The Cost and Value of buying an existing property

A summary post of my thoughts and learnings from buying property and renovating - while there are tons of discussion forums, you'd have to trawl through a whole lot of (rather badly written) comments and sift through the rantings, boastings and fluff to even get a glimmer of useful information. So here goes and hope it helps:

The majority of Malaysians prefer to buy brand new properties from developers. There are definitely advantages in terms of lower pricing and the satisfaction of owning something first hand. However, there are hidden costs to it too - primarily the risk of uncertainty that touches many aspects of a new development that includes:

• Risk of non-completion - this is the worst one, you're stuck with a loan or if you paid cash, you can't liquidate.
• Risk of non-compliance - I have viewed a 2nd hand property before where the owners have been cheated by their developer: the S&P states that the house dimensions were 22x60 but they only built it to 20x60, so that they could squeeze out another unit per row of houses from the "stolen" 2 feet per unit in that row! Needless to say, many wanted to sell off their houses so the market price was the same as the selling price. No capital appreciation and also they had to fork out the interest payments during construction. So this is a major risk too.
• Risk of location: access - during the sales launch, especially for newly developed areas far from town, they give you the standard lines: "There is a planned highway", "Oh, yes, we'll build the slip road here too so that you can bypass this area" and so on. Believe me, it either never materialises or it takes AGES for it to happen. As in decades.
• Risk of location: surroundings - the new property may be very nice, being new and all with the latest design but if it is situated in the middle of a .. not so nice.. area, well, imagine having to drive through a squatter area, run down village, seedy looking commercial area that is half empty and the list can go on and on. Because it happens all the time. My friend bought a condo, lovely place, but literally next to a cow shed. Yes, a cow shed with the smell of cow dung wafting over the wall. And a humongous Hindu temple that, rather unfortunately, likes to set off fireworks continuously during festivals.
• Finally, there are those niggling little problems like workmanship that may not be so good, the neighbourhood not being what you expected and so on.

Not that I want to hate on new developments, many have turned out fine but the problem is that buying property is usually a once-in-a-lifetime (or maybe twice at most) event and if you encounter any of the risks mentioned above, then you're going to be in for a BAD time and for a LONG time too before you can get out of it.

So what I'm saying is be forewarned and also, consider the option of buying second hand. Many many people reject this notion upfront and I don't blame them, the process is daunting and expensive. But there is value to it too. The very simple fact is all of the risks mentioned above DO NOT EXIST for second hand property. None at all. And that is why there is a premium price on buying second hand, you will:

1. See the physical property, it exists before your very eyes. No little model to look at, no floor plan to imagine. It's right there.
2. Know what you're getting into, exactly what the construction is like, what finishings there are and the quality of the workmanship.
3. Know the access routes and the surroundings and the neighbourhood. No surprises. You can also gauge, if you are familiar enough, whether or not there is going to be some new developments around that could either enhance or bring down the value of your property in future! You have none of that luxury with buying off the plan from a developer.

Instead of saying how much it costs to buy a second hand home, I would rather express it in a calculation model because then you can use it according to your own capacity. Frankly, I hate reading those comments by people saying, "Oh, you must have $ABC first, you know etc" (implying that they have it and you don't) - it's not helpful.

Now it is true that you will need to have a fairly decent amount of cash in hand should you decide to embark on this route - but it is worth it because you are paying more upfront to minimise the risk in future. It is a simple thing: pay less at the developer and you may end up paying more later (in the event of non-completion, you keep paying and paying and get nothing in return!); OR pay more now and get what you want.

And why do you need to have sufficient cash? Because the timing of the sale is quite fast - as I will break it down below: 

[After going for rounds of viewings and you finally found the property that fits your important requirements - that's one whole book by itself! - and have decided to purchase, and have negotiated and agreed on the price]

• Day 1: Pay the earnest fee to seal the deal: 3.5% of the agreed price - no credit card, nothing. Cheque or bank draft only. Your cheque had better not bounce.
• Day 2 to Day 14: Assign your lawyer to prepare the Sales & Purchase Agreement - no cash upfront yet but it will come pretty soon.
• By Day 15 - execute the SPA and pay the remaining 6.5% of the 10% deposit. No negotiation here, this is standard. If you can get a 95% or even 100% loan, then you will get your money back to use but in the meantime, you have to have these funds ready.
• You will have 3+1 months to pay the remaining 90% - so this is the time to get your loan approved. As the purchaser, you are going to be hit with the following rounds of legal fees:
• SPA fee - about 1% of the purchase price
• Stamping fee - about 2.5% to 3% of the purchase price
• Loan Agreement & Deed of Assignment fees with the bank - about 1% to 1.5% of the loan sum
• All this you will have to pay up within the 3 months (or 4 months max) from the time you purchase the property. So within the 1st 3 months, you must have in hand (rounded up) 15% of the purchase price. Therefore, work backwards from there, how much you have will dictate how much house you can buy. Compared against buying from a developer, you may only need to pay 5% what with the "discounts" and "rebates" they give you - which to me is all BS because it has all been factored into the price of the house.
• NOTE: you may get some savings on the bank-related legal fees if the loan package covers the legal fees but remember, the interest rate will be higher - so you will pay more interest and maybe take longer to settle the loan. Up to you, if you feel you can afford to foot the legal bill upfront, then I say do it.
• If this is your first purchase, you can also get some money from your EPF Account 2 to off-set and have some money for the legal fees but nonetheless, the 10% has to be paid within 2 weeks or 3 weeks at most and you won't have enough time to apply to EPF for your money. They are fast but they will need to see the signed SPA, so you're still stuck with the 10%.

Now comes renovation - set a benchmark of between 10% to 20% of the purchase price to spend on renovation, depending on the condition of the property and how much you want to change it up. Here is where people get into trouble because there is a tendency to spend too much. Be very careful but at the same time, tell yourself that there must be a buffer to go over because the one major risk of second hand property is Structural Problems.

You cannot tell from just looking during the property viewing and unfortunately, here in M'sia there is no such thing as a house inspection criteria prior to sale unlike in developed countries.

However, it is usually not that bad because unlike say the US, Japan or Australia, where a lot of houses are wooden framed, most Malaysian older properties are solid red clay brick - so problems could be only stuff like leaking roofs, walls that are not straight, pillars where you don't want them and termites in wooden fittings like cupboards.

But if you are planning to and have the budget for major reconstruction - which is actually possible within a 15% budget of the property price, believe me - then these problems can be solved through re-design and renovation.

So in summary, you will need a minimum of:

1. 10% of the purchase price to seal the deal
2. 5% for legal fees
3. 15% for renovations - 10% should be for wet works (structural) and 5% for finishings for basic; for better finishes and larger scale works, expect to go up to 20%.
4. 5% for variances and lots of the other bits and bobs like lighting, plumbing, gates and so on.

Hence, at the minimum (if you need minimal renovations), you will need about 30% all in. So work out how much cash you can raise or have now, then start looking.

If you can find a place that is already done up, then you can scale down to 20% because your renovation may be just a paint job and change the lighting & curtains - so there is some substantial savings there.

A final note on the timing of renovations - if your designer & contractor is good, you should be able to finish within 2 to 3 months from the time you start work. So again, you're going to need to have the cash required immediately to pay them in stages.

If you are short or want to keep some liquidity aside, then you can split the funding by telling your contractor that you will purchase some of the major finishings like tiles, plumbing and lights - this you can do by credit card (can earn some substantial points! LOL) but do make sure you can pay them off within your budget in the coming months.

I hope this "formula" will help take away a lot of the uncertainty in how to purchase an existing property, as I mentioned earlier, it is a daunting task indeed but I believe it is so much more worth it.

And don't forget, the timing - from the time of purchase, you can move in as fast as 3 months (if no major renovation required) unlike buying from a developer where you may have to wait up to 3 years. Time is indeed money, pay more upfront and you can move in and move on from this transaction much faster. :)