10 steps to Thai property

Story : Marie Moon with John Howard

Step 1
With the range of quality property in Thailand ever increasing, the search for that holiday home or investment property has never been more enjoyable. With the help of an experienced local agent, the prospective buyer is given a personalized tour of the locale, granted access to otherwise restricted VIP zones with picture-postcard views as a pretty bonus. It’s not uncommon for buyers to dreamily visualize future cocktail parties and romantic dinners for two even before they’ve fully inspected the house.

Charmed by the view, or the architecture or the neigbourhood itself, you may be ready to get serious about the purchase, but remember to keep your wits about you; the real estate industry in Thailand is not regulated and there are a few pitfalls. Managing Director of Tilleke & Gibbins Phuket John Howard recently illustrated the process of buying property in Thailand. “When you’re looking at a purchase of a property whether it is in Thailand or another part of Asia, you should try to divorce yourself from the emotion of the purchase. This is because what you’re doing is probably one of the most significant investments you’ll ever make; you need to view it as an investment and try to focus in on the soundness of the investment.”

Step 2
Once you’ve decided on a property, you need to focus on the issue of developer risk if you are buying off the plan. John suggests that buyers talk to real estate agents or other buyers to get an idea of the developer’s track-record and make general enquiries to satisfy yourself that that risk is manageable. He said, “We’ve been very fortunate in Phuket over the years that this has not been a big issue and Phuket has many reputable developers, but irrespective of where you buy, you need to make those enquiries and satisfy yourself as to that aspect of the purchase.”

“Also be aware that unless you are purchasing a freehold condominium, the land owning company who may or may not be the developer will also be your landlord or lessor under a long term lease scenario. You need to consider, is that company an established Thai entity with a track record? It may not be problematic if it is not, but you need have a sense of who you are dealing with. Obviously if you were entering into a long-term leasehold arrangement with a public listed company in Thailand then that would give you considerable confidence. Nevertheless there are many reputable development companies that are not listed on the stock exchange but are still solid entities.”

Step 3
John continued, “After you have focused on these macro issues of the developer, you have to look at the payment plan for the property.  All these properties generally require installment payments typically triggered by various construction milestones. You need to carefully consider if those payment plans work for your own finances. You need to negotiate this aspect up-front and directly with the developer or through an agent, so that the payment plan as it eventually pans out, does not unduly put a strain on your finances.”

Step 4
The next step in the buying process is making a formal reservation. You will need to sign a reservation form and pay a reservation fee. This is generally seen as a good faith payment to show that you are a serious purchaser and receipt of this fee triggers a number of things, namely a defined timeline, 30-60 days wherein you must settle the contracts. John elucidated, “The reservation deposit is usually a nominal amount and usually does not exceed 200,000 baht.  Irrespective of whether that sum is stated to be refundable or not, you should write ‘subject to contract’ when you sign to preserve your rights should the contract negotiations fall through in the future.”

“Another very important thing to note and this applies particularly to Thailand, is that when you are remitting funds into Thailand you must ensure that foreign currency is actually received by the Thai bank. Do not allow your home bank to sell you Thai baht; there is a significant spread between what is known as the offshore rate and the onshore rate. If you work on rates quoted by overseas banks you’ll frankly lose out on baht-based property acquisitions.”

Step 5
John continued, “At the time you sign that reservation form the seller should hand you contracts for the property. The contracts actually define what you are buying; they set up the terms of the purchase and are fundamental to the whole transaction. If there is a delay in receiving those contracts that can mean the developer does not have their act together and caution may be indicated. There will be a range of contracts including sale and purchase contracts, a long-term lease agreement, a management agreement, the transfer of building permit into your name, et al. The competent developers have all the necessary documents in place and make it easy for prospective purchasers.”

Step 6
With the contracts in hand the next step is to find a competent lawyer. John recommends that when choosing a lawyer, brand and local presence are important, as he clarified, “All title investigation and land usage issues, commonly referred to as due diligence, need to be investigated in the district where the property is situated. It does not make sense to have a Bangkok lawyer do due diligence on a property purchase in Phuket, this will just cost you more money.”

“You need to know a number of things from your lawyer; how long will it take to get an initial contract review and due diligence completed? What kind of timeline are you working on? You also need to know a cost. If at all possible you should try to negotiate a fixed fee rather than have a scenario where the clock is ticking on an hourly rate. You need a quality firm on your side and generally in Asia quality legal services are not cheap, so you need to understand that from the outset. People go lawyer shopping and I believe lawyers should have no hesitation in meeting with you and having a chat about your proposed purchase on a no-charge basis. In 95% of cases, people get in touch with their lawyer after they have signed the reservation form.”

Step 7
Next, your lawyer will review, amend and negotiate the contracts and settle them on your behalf and that needs to be done on an expeditious timeframe. John highlighted, “In terms of the contracts, purchasers need to be aware that with most developments their principle security is the contracts, until such time as the property is registered in their name. The registration of the property usually only occurs when full payment has been made and the project is completed and that can be some years away.”

Buyers need to avoid setting up a Thai company if at all possible. John advised, “The entity you buy under is something you need to consider and of course liaise with your lawyer so you’ll be properly informed of your options. Typically there’s no fundamental reason in Thai law why you should for example take a lease in the name of a foreign company but there may well be personal reasons related to the property purchaser. Often buyers will be told that buying in a foreign company will be easier in a resale situation because you’d just be able to sell the shares in that company and thus avoid paying the 1.1% lease registration fee which the buyer would pay anyway. However I don’t know how sound that is because query if you would buy shares in someone else’ off-shore company? Some people would, many people would not, and the reason is they can never be sure as to the outstanding liabilities, if any, of that company.”

Step 8
During the construction period the buyer should remain informed through email and updates. Quality developers will send regular updates detailing construction milestones.  If you have concerns, involve your lawyer.

Step 9
John pointed out that, “It is also important to consider that once you do move into your property, there are going to be hiccups; this is normal in life. In Thailand condominium purchases have a 5-year structural warranty; generally villa purchases have a 1-year structural warranty.”

Step 10
When the project is completed the registration process will transfer the property into your name. This may be some years after the initial purchase, until this time, your contracts are your principle security.

While there are differences in detail in purchasing property in other parts of South-East Asia at the end of the day the process is not much different. You need to do a due diligence on the title and the land usage issues, also on what are you buying; property or shares in a company that owns property. Different jurisdictions allow you to do different things as John demonstrated, “In Indonesia you can effectively own the property by forming what is called a PMA company; a direct foreign investment company and a foreigner can own 100% of the shares in that company. In most other jurisdictions in Asia the issue of nominee shareholders is not a big deal. Other jurisdictions allow you to have longer lease periods, some allow you to purchase freehold property over a certain dollar value. These things might provide some psychological comfort, however at the end of the day there is nothing wrong with a sound leasehold structure restricted to 30-year registration periods with options to renew. What’s fundamental is; are you buying a property in a country in which you feel content and comfortable?”

John reiterated, “In Thailand the real estate industry is not regulated so you need someone on your team; often that person is a good lawyer. In jurisdictions like Singapore and the more mature Asian jurisdictions there is a higher degree of consumer protection and a higher degree of monitoring the activities of both developers and agents. But of course in those more mature jurisdictions you are paying a much higher price per square metre for what you are buying. If you compare Thailand with all the other jurisdictions, the general consensus is that you get much better value for money in Thailand. Furthermore historically, capital appreciation particularly in the resort areas of Thailand, has been quite significant over the last few years.” 

Tropical Living: September 2007, Volume 7 Issue 4

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