“No-Money-Down” Strategy To Buy Property
If you read property investment books, you definitely will come across a strategy known as “No-Money-Down” strategy. In other words, it means you don’t have to pay a single cent to purchase your property.
Wait a minute, did I just say “you can purchase a property without paying any advancement or deposit?”
This is true considering our government has a scheme known as “My First Home Scheme” to assist young adults in purchasing their first property, by allowing them to get 100% financing from Financial Institution.
But what about another strategy where you have the Sale and Purchase Agreement reflecting higher purchase price to enable you to get higher bank loan? Let’s say, you need a 10% deposit for a house priced RM400, 000. You negotiate with the Seller to have the Sale and Purchase Agreement to reflect RM440, 000 as the selling price.
Now, you can purchase your property without any money down because the 10% deposit in the sum of RM 40,000 came from the bank for a RM 400,000 property!
This is exactly what happened today where we have friend, who came to our office and asked us whether it’s viable to have the sale and purchase agreement reflecting higher price as suggested by the purchaser to enable the purchaser get a higher bank loan.
What are the problems of this strategy?
In seller’s perspective,
You may pay higher Real Property Gains Tax
An increment of RM 40,000 in the selling price mean you earn RM 40,000 more and this mean an extra RM 4,000 to be paid as RPGT if the property is sold within 2 years, or RM 2,000 if within the third and fifth year.
You have to adjust your Income Tax/Financial Statement.
Where your RM 40,000 goes to?
You may have to pay higher legal fees and stamp duty for the transaction.
Legal Fees and Stamp Duty are based on selling price or market value, whichever is higher. If the standard sale and purchase agreement where stamp duty is shared equally between the seller and purchaser is used, then you have to fork out extras for these fees. Even if both of you have agreed verbally that the seller should fork out the extras, anything not in writing will never be safe on your side.
You may have to pay the opposing party the extras in the event of your default or breach of any of the terms in the sale and purchase agreement.
If there is any unintended breach or default by you, normally you have to return whatever amount you have received from the other party plus another equivalent sum, and may also include amount stated but not received. In other words, you may be liable for the RM 40,000 to the other party!
From the buyer’s perspective,
Likewise, you may have to pay higher legal fees and stamp duty
Same like seller, a higher selling price means higher legal fees and stamp duty payable by you.
You also risk paying the opposite party the extras in the event of your default or breach
Let’s say you’re unable to secure a loan for the selling price reflected in the agreement, you’re liable to fork out to the seller the selling price reflected in the sale and purchase agreement or the deposit required.
You also risk paying the opposite party the difference between the reflected sum and actual selling price
Can the seller come and ask from you the difference between the reflected sum and actual selling price? Yes, the seller can because it’s reflected in the Sale and Purchase Agreement and that the actual selling price ought to be higher than the verbally agreed price. Although you can argue the opposite, but it’s too late and too troublesome to do so once you had signed the agreement.
However, in this strategy the buyer may benefit in the long run because:
- He can command higher selling price, higher than the selling price reflected in the Sale and Purchase Agreement, provided the sum is not excessively extra.
- He pay less in Real Property Gains Tax (RPGT) if he sells within 5 years because the profit reflected will definitely be less than the actual profit.
Now, our two cents worth opinion for you is, weighs the pros and cons yourself if you decide to reflect a higher selling price in the Sale and Purchase Agreement. It all comes to mutual trust between the parties when selling and buying property. It can either run smoothly throughout the entire transaction or a party can intentionally cause you losing money, and in some cases both money and property.
So, always get your own lawyer to represent you. Get your financial status and credit rating right before committing yourself into any purchase. As Robert Kiyosaki said about the problem with no money down strategy is that many people think they can use the strategy even when they don’t have any cash available. Always have some cash available in the event you need to fork out the deposit yourself, else you may be liable for civil suit.
Remember, there is no guarantee that you can always get the bank approved your loan in whatever amount you desire. Recent news stated “Nearly half don’t quality for My First Home Scheme”!