How to Buy Properties in 2019 with Little or No Money Down?

‘How to buy properties in 2019 with little or no money down?’ 

Have you seen this tagline before? 

I did. 

I find it to be a common tagline used by property gurus to sell workshop tickets and real estate developers to market their property projects presently.  

If you are reading this, I believe that you could be belonging into any one of the following groups:

a. You want to buy properties with little or no capital. 

b. You are sceptical of its feasibility or are concerned with its legality.

c. You are reading this for ‘fun’ and wish to voice your opinion on this matter. 

The Purpose of This Article 

Here is my intention of writing this article. 

It is to raise awareness of ‘No Money Down Deals’ and its pros and cons among first-time property buyers and to open a platform for all to have a meaningful & insightful discussion on this method of financing a property purchase. So, if you have questions or wish to offer constructive feedback on this subject matter, do share with us in the comment section below. 

So, What’s Little or No Money Down Deal? 

Supposedly, you intend to buy a condominium unit for RM 450,000. The unit is valued at RM 500,000 by the bank. It means, you are able to buy it for RM 50,000 lower than its bank valuation.  There are two methods to finance the purchase of your condominium unit. 

Method 1: Conventional 

You place RM 45,000, which is the 10% down payment required to buy the unit and finance the remaining RM 405,000, which is the remaining 90% of the price with a mortgage. 

Method 2: No Money Down Deal 

You have negotiated with your vendor and have agreed to place RM 500,000 as the price of your Sales & Purchasing Agreement (SPA). This allows you to take it to your banker to obtain a mortgage based on RM 500,000 (and not your actual buying price of RM 450,000). 

If successful, you’ll obtain a mortgage of RM 450,000, which is 90% of the price set in the SPA. In brief, the money flow is as follows: 

– You place RM 50,000 in down payment (10% of RM 500,000). 

– You submit an application to obtain a mortgage worth RM 450,000. 

– The banker pays off the seller’s outstanding mortgage on that property. 

– The banker pays the seller his remaining amount. 

– The seller agrees to reimburse the RM 50,000 discount to you. 

– Thus, you have bought a property with ‘No Money Down’. 

The Difference between Conventional and No Money Down Deals …

To name a few, they include: 

(1) Mortgage

If you opt for Method 1, your mortgage is based on RM 405,000 and not exactly RM 450,000. Supposedly, you are below 35 years old and the interest rate is set at 4.5% per annum, the monthly installments are as follows: 

Method 1: RM 1,917 a month. 

Method 2: RM 2,130 a month. 

Difference: RM 213 a month. 

Thus, for Method 2, you will pay RM 213 a month extra in mortgage payments. But hey, what is RM 213 a month as opposed to forking out RM 50,000 in your initial capital to finance the property purchase? 

(2) Transaction Fees 

Obviously, you will pay more in transaction costs if you opt for Method 2. These include SPA & its stamp duty, loan agreement & its stamp duty and its valuation report. Their cost difference is estimated as follows: 

Method 1: RM 19,525

Method 2: RM 21,800 

Difference: RM 2,275

Again, which do you prefer: (1) paying extra RM 2,275 in transaction costs or (2) forking out the full down payment of RM 50,000? 

(3) Real Property Gain Tax (RPGT) 

This depends on whether or not you are buying the condominium unit from the primary or secondary market. If you choose Method 2 and plan to buy the unit from the primary market (new from developer), you could save RM 2,500 in RPGT if you dispose it after having it for 6 years and above and the RPGT rate remains at 5%. 

Here is the calculation: 

Supposedly, at year 6, you intend to sell your property at RM 700,000. Thus, 

Method 1: Conventional 

RPGT = (Selling Price – Buying Price based on SPA) x 5%

RPGT = (RM 700,000 – RM 450,000) x 5%

RPGT = RM 12,500 

Method 2: No Money Down Deal 

RPGT = (Selling Price – Buying Price based on SPA) x 5%

RPGT = (RM 700,000 – RM 500,000) x 5%

RPGT = RM 10,000

RPGT Difference: RM 2,500

However, if you choose Method 2 and are buying an existing property from the secondary market, the seller may require you to pay for his RPGT, unless if he is a desperate seller who wishes to sell off his property as quickly as possible. 

The True Meaning of ‘No Money Down Deals’

I think it is misleading to say that you don’t have to have cash to buy properties in Malaysia. You still need some cash to buy real estate, be it the primary or the secondary market. 

I believe, ‘No Money Down Deal’ can be translated as the following: 

‘An attempt to finance your down payment, cost of transaction, and renovation expenses through additional mortgage from the bank.’

You are still paying for the above expenses. The difference is that you intend to stretch these payments over your loan tenure and are willing to pay an interest rate of 4-5% per annum on them. 

But … Is it Legal? 

I am not a lawyer and thus, do not know whether or not it is legally sound. 

Personally, I financed my property purchase with Method 1, not Method 2. The reason is because I am not sure of its legality. Some say it is okay. Some say not. I do not know who and what to believe in this subject matter. 

You may ask: ‘If it is illegal, why is this common in Malaysia?’ 

Here is a short answer: ‘Because ‘almost’ all who are involved in your purchase of the property profits more if you opt for Method 2’. For instance, 

– Banks earn more interest income. 

– Developers can push for sales as properties become more affordable. 

– Property Sellers can wrap up their property sales quicker. 

– Lawyers make more as SPA & Loan Agreement are based at higher prices. 

– Government collects more taxes as ‘the above’ reports higher income. 

I believe you can see a ripple effect to our nation’s economy as a result of locals using Method 2 as a property financing method over Method 1. 

Here is my findings thus far: 

– Consult your trusted lawyer for the best answers. 

– It may or may not be legally sound. But, it is profitable to many parties. 

But … What if Method 2 is to be Eradicated? 

Let us imagine. If Method 2 is abolished and property buyers must only finance their purchase with Method 1, they need to prepare the following: 

10% Down Payment: RM 45,000 

Estimated Transaction Costs: RM 21,800 

Renovation Costs: RM 25,000 – RM 50,000 (Optional) 

1-Year Mortgage + Maintenance Fees Buffer: RM 30,000 (Optional) 

The above sum is for property buyers who are below 35 years old. In short, the amount needed to safely finance a property purchase is above RM 100,000. So, the question to ask is: ‘How many (in proportion terms) of Malaysians below 35 years old have RM 100,000 stash aside to buy properties?’ 

If there are plenty, then, great! Our property market will hold up pretty well for there are more people who can afford to buy a RM 450,000 property. 

But if the answer is no, then, our property market will remain depressed for we lack people who can afford to buy properties of that price range in the absence of Method 2. 

So, legally sound or not, I believe Method 2 of financing a property purchase will persist in the future. 

How Do ‘No Money Down’ Deals Impact Property Investors? 

We are impacted by the following: 

Brickz.my 

It is a portal that compiles actual transacted prices of properties in Malaysia. As I write, I may take these figures with a pinch of salt due to the use of No Money Down Deals in property transactions. To be safe, you may take 10% off from the figures compiled as a reference point to value a property. 

Cashback Properties 

This is quite common today, especially in the primary market segment. To-date, it is rare for a developer to not handout rebates, discounts, perks, and cashback to their buyers for purchasing its property units. 

The question to ask is: ‘Do you think the above are ‘freebies’ to you?’ 

In most cases, they are not and their prices are being ‘marked-upwards’ so that their products are made affordable to you as a buyer. It is why properties being sold in the primary market is more expensive than existing ones in the sub-sale market. 

Conclusion: What is Your Verdict?

So, should you use ‘No Money Down Deal’ method to finance your purchase of your property? 

Personally, I did not and I do not intend to promote or discourage you from the use of this method to buy properties. If I have created an awareness of the pros and cons of ‘No Money Down Deals’ to you, I have done my job well. 

Here, let me reinstate: 

‘On behalf of KCLau.com, we support you to make decisions that are financially and legally sound. We’ll give you the utmost respect for your best efforts made to be a good and responsible citizen in this country.’ 

So, what is your comment on ‘No Money Down Deals?’ 

Please leave them below.