In recent years, the property market has seen some of the most unconventional purchasing methods in a move to combat the credit crunch. The younger generation of property investors are less skittish about the idea of non-traditional financing as compared to their predecessors—to them, grants and freehold properties may be ideal, but not necessarily practical.
While the end game is still residual income, the new rule is “you no longer have to own a property to earn from it”. And because these methods are unconventional, they pose a higher risk than the traditional methods. Elizabeth Siew, Commercial & Property lawyer and author of “Smart Property Investors Know The Law In Creative Investment”, broke down some of these creative investment strategies and ways to circumvent their risks.
RENT-TO-OWN (RTO)
- Government
In a bid to help young buyers, the government has implemented the innovative rent-to-own housing scheme (under the People’s Housing Project) that is designed to ease homebuyers’ transition from renting to buying a home through a deferred payment method. Upon purchase, a tenant is required to service the monthly rent—which includes an amount that is accrued in the buyer’s savings account and will accumulate towards the purchase price—for an agreed period of time. The title will be transferred to you at the end of your lease.
- Developer
“Some developers are now offering this deferred payment scheme too,” informs Siew. “You rent the property for three to five years, and at the end of your tenancy you can obtain a bank loan to pay off the outstanding amount.”
The Risk(s)
Since young buyers are still relatively financially unstable, they run the risk of unemployment which then leads to overdue rents. It begs the question of whether the government is able to terminate the contract in such cases—or if the accumulated rent is transferable to the property when these young buyers decide to upgrade their home. The landlords risk having to bear the damages to the property if the tenant decides to refuse purchase at the end of the tenancy.
What you should do
Make sure you address these issues in your agreement.
OPTION-TO-PURCHASE (OTP)
An OTP is an agreement between a tenant and a property owner that allows the tenant the right to either purchase or refuse the property at any time during the lease. The purchase price can be set forth at the time the option agreement is signed or at the start of the deal. This practice has given a rise to the option fee trend.
“Paying an option fee to book a land is a common practice in Johor Bahru,” shares Siew. “And now, the trend has moved to housing.”
The Risks
There have been numerous cases reported involving the fraudulent practice of option fee. Siew shares her experience working with a client who became a victim. “A handicapped elderly woman came to the office claiming that she wanted to sell her property. She started asking a lot of questions and was willing to sign all the documents as a genuine seller would.”
“As it turns out, the house has already been sold to someone else—and my client lost RM250, 000,” she adds. ““These con artists will come to you with an elaborate story and various tactics to get your money.”
What you should do
Siew advises property investors to do their due diligence and verify the authenticity of Certified True Copy (CTC) documents of the title with the land office. Alternatively, do a CTOS search and then visit the address to identify the real owner.
“It is advisable to have more than one lawyer on standby. If someone ever approaches you with such proposition, request to seal the deal at your lawyer’s office.”
LEASE-SUBLET
If you are renting-to-own as an investor, you can sublet the property that has been leased out to you.
The Risk(s)
You may be violating your tenancy agreement by subletting the property, in which case the owner has the right to terminate the lease.
What you should do
It is important to ensure that it is explicitly stated in the tenancy agreement that you are allowed to sublet the property. Impose a heavy compensation in the case of an early tenancy termination.
DISCLAIMER: The opinion stated in the article are solely of Elizabeth Siew and are not in any form an endorsement or recommendation by iProperty.com. Readers are encouraged to seek independent advice prior to making any investments.