cash rich buyers.

What is BMV?

BMV properties are residential properties that are available below their market value. It also includes a distressed property that has been auctioned off (rumah lelong) by banks, usually from a seller who is unable to service his mortgage.

When buying a BMV, you will need to attend an auction in court and prepare a bank draft in advance to show of interest.

This will cost you around 10% of the reserve price. For example, if the property is being auctioned off at RM50,000, you will need to prepare RM5,000 in bank draft. If you have successfully bid for the property, you will need to settle the balance of the payment within 120 days.

The good

If you urgently need a home, you do not have to wait three years, as in the case of buying from a developer. From an investment point of view, buying such properties makes sense as you can buy multiple of distressed assets equivalent to buying one from the primary or resale market.

Due to the lower acquisition costs, your rental yield is higher which ensures that you can cover your mortgage (if you are taking a loan) or positive cash flow if you are buying it in cash.

The bad

A BMV property may have a reserve price of RM50,000 but at an auction, it may go up to RM100,000 as there are many bidders who may have deep pockets.

Therefore, you need to be prepared to have sufficient cash in case you need to top up.

Also, there are a lot of hidden costs for example legal, quit rent (cukai pintu), unpaid utilities and maintenance fees, assessments and so on. One friend of mine, had to pay up in cash the unpaid utilities and maintenance fees in excess of RM10, 000 as the previous owner had not paid these fees.

Perhaps, the biggest risk is this – while the property is legally yours, you may find it hard to evict the tenants or owners.

You may have to apply for a court order, through a lawyer, to evict the occupants.

This process can take you up to four weeks and costs you between RM1,500 to RM2,000. Even so, there are no guarantees they can be evicted as Malaysian laws favours occupiers.

When buying a BMV property, it is best to find out if the property is occupied by tenants or owners.

In the case of tenants, they are generally easy to deal with by offering extended lease. 

However, this is not the case for disgruntled owners who may be forced to sell of their property and are reluctant to move.  Therefore, to mitigate your risks due diligence is important by hiring a good solicitor and agent to help you buy BMV properties.

DISCLAIMER: The opinion stated in the article is solely of Khalil Adis, Director, REI Mediaction Sdn Bhd and Founder of Khalil Adis Consultancy and is not in any form an endorsement or recommendation by iProperty.com. Readers are encouraged to seek independent advice prior to making any investments.

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