Better to sell home than be bankrupt, say property experts

It's the bitter exit plan for struggling homeowners if they want to stop banks from turning their lives upside down.

PETALING JAYA: It is better for homeowners struggling to repay their housing loans to sell off their properties and avoid bankruptcy, says a property expert.

Ernest Cheong said in doing so, a property owner avoids ending up with the bank foreclosing property if he defaults on payments and worse, declaring him bankrupt if outstanding loan amounts remain unpaid.

Commenting on recent remarks by a think tank that Malaysia’s property bubble was set to burst, Cheong said the situation was bleak for property speculators and genuine house buyers who overestimated their ability to afford properties worth more than RM800,000 between 2010 and 2015.

“I believe those who purchased properties under RM500,000 will be okay.

“But for those who bought properties closer to the RM1 million mark, it might be a bit too late for them to get themselves out of a sticky situation.

“Say, for instance, you bought a RM800,000 condominium in 2014/2015, when the property market was at its peak.

“If you took a RM700,000 loan for 30 years, the monthly repayment is RM3,500 a month.”

To repay a RM3,500 loan a month, a person’s household income would need to surpass the RM10,000 mark at least.

“But as we know, salaries haven’t increased at the same rate as the rising cost of living.

“On top of that, some people may have incurred new commitments like having a child or sending one to college. These cost a lot of money.”

So, Cheong said, there was bound to be those who are struggling to repay their loans and this was evident in the increasing number of housing loan defaults and the affected properties being auctioned.

Last May, it was reported that 6,225 residential properties were put up for auction in the first quarter of this year compared with 5,442 properties in the corresponding quarter of 2016.

Exit strategy

Still, he said, speculators or home buyers who bit off more than they could chew a few years ago, should now look for an exit strategy, especially given that property prices are plummeting while the cost of living is increasing.

“My advice is that if you feel you are unable to sustain your monthly housing loan repayments, try to sell it even if you end up making a loss, which is highly likely.”

Cheong said since 2016, property prices have been dropping and on average, in the Klang Valley, property prices have dropped by around 30%.

“If you took a RM700,000 loan for a RM800,000 property, for the first three years, you’re only paying the interest. You still owe the bank the RM700,000 principal amount.

“So, if you can get an offer for RM800,000, you should consider yourself lucky given the drop in property prices.”

Cheong said if a person managed to sell the house at less than the purchase price, he may still owe the bank the difference between the selling price and the outstanding loan amount.

But, he said, at least such homeowners could negotiate with the bank to convert the difference into a personal loan repayable over 10 or 20 years.

Cheong said this was a relatively “good” outcome for someone in a financial quandary as it was better to sell the house at a loss than defaulting on the loan and letting the bank foreclose and auction off the house.

Avoid default at all cost

Cheong said those struggling to repay their loans must avoid defaulting at all cost.

“Forget sentiments or profit that could’ve been. Cutting losses is better than the worst-case scenario which could end in bankruptcy.”

He said in the worst-case scenario, the property will be foreclosed and auctioned off.

“But if after the auction, the homeowner is still unable to settle the outstanding payments to the bank, they may be declared bankrupt.”

Cheong added that if a homeowner fell behind their loan repayments for three months, they’ll get a foreclosure notice from the bank.

From that point on, if they try to sell their house themselves or if the bank forecloses it, it could take up to 18 months before the property is actually disposed of by auction.

“You could even end up losing large amounts of money as you would have to pay various fees such as auctioneer’s fees and legal costs from the auction price which may be significantly lower than the market price.

“If you bit off more than you can chew, take this experience as a lesson. It’s okay to cut your losses and start again.

“There’s nothing wrong with selling your home and renting a house. It’s better than being declared bankrupt.”

Upmarket properties harder to sell

Mohd Izwan Abdul Latiff, a property auction agent, says he is seeing more upmarket properties being auctioned.

“Nowadays, I am seeing more properties above the RM800,000 mark being auctioned.”

For now, he said most of his clients who are investors are into the market for affordable homes under the RM400,000 mark and higher-end properties were harder to sell.

What is certain, he said, was that it’s difficult for homeowners to get their desired selling price because the property market is in the midst of correcting itself.

“People who are struggling with their housing loans should opt to sell their homes before it is put up for auction, even if it means selling at a lower price,” Izwan said, giving the same advice as Cheong.

Izwan said it is better for homeowners to sell the house on their own rather than have it auctioned, except for homes in really “hot” areas.

“If you default on your loan and the house is auctioned, you’ll be charged higher interest rates. So you’ll incur more debts.

“If the property is in an area which is not high in demand, it’ll fetch a lower price.

“But if the location of the property is hot, then it may actually be better to let the property be auctioned even though it means higher interest rates as you’re likely to get a better deal due to the sheer number of bidders.”

Property, he said, is all about location, and properties in good locations may even fetch market rates.

Last year, economist Hoo Ke Ping predicted that Malaysia would be hit by a recession in 2018, resulting in, among others, the prices of medium and high-end properties dropping.

Previously, Cheong had also warned that the glut of unsold luxury properties could result in a financial crisis. - FMT