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Sub-sale Transaction Do’s And Don’ts

Sub-sale properties are purchased in the open market from previous owners. When purchasing a sub-sale property, it is firstly important to conduct a search on the property at the relevant land office. This is to ensure that the seller is the registered owner of the property. Furthermore, by doing so, one can conduct relevant research and find out whether the property has any encumbrances. Before investing in a sub-sale property, investors need to research what they are actually getting for what they are paying.

According to Malaysian Institute of Estate Agents (MIEA) Past President K.Soma Sundram, there is only the sub-sale and new properties market when it comes to classification. Each category has its own strengths and weaknesses in terms of being an investment property. To differentiate whether it is a good investment or not largely depends on the individual, so long as it fits their investment portfolio.

Some may look for rental returns pertaining to the condominium market while others may be looking at landed properties for capital appreciation in the long term.

“Generally, in a sub-sale condominium market, a rental return of 5% to 6% is considered good while landed properties will be much lower as rentals (in this segment of the market) are low,” says Soma.

However, landed properties, due to their more limited supply and higher demand, he opines tend to command higher capital appreciation in the long run.

Here are some do’s and don’ts you need to look out for before you decide to buy a sub-sale property.

WHAT YOU SEE IS WHAT YOU GET

When buying a sub-sale property, you can take a look at the completed unit by visiting it and taking time to ascertain the view, furniture and finishings as well as considering the demographics of the neighbourhood.

Macquarie Connect Director of Sales and Marketing Ken Teo says, “I am a sub-sale lover because in the case of sub-sale properties, you can see, evaluate and experience the unit’s overall feel instantly which contributes to the environment factor, making this the most stable investment as compared to new developments.”

He adds that sub-sale properties are also very good in terms of cash flow management because one can straight away buy the property and lease it out for cash flow.

“I like the sub-sale segment because it is very sexy and there is not much capital that is needed,” says Teo.

ASCERTAIN WHAT YOUR BUYING PURPOSE IS

JLL Malaysia Associate Director for Research and Consultancy Veena Loh says there is no simple formula to ascertain whether the purchase – representing either a sub-sale or initial launch is a good deal as every project has to be assessed on its own merits based on its location, unique selling point, comparative pricing to the market and whether it fits the requirements of the buyer.

Teo on the other hand shares that when trying to decide whether a sub-sale property is a good or bad deal, the most important thing to consider is whether the property meets one’s investment objective or not. If it meets the investment objective, then it is a good deal. Therefore, most of the time, whether it is a good or bad deal, depends on the objective of the buyer. For example, if a businessman makes a lot of money in business and wants to build a hedge against inflation, then investing in any property that can achieve this is already considered a good deal.

Teo himself prefers to buy something that can generate rental income so that he will not face any challenges in paying off his mortgage while giving him revenue at the same time.

“Any property that can generate a healthy rental income is considered a good deal for me,” he says.

Property flippers he says may prefer to speculate by buying low and selling high. Therefore, properties that are considered as good deals for them comprise those which have the potential for high capital appreciation.

Hence, an investor needs to know one’s objectives first in order to understand what a good deal entails. However, some opine that it is better to buy directly from the developer during the launch phase because one can choose one’s unit and also enjoy the financing schemes given out by the developer. 

DO CONSIDER THAT SUB-SALE PROPERTIES ARE LOWER IN RISK

Tentatively, new developments tend to have higher risks. Teo further explains that in the case of new development projects, there is always a certain percentage of uncertainty until the delivery of vacant possession (VP) is confirmed for the new homebuyer. However, for sub-sale properties, everything is already there. The condition of the building can immediately be seen right down to whether the place comes with complete amenities. Lastly, the market and rental price around the area can be ascertained.

However, for new developments, you will need to wait until VP to know whether the price has been set at a reasonable rate. Therefore, a lesson to learn is that things can change from the time it takes for the VP to arrive which could be up to three years, 36 months or 48 months.

For instance, the policy might change or the government may introduce other cooling measures. These are some of the risks borne by new developments. However, if everything pans out well, these developments could fetch better capital appreciation as compared to sub-sale properties.

HOW ARE SUB-SALE PROPERTIES DIFFERENT FROM SECONDARY PROPERTIES?

Teo discloses that 5% of new projects tend to not be completely built while 10% to 20% may be under-delivered with the risk being borne by the developer. In Malaysia, it is very difficult for a purchaser with small capital reserves to sue a prominent developer and this is where the homebuyer’s tribunal comes in.

However, the homebuyer’s tribunal also has its own challenges whereby they can have the power to award remedies but not have the power to execute it. For example, if someone sues a developer through the tribunal, it can award compensation. However, if the developer refuses to pay the compensation, buyers cannot do anything unless they hire a lawyer to sue the developer by going to the civil court.

The problem of going to a civil court is that buyers would need to engage a lawyer first to open a file with a chargeable fee involved. In the end, buyers may win the case but lose money in return. The moral of the story is that buyers should always purchase from reputable developers because of their reputation for integrity and consistency in delivering good quality properties to their buyers.

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