When looking for property in Malaysia, buyers generally have one of two options to choose where to buy from, that is either;
- buying a brand-new property directly from a Developer (new launches or ongoing construction), or
- buying it ‘sub-sale’ from an existing property owner in a secondary market.
There are several differences between buying a property directly from a Developer and buying it ‘sub-sale’ from an existing property owner in a secondary market, such as;
a) Critical Information
When buying from a Developer, obtaining critical information regarding the development and unit is convenient and straightforward, as you can visit their sales gallery, view the showroom unit (do take note of the obvious disclaimer that the showroom is not a representation of the actual property), and most of the property-related information is provided in the sales brochure or given by their sales representatives.
However, it is different when purchasing a sub-sale property as the onus is on you as the potential purchaser to ask specific questions about the property based on your own knowledge, for which some critical questions can often be overlooked. This is where appointing a diligent and professional real estate negotiator can (and should) assist you in procuring the critical information regarding the property, in addition to merely arranging for a property viewing. Keep in mind that the real estate agent is appointed to represent the seller’s interests (yes, it is the seller who pays the agent’s commission), and NOT your interest as a buyer. As the maxim ‘let the buyer beware’ goes, the onus will ultimately be on you as a buyer to ask the right questions AND conduct the preliminary due diligence on the sub-sale property.
Below are some important questions that every sub-sale property buyer should ask about the Property before signing the Offer Letter:
- Is the seller the legal and rightful owner of the property? It is possible that the ‘seller’ is not the legal owner. For example, a relative who inherited the property or obtained the property from a divorce settlement, but is not recognised as the legal owner, etc.
- Tenure of the property: freehold or leasehold. How many years remaining? It is important to note that some banks do not approve a buyer’s loan as a result of a few years left on the remaining lease.
- For strata property: is the strata title already issued by the relevant authorities and has the seller obtained the strata title? This increases the transaction time towards completion of the sale if the seller fails to perfect the strata title.
- For strata property: does the property come with parking lots? As a buyer, you need to be aware that not every strata property comes with parking lots.
- For landed property: any renovations, extensions that had been done previously and has the Certificate of Compliance and Completion (CCC) been obtained? If the seller fails to inform or provide proof of this, your loan application or the loan margin you may be applying for could be affected
- Are there any occupants or tenants currently staying at the property? This will affect the period of when a buyer can move in
- Does the property come with an inventory of fixtures / fittings / furniture?
- Any specific repairs needed done by the seller before the handover? (as is where is basis)
b) Payment and timeframe completion period
If you are purchasing the property directly from the developer, as a buyer, you are required to place a nominal booking fee to book the property. This is followed by placing a deposit (first 10%) upon signing the Sale and Purchase Agreement (SPA) a few weeks later when the developer’s lawyers have contacted you. The Developer will then issue progressive invoices to you or your financier within the estimated construction period of 48 months (for ‘sell then build’ developments).
In contrast, for a sub-sale transaction, the buyer is required to place between 2% to 3% of the purchase price as an earnest deposit with the real estate agency. There is usually quite a strict and often short timeframe (14 to 21 days) for both parties to engage their own lawyers, conduct preliminary searches, negotiate the SPA and then sign the SPA. The risk of disputes, delays, or disagreements on the SPA during this time which can result in an aborted deal is high, compared to if purchasing from a developer. The remaining 7% of the purchase price is payable upon signing the SPA. The standard time frame to complete the SPA transaction is within 3 months where the buyer needs to pay up the remaining 90% of the purchase price.
c) Defect Liability Period
The sale and purchase of a property under construction is regulated by the Housing Development (Control and Licensing) Act 1966 (“HDA”). If you have purchased directly from a Developer, there is a statutorily-prescribed defect liability period of 24 months (landed title) under the Schedule G or 36 months (strata title) under Schedule H of Housing Development (Control and Licensing) Regulations 1989, where the Developer is required under law to fix any defects e.g. leakages, cracks, broken tiles, etc. from the date you receive your vacant possession (keys).
This is different when purchasing a sub-sale property as the property will commonly be purchased on an “as is where is” basis as at the day of inspection or the day the agreement is signed unless negotiated or agreed between the parties for the seller to make specific repairs before the handover. Generally speaking, if there are any major damages to the property arising during the sub-sale transaction, the owner will be responsible to fix the damages during the sale transaction before handing the property over to the buyer.
d) Rebates and Goodies
As a buyer purchasing from a Developer, you can get some good rebates and freebies. The Developers’ market is often very competitive and as a local practice particularly where supply exceeds demand, developers tend to give various discounts, rebates (return of purchase price at the end of the transaction), freebies (renovation for either built-in cabinets or kitchen cabinets), free SPA and loan legal fees and / or stamp duty etc., which can save you a lot of money.
Meanwhile, there are no similar rebates and goodies offered by the seller for sub-sale purchases. As a buyer, you may have the ability to negotiate or request for early vacant possession or renting the property during the transaction from the seller. However, such requests need to be put forward before the signing of the offer letter to purchase, or before the signing of the Sale and Purchase Agreement.
Buying from a Developer may also have its perks, in terms of financing. Developers often have an array of their ‘panel banks’ on standby at the sales gallery during the launching of the project. This allows easy access for buyers to apply for their loans which saves time as they will be able to submit their applications, assess their borrowing ability and possibly stand a higher chance of obtaining a loan with several ‘panel banks’ on the spot.
However, buying from a sub-sale is different as the buyer needs to get quotations from various banks on their own or via bank agents with the possibility of a lengthy time spent looking for the right bank and subsequently providing more documents to the banks. Before the bank approves your loan application, the property will need to be valued by professional valuers, costs of which are usually borne by the buyer.
If the value is lower than the SPA price, the buyer may need to come up with a higher differential sum to make up for the shortfall. The home loan’s margin of finance is based on the market value, not the SPA price.
Buyers also need to be aware of other incidental costs when buying a sub-sale property. For example, you may need to fork out the legal fees, stamp duty on loan documents compared to direct purchases from developers, which we had previously highlighted in our article Incidental Costs Applicable to Purchasing Sub-Sale Property in Malaysia.
In conclusion, ultimately you, the buyer, will need to weigh the pros and cons of buying directly from the developer versus via a sub-sale based on which option best suits your needs and budget.
This article was written by Shawn Ho (Partner) & Suzanne Fam (Senior Associate) from the corporate practice group of Donovan & Ho. Shawn leads the corporate practice group of Donovan & Ho, and has been recognised as a Notable Practitioner, whilst the firm has been recognised as a Notable Firm for Corporate and M&A by Asialaw Profiles 2020 and 2021. We are also ranked as a Recommended Firm by IFLR1000 2020 and 2021.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. We also advise on property transactions and real-estate related tax planning. Feel free to contact us if you have any queries.