Property speculation - Don't get carried away

By Leong Chan Teik - Feb 4, 2007

The Sunday Times

IF YOU wonder how intensely some working folk might speculate in property, consider the story of a lawyer who bought 15 condominium units at the peak of the 1990s boom.

When he - and everyone else - was sure that property prices could only go up, the downturn happened. He had to sell at a loss and downgrade from his lavish home to a HUDC flat.

It is a good cautionary story for these times when speculative activity is again turning red-hot.

The tale of the luckless speculator was told by conveyancing lawyer Kim Cheong, a partner in the firm Low Yeap Toh & Goon.

It highlights a rarely acknowledged truth - that pitfalls and risks abound when people treat speculation as a surefire way to mint instant money.

In fact, some speculators have already suffered losses in this latest market boom.

At Marina Bay Residences, for example, a handful of options to buy units expired recently without being exercised after four weeks, reported The Business Times.

The speculators could not find buyers at their asking price and decided to forfeit what they had put down - typically, 1.25 per cent of the purchase price, or $12,500 for every $1 million. Units there ranged from $1 million to more than $10 million.

If they had exercised the options, they would have had to next cough up between 4 per cent and 20 per cent of the purchase price, plus up to 3 per cent for stamp duty.

Here are some risks to beware of:

People risks

FAMILY members or friends are teaming up to speculate without knowing whether their partners are overstretching themselves financially, says Ms Lie Chin Chin, a partner at law firm Lie Kee Pong Partnership.

Many are speculating on projects offering deferred payment schemes. This means they don't have to pay the bulk of the purchase price until a year or two later when the projects are nearing completion. When they book a property, they do not check with the bank regarding loans.

'I think some speculators don't have money set aside for mortgage instalments. They are just hoping to flip the property quickly,' says Ms Lie.

Some might not eventually qualify for a mortgage of the size they would need if they can't flip the unit, says Mr Mohd Ismail, the chief executive of real estate agent PropNex.

They could also discover their partner is less creditworthy than they had thought, which would affect the size of the loan approved, he notes.

Properties under speculation are chiefly luxury units, not mass-market ones, so the loans required will be high.

For other people, the crunch will come if they lose their job and cannot even qualify for a mortgage.

The risks rise the longer they hold on to a property.

'If one of them reaches a point where he says, 'We have to sell out or there'll be no food on my table', there will be lots of emotions to deal with, and their relationship will be tested,' says Ms Lie.

If one party refuses to sell - especially if it is at a loss - the other party can sell his share to the partner or an outsider for perhaps a below-market rate, suggests Ms Cheong of Low Yeap Toh & Goon.

Much pain can be averted if there is a written agreement on when to sell, or what price to sell at, says Mr Ismail. 'But most people don't do that.'

Profit risks

HOLDING a property incurs costs that have to be covered if you hope to sell for a profit.

Apart from stamp duty, you have to pay a few thousand dollars in legal fees, and a 1 per cent cancellation fee if you redeem your mortgage before the end of the lock-in period, typically three years.

Mortgages with floating interest rates and no lock-in periods might be more attractive, although the interest rates are higher, says PropNex senior associate manager Bryan Ong.

Payment risks

LET'S say you and a friend buy a property in either equal or unequal shares.

If your friend cannot pay his share of the mortgage, the bank mortgagee will come after you for the entire monthly instalment, whatever the size of your share of the ownership, says Ms Lie.

If the bank has to force-sell the property, it is also legally entitled to look to you for all of the outstanding loan, she adds.

To deal with this risk, Ms Lie suggests taking a type of mortgage where you and your partner(s) can deposit into a joint account a sum of money equivalent to one or two years' worth of instalments. You save on interest costs on a sum of the mortgage equivalent to the deposit.

Ownership risks

IF YOU buy a property with someone outside your family, you and your partner should own it as 'tenants in common', that is, each should have distinct shares, such as 50:50, or 60:40, says Mr Ismail of PropNex.

If one of the owners dies, his share goes to his estate.

This is unlike joint tenancy, where the surviving owner automatically inherits the entire share of the deceased. This is the type of arrangement spouses usually choose.

With quick gains on their minds, speculators could approach you to do a deal if you are lucky enough to work for a property developer or be invited to join the early birds at a launch.

Be wary about lending your name to a purchase in exchange for a cut of any profit.

Legally, you will be one of the owners, and this has serious implications. If your partner defaults on the instalments, the bank can look to you for all of the payment.

And if you later apply for a mortgage to buy your own property, the bank records will show you have already taken out a loan.

Your new loan application might not be approved if your income is insufficient to support two properties, says Ms Lie.

As for the other party, he faces risks that you could lay claim to the property.

He can protect his interest by having you sign a trust deed stating that he is the beneficial owner of the property, says Ms Lie.

This way, he will not lose any share to you - or your estate, if you die unexpectedly and your beneficiaries make a claim.

Tax risks

CAPITAL gains are generally not taxable but if they arise from frequent speculation, they will be taxed.

'If a person is in the business of buying and selling properties with a profit motive, the gains are considered trading profit and are hence taxable,' says the Inland Revenue Authority of Singapore.

'In determining whether an individual is carrying on a trade, factors such as length of period of ownership, frequency or a number of similar transactions, will be considered,' it says.

If the individual is a resident for tax purposes, the income will be taxed at between 3.5 per cent and 20 per cent. For a non-resident taxpayer, the rate is a flat 20 per cent.