The difference between buying a second hand (sub-sale) and a new property from a property developer in Malaysia

22 June 2018. By David Geh

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Many people ask me what is the difference between buying a second hand (sub-sale) property and a new property from a property developer. I would like to state the advantages and disadvantages for both sides of the argument.

Consider a RM500k property both new and in the sub-sale market.

You are a new house buyer and you are contemplating your first property. You calculate your commitment and decided that you want to buy a RM500k condo in KL city after searching through iproperty or mudah and contact an agent to view the property. He brings you there and you find it's brand new without any renovations done (the lights and fan are not even installed). The buyer has just gotten the keys from the developer and is planning on flipping it for a quick profit. First of all, he probably bought the property for 400k during the property's launch 3 years earlier and yes, if you are buying that property, you just helped him make RM100k. Completed properties will usually fetch a premium of between 20-25% upon VP depending on the demand for that property in the market.

However, for a completed project, one advantage is you have a wide choice of units to choose from. You don't necessarily need to agree to buy the first unit you see unless you really like that unit. The reason is because in a newly completed project there's usually hundreds of new units in the market with various sizes and prices. Some of them you can easily bargain down depending on how desperate the owner is to let go of his or her unit. Sometimes circumstances require them to liquidate their units fast for cash like a family emergency or a divorce.

For a first time home-buyer or a serial property investor, I believe entry cost is an important factor. Buying a sub-sale unit requires you to put down a 10% deposit, which in the case of a RM500k unit is RM50k upon signing of the S&P within 14 days. You can pay the 10% in cash and get the necessary documents to go to EPF to get it from your Account 2 later on. The 90% margin of financing depends on the bank valuation. From my experience, usually if the property is too new and there is not so many transactions, there might be difficulty getting a high valuation for that property.

Consider this scenario; A 90% valuation for a RM500k property is RM450k. What if the bank doesn't feel that RM500k is the market value of that property and values it at RM480k? Your 90% MOF is now RM432k and you are required to fork out an additional 18k in cash to pay for the shortfall if the seller insists on selling the property at RM500k. Sometimes, depending on your luck, the bank doesn't feel you qualify for a 90% MOF but a 85% instead. So now a RM500k property, valued at RM480k and the bank gives you a 85% loan on it (RM408k), you need to put up RM92k in cash to buy that property, a far cry from the RM50k you were planning to in the first place. The extra RM42k could go a long way to renovate the place and get some nice furniture for it to live in comfortably.

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Calculation (All in RM - Ringgit Malaysia):

Property Asking Price: 500,000

90% MOF: 450,000

Down-payment: 50,000

Valuation price: 480,000

90% MOF on valuation price: 432,000

Difference if owner insists on selling for 500k: 68,000 (Your original budget was 50,000)

On top of that, you still need to pay legal fees for the S&P and loan. Here's the rough calculation:

Purchase Price : 500,000

Loan Margin: 90%

Loan Amount: 450,000

S&P Agreement:

Stamp Duty: 9,000

Legal Fees for SPA 5,000

Total: 14,000

Loan Agreement:

Stamp Duty: 2,250

Legal Fees Loan: 4,500

Total: 6,750

Total Legal fees for Loan and SPA: 20,750!

So the total you need to pay in this scenario is RM68,000 (Valuation price: RM480k, MOF 90%) + RM20,750 Legal fees for Loan and SPA = RM88,750

or RM50,000 (Valuation price: RM500k, MOF 90%) + RM20,750 Legal fee for Loan and SPA = RM70,750

and the worst case scenario RM92,000 (Valuation price: RM480k, MOF 85%) + RM20,750 Legal fees for loan and SPA = RM112,750!!!

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Of course you are not tied down to the deal and can walk away from it if you don't find it favorable to you financially but trust me, sometimes real estate negotiators can be very persuasive and insists on an earnest deposit right away to process your SPA and loan to 'secure you dream property' before anyone else gets it once you show the slightest inkling of interest.

As for a new property, the down-payment can be as low as 1% to own the property. Booking fees range from 500 to 5000 depending on which project you are considering and this booking fees usually forms part of the down-payment you are supposed to pay upon signing of the SPA (Sales & Purchase Agreement) at the lawyer's office within 14 days of placing the booking fee. A booking fee is a commitment to purchase the property and for the agent or developer to proceed with the documentation for your loan application.

With so many new projects coming up nowadays, it is not uncommon for projects to be advertised with legal fees (for SPA and loan agreement) included. The stamp duty (or known as memorandum of transfer or MOT) and loan disbursement cost may or may not be included in the sales package.

So, for a 500k new property with a 1% down-payment sales package (9%) rebate promotion from developer with free legal fees for SPA and loan:

Purchase Price: 500,000

90% MOF: 450,000

Down-payment: 5,000 (with 9% or 45,000 rebate from developer)

Other fees payable: 9,000 if no stamp duty (MOT) included in sales package

Buying a new project property is more straight forward than buying a sub-sale property. I am not putting sub-sale units down but the entry cost is much higher than if you were to buy a new unit. Furthermore, if you are buying a 'new' sub-sale unit, you are already helping the seller to make a handsome profit which you will be paying the next 30 years for with interest!

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Banks are also more receptive for loan applications for new projects and the chances of you getting a margin of finance of 90% is higher with the developer's 'panel banks'.

You might need to wait 2-4 years (average 3 years) for a newly launched project to obtain vacant possession, do some renovations and move into your own home. Some new projects even comes with air-conditioning, water heater, wardrobe, kitchen cabinet and some appliances thrown in so you don't have to spend extra money to purchase them thus saving you thousands of RM. Buying a new unit is paying today's price for a property in the future which is not necessarily bad if you currently have a place to stay but if you are the type who wants to own a house right now then your only option is to buy a sub-sale unit.

So, as illustrated, buying a new under-construction property will cost you less in entry cost (which is the cost of acquiring the property) than buying from the sub-sale market. For me, if I had that much of extra cash, I'd like to keep it handy to do renovations, pay installments or even pay more in down-payment (after rebates) to reduce the loan amount and save on interest and repayments.

Contributed by: David Geh, MBA(UK), BCom(Curtin)

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