Do you need a property guru?

 

From John Tan

For this topic, I will confine it to residential properties i.e. serviced residences, which are the mainstay for most residential property launches by developers these days.

It is common knowledge that buying newly-launched serviced residences or condominiums comes with several tier pricing. Not every buyer gets to buy at the same price point, which is the nature of the industry where pricing is not transparent. There are:

1. Early bird rebates;
2. Associate rebates;
3. Staff rebates;
4. Repeat buyer rebates; and
5. Family members’ rebates.

Note the keyword used is “rebate” and not “discount”. A rebate permits the sale and purchase agreement (SPA) price to be maintained while a discount actually reduces the SPA price. Investors of serviced residences will prefer a rebate as it gives them the avenue of buying properties with little equity. If a 30% rebate is given, then the investor can borrow the remaining 70% from the bank with zero equity to complete the purchase.

The rebates described above are quite commonly practiced. But the highest rebate is arguably the bulk purchase rebate, which is generally not disclosed and not published on the front page of newspapers.

In this pandemic and property market downturn, developers are also in need to dispose of inventories quickly for cash flow. Cash flow is crucial and profits may take a back step in these volatile times.

We are witnessing many property gurus giving online talks and busy recruiting members in this economic downturn. The tag line of “Be greedy when others are fearful and be fearful when others are greedy” is a common quote.

There is an ever increasing role for property gurus to negotiate bulk purchase rebates with developers on behalf of their members. Key motivation for investors of serviced apartments is to buy at the lowest entry price compared to other buyers. The lower entry price is needed as a buffer in case the market value drops in the future and of course with a lower entry price the return on investment (ROI) will also be higher.

On an individual basis, it is difficult for an investor to continually rope in a group of buyers on their own to buy their next property in order to continually earn bulk rebates. Hence, it opens the role for a property guru to occupy this space.

There are several options for investors to choose which property guru to follow:

1. Opt for the guru that gives you the most value. If a guru can give you the lowest entry price for the project you are targeting, you may consider them;
2. Do your own due diligence. If the guru claims you are getting 10% additional rebate as compared to a walk-in client, call or walk in to the showroom of the project and inquire for the walk-in price from the sales staff and then compare with the price that the guru is offering.
3. A good guru will also go through the details of the surrounding projects and rental rates to give you a perspective of the rent you can expect from investing in the guru’s project.
4. There will be “no money down” deals where due to the pandemic, some anomalies are bound to happen i.e. the market value is still higher than the price you are buying from the seller. Market value is determined by the property valuer after making comparisons with recent sales prices for similar projects nearby. Hence, you can maintain your purchase price at market value for the SPA although the actual purchase price is actually 30% below (for example). In this scenario and if you can borrow 70% from your bank, it will translate to a “no money down deal” as the bank would have financed 100% of your net purchase price. This is applicable for new launches or sub-sale properties. The guru will help you to navigate through the legal documentation of such deals if it is a sub-sale purchase. Of course such deals will not be published on the front page of the daily newspaper.

As an investor, be advised that all property gurus have their own agenda when pushing the sale of certain projects as they will earn an arbitrage fee from the developer. How does this work? If a developer gives 20% additional rebate for a bulk purchase, the guru may keep 5% of the rebate for himself and let their members enjoy the balance of the 15%.

Doing the math, if the guru sells 40 units of RM500,000 serviced residences each, he stands to earn RM1 million in brokerage fees. This is on top of the fee he charges the members to join his property guru club. The more buying power the guru has, the higher rebates he can wrestle from the developers. This is what bulk purchase rebate is all about. It’s about the numbers.

Property gurus will need to continually recruit new members as most gurus concentrate on the sales of uncompleted units from the developers, hence their members will not be able to rent out these units anytime soon. As members borrow from banks to acquire under-construction units, their gearing will increase without any corresponding rental income hence after one or two purchases, their debt-service ratio (DSR) may breach the bank’s credit appetite, and these members will not be able to borrow anymore until they find additional income.

The author’s advice to investors is that they should conduct their own due diligence on the additional rebates promised by the guru and always confirm this at the developer’s office. Do also double check the market value of surrounding similar projects and rental rates. Despite bulk purchase rebates, is your project’s pricing comparable or lower than the nearest similar project?

So, do you need a property guru?

It all depends if you have the time to do your own research and get the best deal for yourself. In the author’s view, there is a role for property gurus for investors in this pandemic. Profitable property deals continue to abound during the property market downturn and good property gurus will strive to put the best deal on the table for their followers.

Happy investing! - FMT

John Tan is an FMT reader and a property commentator.

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.