Beware of pitfalls in property deals

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June 7, 2009 Sunday

Beware of pitfalls in property deals

Besides errant agents, there are other factors to be mindful of during bad times, say experts

By Joyce Teo, Property Correspondent

A couple recently lost out on a property deal because their agent sold off the unit without their knowledge. In another case, a couple paid cash for a deal that did not materialise.

In every property downturn, some agents will get 'creative', though a deal can fail for many other reasons, property agency bosses said.

Buyers should always take precautions and do their homework when presented with what seems like a really good deal, they said.

Case 1

A couple thought they had bought a unit at Yishun Emerald when they paid $5,000 cash for the option to purchase, as well as another $20,000 upfront to the seller, of which $8,000 went to the agent.

The seller let them move in early while they waited for the $550,000 sale to complete. They held their housewarming party and settled in.

But the deal fell through. The condo's management could not transfer the unit to them because of the seller's debt arrears.

The $12,000 upfront cash was for the seller to pay that debt. Not only did he not pay it, he also asked to borrow money from the couple on a few occasions, said the husband, MrJumari Osman, 34.

'We realised the seller was also defaulting on his housing loan and that his flat was later repossessed by the bank,' he said.

By then, the couple had forked out nearly $40,000, including legal fees and the bank mortgage penalty fee. The agent refused to return his commission to them and the seller said he was flat broke.

'It was a negative sale, so we knew the seller wasn't going to get anything out of it, and that he had a debt with the condo's management,' said Mr Jumari.

'But we were not told at all that the unit was in danger of being repossessed.'

The agent, Mr Jumari said, claimed that he did inform them of the problem. In any case, he was the one who instructed them to pay the $20,000 to speed up the sale, said Mr Jumari.

In this case, 'the buyer should have made the cheque out to the MCST (management corporation) instead of the seller, knowing that the seller has debts', said Mr Chris Koh, director of Dennis Wee Properties.

What the agent should have done was to get a lawyer to add a clause in the standard option to purchase document, saying the $12,000 is for the payment of the MCST debts, he said.

As an added precaution, the clause could have also said that the $12,000 was conditional to the sale, he said.

As a sign of goodwill, the agent should refund the commission, agency bosses said.

In general, buyers should avoid paying more than 1 per cent option money in a resale deal, said PropNex chief executive Mohamed Ismail.

This way, their exposure will be limited if the deal gets terminated for various reasons, such as the death of the seller or if the seller becomes bankrupt, experts said.

Case 2

Mr Kenneth Chia and his wife were so keen on a Spring Grove unit in Grange Road that they were prepared to offer a cheque on the spot.

They offered $990,000 - $10,000 more than the previous offer - and were willing to raise it if there was more competition.

The seller's agent told them not to bother with the cheque (the asking price was $1.08 million) and later sold the unit to another party for $1 million in a co-broke deal.

The couple's beef was that the agent did not inform them of another higher offer that came later.

When confronted, the seller's agent said she was not bound by duty to tell them about it, said Mr Chia, 32.

'We bought a much better unit for a bit more ($1.08 million). But if we had known about the $1 million offer, we could have bid at $1.05 million and the seller would have got $50,000 more.'

In hindsight, everyone may be willing to pay a bit more, experts said. 'What keen buyers should do is to make an immediate offer that is close to the seller's expectations,' said PropNex's Mr Ismail.

In this case, if the couple did not raise their offer on the spot, it meant their offer was only $990,000, said ERA associate director Eugene Lim.

'If another buyer later offers a cheque at a higher price that the seller agrees to, it will be a done deal. The agent is not obligated to inform the previous home-hunter of the higher offer,' he said.

The key is whether buyers are serious about their offers, experts said. 'When the buyer makes an offer to the seller through our agent, we do it officially through a document called the offer to purchase. It is never verbal,' said Mr Lim.

Case 3

There are sellers out there desperate for cash, and agents may thus structure an attractive deal for the buyer.

In these cases, the buyer may be tempted by the extra discount, which is all right as long as precautions are taken, said Mr Ismail.

Let's assume a seller is willing to sell his $1 million property for $950,000 on the condition that the buyer gives him 10 per cent of it in cash immediately.

Typically, the buyer pays 1 per cent, and a further 4 or 9 per cent within four weeks, to the seller's lawyer. The money will be transferred to the seller when the deal is completed three months later.

So if the buyer agrees to give him 10 per cent cash, it means that only 90 per cent, or $855,000 is going towards the property purchase.

Problems will arise if the seller's housing loan is more than that amount. 'If the seller cannot redeem the loan, the property will not be transferred to the buyer,' said Mr Ismail.

To avoid this problem, a buyer should get his lawyer to check on the seller's outstanding loan on the property, he said.

Another risk is that the seller becomes a bankrupt within the three months it takes to complete the deal, said Mr Ismail.

A buyer should therefore also check to see if there are any pending legal suits against the seller to ensure he won't be made a bankrupt before the deal is sealed, he said.

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