Buyers Beware - If it looks too good to be true it nearly always is!!
My name is Jo Lodder and I have been working in the resort property industry for nearly 20 years with a focus on Asia for the past 12 years, as a developer, agent & advisor, and I can honestly say I have seen “the good, the bad & the ugly” and what the last 2 decades have taught me is that “BUYER BEWARE” - it is so easy to buy a property especially when you have a slick sales agent and you are in your dream location, and the deal looks SO good however once you have bought it, this is when trouble can really start!
These 6 vital steps outline the issues I have encountered as a developer, agent & advisor when looking at everything from land, apartments, houses to hotel resorts, and with this, I hope to help you avoid the pitfalls that I have encountered along the way. Or at least open your eyes to them!
1 - Finding the right investment property
Investing in property anywhere in the world requires careful research and thorough due diligence. Some countries and regions are more transparent than others with strong laws and protections in place to protect both the seller and buyer.
Asia has had its share of nightmare scenarios for the unwary and underprepared investor, with Thailand & the Philippines in particular notable hotspots because of their attraction and popularity for foreigners looking for dream homes. Investing in most of the regions’ capital cities is much more clear-cut with many reputable developers offering high levels of transparency however this isn't a given. Heading into the sea & mountain resort areas things can be less well defined, especially where land is part of the deal. Japan is one of the only countries where land is owned fully freehold for foreigners however even here things are not clear-cut.
2. Due Diligence
Most investors that purchase abroad are looking for a second home, vacation apartment, or property that can appreciate in value as well as supply a regular rental income. So, we are not inexperienced property buyers. In our home countries, we are (quite rightly) punctilious when it comes to doing our homework. We studiously study the land title registry, structural surveys, town planning proposals, access rights and borders, any sewage & waterworks, checks on plumbing and heating, insurance, roofing, subsidence, vetting the neighbours, and making cost comparisons. Make sure the management of the property if in an apartment block or house community has a reliable track record. This is all in the name of making absolutely sure that we are making a sensible, smart purchase, rather than buying into a liability.
We call this DUE DILIGENCE!
However, our natural cautious mentality often takes something of a vacation when we start looking to buy property overseas. We allow ourselves to be easily beguiled by the ever-friendly salespeople and the abundance of photos of palm-fringed sandy beaches or beautiful fluffy white snow as if we were choosing a package holiday. This preoccupation with ‘living the dream’ can certainly put our intuition and prudence on stand-by.
3. Location Location Location
Proximity is also another factor. We may have only visited the country or area whilst on holiday and been enchanted or we are buying off-plan without ever having been there before. More often than not, we live in another country and don’t have the time to make frequent trips or in the case of now, COVID prevents this. Thus, doing thorough due diligence becomes somewhat emotive, relying on the information provided by the agent rather than using our intellect to challenge and check the facts presented.
Site Visit or clear knowledge of the location and surrounding areas
We may not have a clue about the local laws, attitudes to foreigners or the general economic and political climate. That’s why a site visit is essential, not just to bask in the snow or sunshine, but to see for ourselves even the obvious things such as the locale and position of the property as brochures can be edited or airbrushed to create the perfect environment when that might not be the case at all. Even though there is strong property title legislation in most countries, the law can be interpreted in many different ways depending on the bias of the local legal representative. Foreigners also have the added problem of translating documents where important information is not communicated or falsely entered. For example, buying a property with a spouse or partner who is a local can often see the rule of law stretched in their favour leaving the buyer exposed for many reasons.
4. Legal - employ a local lawyer
Wherever the property, it is essential to engage legal (and financial) counsel from reputable law firms that have a track record of working with foreign investors, are unbiased to local forces and can extricate the buyer if the sale goes wrong. This is also true when purchasing through a sales agent. Reputable companies choose their projects carefully, fully vetting the developer and conducting due diligence through a creditable law firm getting copies of all the requisite documents to present to their clients and ensuring that there is an honest exit plan should one become necessary.
Going it alone is extremely ill-advised as frustrations can arise when asking developers questions such as how their projects are funded. Getting information on who the shareholders are or even if they have sufficient funds to complete the project irrespective of sales are often obfuscated to baffle the inexperienced buyer. These are some of the most important questions to be asking and ones that reputable developers and agents should have on hand with proof. They are far more critical than ‘how close is it to the beach?’ or ‘is it ski in, ski out?’ The bottom line for anyone considering an off-plan investment is ‘how safe is my money?’ Everything else is purely secondary.
5. Management of property & rental
It is easy to buy a property however if it isn't managed correctly then it is almost impossible to sell (or rent). After making sure that the property will be built if off-plan or is real if built, then making sure the management set up is professional and competent is the next most important part of the purchase process, things like if the management costs are for free then this should ring alarm bells. Getting a full breakdown of costs is very important with an explanation of what each fee is for. Again, if the developer can't do this it should ring alarm bells! - The main reasons it's so important that we have good management set up in place is that it takes all the headaches away from the day to day running of the holiday home/investment property leaving us to enjoy it and reap the rewards. Then when it is time to sell we have a property in a tip-top condition which will mean a quicker sale and better profits.
I have seen far too many properties that look amazing on paper however the developer has just disappeared after a couple of years and the management has stopped and with that, the property condition has quickly fallen into poor repair, the gardens all overgrown, paint peeling off the walls, the interiors damp as there is no one opening up and on top of all these issues no rental income.
For me, this is the equivalent in the property industry as the Pump & Dump in the financial industry. To avoid this, we should see if the developer is keeping any units, what their involvement and responsibility ongoing will be. If they are not involved after completion then we should make sure that there is a professional management setup that we as the owners have input into before we take on our dream vacation home or investment property.
6. Tourism levels & government support of tourism
Economic forces should also be analysed carefully, especially if buying a resort property and we want to get a strong rental return. We should be looking at tourism arrivals; are these going up year on year? Is the government behind increasing these figures & what demographic is the focus? We need to know the expected occupancy levels and what the anticipated room rates will be. How will the income be divided between the management company/developer and the owner? Of course, we would also want to know how many days a year we can enjoy our fantastic dream property for ourselves. After all buying, an investment like this is ideal for paying for your holidays & receiving an income if done correctly!
We should look for airport expansion or a new airport arriving shortly, new roads & rail links that help tourism arrivals such as with Niseko where Sapporo airport has been expanded with plans to do so again as the numbers of arrivals increase year on year along with a new more direct road from the airport to Niseko cutting nearly an hour in time to make access easier and quicker. There is also the bullet train expansion that will mean 4hrs 30mins from Tokyo to Kutchen.
The same is happening in Vietnam with their largest airport Tan Son Nhat in Ho Chi Minh City that could get a 3rd terminal and other facilities.
All examples of government money being spent to increase tourism and a good indication that this will help tourism in the area, with subsequent rental increases as well as property price rises. This has happened in some other Asian tourist destinations with investors making some great returns.
Also due to the issues of COVID it is wise if we look at how big is the domestic market & if international tourism is affected how will that impact on the purchase. Ideally, we see what the management companies’ abilities are to market to both international & domestic tourism and is the investment able to attract both.
Read the remaining pages to see two recent examples of developers one in Niseko, Japan & the other in Pattaya/Koh Samui/Phuket, Thailand
EXAMPLE 1 - Niseko, Japan (this project has been sold off-plan and building hasn’t started so the findings are based on experience & local sentiment)
Recently we saw a developer in the much sort after Niseko (Asia’s only branded ski resort) promoting a project with rental guarantees that we know for sure are not possible, houses on plots that are so close together it is impossible for snow clearing, promoting that it is just minutes from the ski slopes and other amenities when it was absolutely miles away and would require a car which is not often possible, especially if Chinese with no international driving license. The property was sold to include management fees with guaranteed 7% rental returns. On top of that, they are selling properties that look on paper to be good value price-wise however very quickly with a small amount of research you can see that they are selling almost double the value based on location, plot size and villas size and with totally unrealistic rental returns which we know based on the location will not be possible to achieve. This means that there is a high chance the rental has been added to the purchase price, as well as the free yearly management fees (the way the properties are set up the snow clearing is going to be almost impossible, thus expensive - also they are proposing they truck the excess snow out of the project which will only add more to the cost)
In the best-case scenario the properties are ok at the end of the guarantee period however once the guarantee stops & the actual income rate kicks in then suddenly the income will drop considerably, as well as the management fees being added on which will dent any income you may be getting & this is if you are lucky.
It is more likely based on my experience that the developer has no intention of full filling the management & rental agreement and that they will just disappear after a year or so. All the owners are then left to try and sort out the project and as there is no central management this will prove very difficult and like many a similar project it will become a ghost town and any investors money will vanish as the houses will under snow!! - BUYERS BEWARE
This example is not normal for Niseko as there are many reputable developers. It is only now that we are seeing these kinds of example arriving there with developers looking for the easy buck as Niseko is becoming more and more known internationally with property prices on the rise (this example has happened in Phuket, Koh Samui, Boracay & many other locations that property prices have risen and supply is in demand)
EXAMPLE 2 – Thailand - Developer that sold small apartments in Pattaya/Koh Samui & Phuket with between 8 - 10% guaranteed rental returns for 10 years along with a guaranteed buyback scheme at the end of this 10 years.
When a client approached me and asked me what I thought it didn't take too much due diligence to see that this was a pack of cards waiting to fall. (he said surely not as the company was 20 years old - Bernie Madoff was a well-respected American financier for 40 years - his too good to be true investments lost people billions of USD when his Ponzi scheme collapsed, so even longevity isn’t proof that the deal is good) When I did a little digging, I could see that the developer couldn't rent the property out and receive enough income to cover the rental guarantee plus their costs and that they must be adding some of this to the purchase price. And then how would they also buy back the property at the end of 10 years?
The developer was relying on continued sales from new projects to fund the buybacks and rentals. When the market stopped because of COVID the whole pack of cards came toppling down and now the company is bankrupt owing billions of Thai Baht and leaving many people stuck with a property they paid way too much for so are unable to sell. That's not to mention the management of the properties which I can almost be certain has stopped looking after them, so not only were the properties overpriced when sold but will also start looking very old very quickly as properties in tropical countries need constant looking after. As with any resort type property whether by the sea or in the mountains with snow the management is critical to keeping your vacation home in good condition. Sadly no one who has bought one of these apartments is a winner (well except possibly the early buyers!!)
Full disclosure – I am part of a number of developments in Niseko, Japan as well as their marketing agent. I have been involved in the past with projects in Cambodia, the Philippines, Thailand, Sri Lanka, South Korea & Vietnam