Homeownership is a double-edged sword.
A property’s asset value offers benefit for the homebuyer, but when a homebuyer can no longer afford the mortgage, the property cease to be an asset but instead a liability.
In this economy, secondary market presents another opportunities for investors, especially those with a creative streak.
“The Wealth Dragon Way” co-author Vincent Wong, who utilises his experience as a UK property entrepreneur to impart knowledge of financing strategies, thinks there could be a win-win situation between the homebuyers who have difficulty paying the mortgage and the investors who are looking for a good deal in property investment.
In every market, one of the constant factors is the people.
Homeowners all have their needs and problems. They could lose their jobs, face relationship problems and etc., which could affect issues related to the properties.
“What I do is to educate people on what makes a deal a deal,” he said in an exclusive interview with StarProperty.
Examples:
The Lease Option
Property Owner Jack (alias) was facing difficulty to pay the mortgage. He has to give a decent discount to sell a property fast, but he has little leeway to drop the price due to a lack of equity.
His motive of selling a property is not to make a profit but to stop paying the mortgage.
In this scenario, Wong suggested that Investor Peter (alias) could step in and offer a long-term lease option.
Peter could offer to take over mortgage payment and assume the risks, but he will find another tenant to rent out the property. In return, Jack will let Peter to have the option to buy the property in future, at a price agreed upon now as stated in the contract.
For the lease part, Peter is paying the mortgage.
For the option part, Peter has the right but not the obligation to buy the house at a fixed price.
For Peter, the outcome is the same, he can benefit from the rental profit and the capital appreciation by taking over the control of the property.
For Jack, he won’t be losing the money as for now as he don’t have to sell the property immediately. If Peter decides to buy the property, Jack could get back some money. Under more amicable circumstances, Peter could opt to share some profit with Jack if he successfully resells the property.
While there are no rules in Malaysia against this kind of arrangement, Wong insisted that both parties must enter into the agreement with proper knowledge and understanding of the terms. Both sides also need to be ethical in the business dealing.
Education is key, and an ironclad contract wouldn’t hurt either.
To protect both parties, issues that have to be considered include what if Jack dies before the contract has been fulfilled? What if Jack changed his mind?
Wong noted that there is still mental barrier for Malaysians to adopt this strategy, as most investors are still clinging on to the hope that the primary market will not go flat and they could find the easy way out.
He stressed that the contract and lease option strategy was not a scheme to get rich quickly, as it is simple but not easy.
“You have to find the sellers in the secondary market, negotiate the deals and get the legal contracts. It is much harder than queuing up at the office,” he added.
Sell and Rent Back in UK
Wong said the ‘Sell and Rent Back’ program is catered to people with equity problem, who want to release the property but remain as tenants.
“So, the owners sell 20% below true market value, and rent it back from the new owners,” said Wong.
For the investors, they can buy below market value and secure tenants from day one, who have been living there for a long time.
Unfortunately, Wong said people started to abuse the program, with unscrupulous investors kicking the tenants out to sell the property when there were better offers in the market.
Wong pointed out that since the practice was regulated in 2010 in UK, the regulations involved were too stringent to the extent that investors are discouraged from participation.
“That’s a shame as it takes away choice from people who can benefit from it… and that’s the reason why, to invest in secondary market, one has to have ethics,” said Wong.
Rent to Buy
Based on an option strategy, the tenant who is renting a property can get an option from the landlord.
In place of a normal rental deposit, the tenant could offer to pay a premium option fee, negotiate for a longer lease period (five, ten years or whatever period agreed upon by the two parties), in return for an “option” offered by the landlord to the tenant.
Within the contract period, the tenant could opt to purchase the property at a price fixed in the contract, in which the premium could be used to offset against the purchase price, or both parties could agree on other different conditions, such as selling the contract to another third party.
“In effect, the tenant already owns a home, as the option fixes the prices in which he can buy the properties later,” said Wong.
Why would the landlord agree to an option?
Wong argued that everyone has different life situations, and some might be landlord by accident when they have to move away.
“Landlords have obligations, but if the tenant says ‘give me option, I wouldn’t give you hassle’, especially if the landlord is in negative cash flow situation, the tenant can structure the deal to pay a rent premium, then the landlord has every reason to give the options,” said Wong.
He said the “Rent to Buy Deal”, if done correctly, could be a win-win deal between the landlord and the tenant.
The landlord will benefit from high rental or option fees and secure a long-term tenant at the same time.
“If we can educate more landlords to offer these deals, or for tenants to approach the landlords, we have a new market emerging, which is suitable for the current situation in Malaysia,” said Wong.
Vincent Wong will be presenting at the Wealth Conference organized by Wealth Mastery Academy at Connexion@Nexus, Bangsar South, KL on July 31.
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