Reacting to Asking Sean #153 | Losing Money In Property
Just finished viewing Asking Sean #153- “Losing Money In Property” by prolific property blogger Sean Tan, see below. Episode #153! Wowza! Truly impressive achievement, Sean. I think Sean Tan must be the Energizer Bunny of the Malaysian YouTube community. Why? He just keeps on moving on and on. A viewer of his popular YouTube channel rang to ask Sean for advice. A couple of yeas ago, the viewer had bought an investment property in Selangor from a developer at a significant premium price to the neighbourhood, only to find on taking delivery recently, the market value of his investment was much lower than expected. A depressingly familiar scenario in 2021.
Picture credit: Green Chameleon, Unsplash
Should he therefore cut his loss? Or move into his property, pay off his loan installment of RM1,600 pm and hope to sell it when property prices rebound sometime in the future?
There are a couple of interesting points made by Sean in his reply that to my mind are worth highlighting. First, to his credit, Sean starts by commiserating with the viewer on the predicament in which many First Time Home Buyers (FTHB)s will increasingly find themselves in this year and perhaps beyond if a property rebound isn’t around the corner as the experts predict.
That current market rents have fallen below rosy forecast assumptions two or three years ago when New Projects properties were first put on the market by developers should not surprise anyone. Lets fast forward to 2021, the year of the pandemic. In September 2021 as I write, the daily death toll remains stubbornly high despite 80% of the adult population of Malaysia being vaccinated at least twice. So what’s the problem? Upon taking the keys, some highly leveraged FTHBs have been unable to find tenants willing to pay rents high enough to cover the cost of servicing their loan installments. So they have cut their losses, dumping their property investments at big discounts to what they paid for.
Caveat emptor is what this FTHB viewer of Sean’s YouTube iherng Channel should have done. You see, New Project properties, unlike sub-sale properties, are difficult to analyse. Sean also mentions there is no track record of rentals achieved or property price transactions to analyse because ,of course, the properties have not been completed. So what the FTHB viewer should have done before he committed to buying the investment property was to perform a due diligence check of what properties in the same location were fetching in rents and the trend of their transaction prices in psf. I agree with Sean and in fact have covered much the same ground in an earlier post in my blog, Real Estate Marketing 101.
The Big Reveal ?
Many real estate agents just love to market New Projects properties simply because developers pay them higher commissions . I think but cannot be 100% certain that New Projects marketing represents the jam of the real estate industry business - ie. my industry sources say developers happily pay REAs fees or commissions ranging between 4-10% to sell and market New Project properties. Moreover, REAs do not have to disclose to their buyers, whether they are seasoned property investors in the know or FTHBs, most of whom probably are not in the know. In comparison, for sub-sale properties that represent the bread-and-butter side of the real estate industry, commissions are capped by BOVEA at 3%. See the fee schedule on BOVEA’s website below:
Source: https://lppeh.gov.my/WP2016/fees/
REAs naturally prefer to earn the higher commissions paid by developers for marketing New Projects. And why not? After all, as one REA I know well says, “We have to pay fixed overheads (office rent, admin and support staff etc), hire booths in shopping centres, and continually advertise in portals to find buyers”. But as the fee schedule posted on BOVEA’s website makes it plain for everyone to see - the commissions and fees earned on selling and marketing New Projects are “to be agreed upon between the estate agent and the client” . As the saying goes. “Nice work if you can get it”. So some real estate agencies earn a lot of money during boom times because they specialise in marketing New Property projects - in fact they have entire teams dedicated just to market developers’ new projects.
Now obviously if some FTHB buyers not in the know were to find out that up to 10% of the purchase price of New Project properties they are buying are going to the agent as a fee paid by the developer of the New Project, you might ask : Might the buyers be tempted, to Ahem!, change their mind about buying?
Seasoned property investors, of course, have always known there is no need to go through agents to buy New Project properties, especially in the current soft market conditions in 2021. They can go direct to the developer, and ask for a 15% discount off the list price, like what I did in 2000 when I bought my first KLCC property. For the story of how I came to be the owner of a 3000sf+ unit in Kirana Residence, a 5* KLCC SUPER condominium see here.
Maybe in 2021, the year of the pandemic, if there are some brave investors who are cash rich and still think New Project properties in prime locations with a good walkability score will pay off in the long run, why not try asking for 20% or more discount if you think the developer is desperate to sell leftover i.e. unsold units? RC says, “If you don’t ask, you’ll never know”.
Sean says FTHBs should visit at least 20 properties before they commit to buying a property. As the holder of a second rate MBA from Bradford School of Management (I did a one year full time course at the old Heaton Mount campus some 40 years ago - yes, I am in my mid 60s and a certified Warga Emas - for my overseas readers, in Malay, a literal translation means Golden Citizen Retiree) I think Sean’s advice is excellent. In short, do the research like you would if you were buying a high end two door fridge or high end hifi system or a high end 75in 8K Smart LED TV.
I mean many people I know literally spend hours visiting showrooms to personally check out the prices and specifications of high end 8K TVs that might cost say a maximum of RM20,000. But when it comes to buying high end properties costing RM700-2,000 psf that have not even been completed, these very same buyers are happy to believe the promises of developers and agents in marketing advertisements and plonk down a booking fee. Without doing first the same level of research they do before they buy a high end TV. Does that kind of behaviour make sense to you?
Sean also adds, you should learn how to identify USPs of any property you might want to buy - is it near shopping malls, parks and greenery, reputable schools your children might want to attend, etc. Knowing an investment property’s USPs yourself means you will hopefully be immune to the marketing hype that is often employed to sell New Project properties. Marketing professionals talk of selling the Sizzle, not the Steak. You see the same idea used in glossy property magazines all the time to sell high priced New Projects properties: Sell the Dream, not the Property. e.g. To sell pricey dual key duplex properties, marketing savvy developers and their agents sell you the dream of “The joys of multi generation living -staying close to your aged relatives (so “they can occupy the smaller unit and be on hand to look after your children”). Or dual key duplex properties are packaged as ways to sell big floor plate properties to seasoned investors on the basis its easier to rent out two smaller dual key properties rather than one large floor plate single property (because of course “it takes more time to find tenants with bigger budgets”).
What is probably not mentioned in the advertising copy for dual key duplex properties is why some property developers are keen to build them in the first place - they are in fact an ingenious solution on how to maximise plot ratios. And now, you also know why.
Notes and disclaimer:
I am not a registered REN. If you are interested in buying a property in Malaysia, you should get professional advice from a real estate agent or valuer registered with BOVEA.
I have not met Sean Tan in person. But I like Sean’s energetic presentation style on his iherng YouTube Channel. Sean has put out two YouTube videos on Straits Residences on his YouTube Channel. See Sean’s latest Straits Residences walkthrough video at https://youtu.be/7UKxrklhshQ . I have also a post on “Property USPs - a Penang case study “that mentions Straits Residences as an example on how to find out a property’s USPs. You might want to compare Sean’s energetic Condo Walk Through style with my more Ahem! academic approach to finding out a property’s USPs. I think both approaches have their strengths and weaknesses. I will leave it to my readers which style they prefer. But I should add that I am based in Penang and know the Tanjung Tokong neighbourhood quite well. In fact, I also have a third blog that focuses on seaside photography at Tanjung Tokong called Seascapes. If you are a real estate professional in Penang, might I suggest you take time to check out my Seascapes blog as well. The sea views from my balcony are arguably another USP for buying or renting a condominium or serviced apartment at Tanjung Tokong, Penang. And I usually update my photography blog every day.
By second rate, I mean my MBA from the Bradford School of Management was a one year full time course that did not require high GMAT scores nor two years of working experience before my application for entry some 40 years ago. First rate MBAs 40 years ago were usually TWO year full time courses run by leading business schools that almost always required high GMAT scores for entry. Entry to such First Rate MBA courses were highly selective then and even now because demand always exceeded supply. I am of course, very proud to be part of the Bradford MBA international alumni and am delighted to note that in 2021, the Times Higher Education paper has recently nominated the School of Management for the award of the Best Business School of the Year 2021 UK. I am chuffed to note that Educate North ranked Bradford School of Management as “Business School of the Year 2020”. https://educatenorth.co.uk/2020-winners/
