The normal perception of property investment involves the acquiring of ownership to a property through conveyance of the title deed from the property owner to the buyer. Typically the process encompasses the entering into a sale and purchase agreement (SPA) and transfer instrument between the property owner with the buyer.
In the case of a property with individual or strata title, the parties will execute a Memorandum of Transfer where the title deed will be conveyed or transferred to the buyer.
In the case of a property under master title (where individual or strata title is yet to be issued), the conveyance of property is done through a Deed of Assignment, where all the owner’s rights, title, benefits, interest, obligations and liabilities are assigned absolutely to the buyer.
Some of the normal or conventional ways where one could acquire property are as follows:-
- the easiest (but not common) of all, through inheritance;
- buying an off-the-plan property (be it residential, commercial or industrial properties) from a developer or builder. This is generally known as primary market purchase. Purchase is done while construction is ongoing or in most cases prior to commencement of construction;
- buying a completed property from a developer or builder. This may be referred to as a built-then-sell project, where a developer actually completes construction of the project and obtain certificate of completion and compliance, before offering the project for sale to the public;
- buy from an existing owner a completed property or a property due for completion soon. This is generally known as secondary market purchase or sub-sale. One may buy from an existing owner of a property, enter into sale and purchase agreement and instrument of transfer. Upon completion of the sale and purchase transaction, ownership of the property will be conveyed or transferred to the buyer; or
- buy through an auction. It could be a public auction or private auction, where one will bid for the property. Upon successful bidding and payment of full auction price, the auctioning party (more often than not, will be a financial institution) will affect transfer of ownership to the successful bidder.
Unconventional mode of property investment
This article serves to assess and analyse some of the unconventional or uncommon methodologies used by property investors in Malaysia and other parts of the world as their means of investing and obtaining ROI (return on investment) in real estate.
1 Buy from an existing owner of a property SOMETIME IN THE FUTURE. This is a future contract of purchase of property from the existing owner. The agreement may be executed NOW but the conveyance of title may take effect some time in the future. The sale and purchase agreement may be signed in escrow by the parties, deposit with a Solicitor, with specific instruction to date and stamp the said agreement on a specific date in the future. Upon the dating and stamping of the sale and purchase agreement on the specific future date, the sale and purchase transaction shall take effect. In the meantime, the buyer may even have arrangement with the owner for early vacant possession or temporary license to occupy the property on a temporary basis.
2 Take over the company that owns the property: This happens to some commercial properties transaction. A particular property is bought and held under a company. It could be a limited liability company, partnership, limited liability partnership or corporation. The purchase is done via acquisition of 100% paid up shares in the company. The are two setbacks in this type of acquisition :- (i) bank will not finance purchase of shares, as opposed to purchase of property; and (ii) the risk of acquiring an existing company is one may inherit the debt and liabilities of the company. It is important to ensure all liabilities accrued up to the date of completion of the transaction shall belong to the previous owner.
3 Investing in REITS: This is an indirect investment in prime properties, especially prime retail and commercial malls, which otherwise will be beyond reach of a normal man on the street due to its high cost of entry. The benefit of investing in REITs is low starting capital and regular earning of dividends.
4 Invest in property developers’ shares: Another indirect investment in property is by investing in the stock of property developers that is listed on the stock exchange. The set back is the lack of direct control over the management of the property and the company. The performance of the stock may not correspond with the performance of the property but rather a reflection of the management of the company. One may end up hoping and wishing for a dividend that never materializes. Due diligence and study of past performance of the company is important.
5 Buying Power of Attorney (PA): An irrevocable full PA granted by the owner to the purchaser for good consideration, provide the purchaser with full power and authority to deal with the property, sell, dispose, transfer, lease, receive proceed of sale, to sue, receive insurance money and recover debt owing and all matters relating to the property.
6 Buying a Trust: A deed of trust is an equitable instrument where the legal title of a property is vested in the trustee for and on behalf of the beneficial owner. The trustee may be appointed or nominated by the actual owner to purchase and hold the property of behalf of the real owner.
7 Buying Option: An option granted by the owner of a property to the option holder gives the holder the right but not the obligation to purchase the property some time in the future. Once option is exercised, the owner is obliged to sell and transfer the property to the option holder. During the option period, the option holder may negotiate for right to temporary occupy the property or right to lease out the property to third party at a certain rent.
8 Lease options: Lease option is where an option is granted, at the consideration of an option sum, by the owner of a property to a prospective buyer (holder) to purchase the property sometime in the future. Meanwhile the holder takes the property on a monthly rent, until such time the holder exercises the option to purchase.
9 Buying lease rights: A lessee or lease holder of a property may sell the right over the lease to third party, normally with the consent of the owner or lessor. The prospective investor may by virtue of a deed of novation or assignment, assume the right as lessee of the property.
Disposing Properties through Unconventional Means
The same methodology discussed above could be adopted by owner of property who intends to sell, dispose or part obligation of their property to a third party. These could be processes and methodology where one could ‘release’ or ‘offload’ his/her duty and responsibility over a property to a third party without parting legal ownership.
1 Granting a lease: A lease is a tenancy exceeding a term of three years. One way for a property owner who needs to ensure that his/her responsibility of mortgage repayment is by securing a long lease, especially a fixed term lease. He is somewhat guaranteed of the monthly inflow of revenue.
2 Invite a Joint Investor to one’s property or disposing to third party a portion of equity in a property, while maintaining himself/herself as the registered owner. The portion owned by the third party can be hold by the existing owner on trust, by virtue of a deed of trust. The risk of investment is hence shared and spread.
3 Granting Call Option and Put Option to sale and purchase of the property in the future. Whilst the option holder may exercise option to compel the owner to sell in the future, the owner may compel (by way of put option) the option holder to purchase his/her property some time in the future.
In conclusion, be it a conventional sale and conveyance of a property or unconventional disposal methodologies, the fundamental issue guiding one’s decision in selecting the mode of acquiring or disposing an investment property is conducting the necessary due diligence. Proper and thorough due diligence ought to be conducted on the subject matter property, the property owner, the developer of the project, the management of the project, the State’s guidelines, the legality of the structure and scheme of arrangement. It is an investment and therefore calls for risk analysis and feasibility studies.