The Inherent Risks to Buyers of Phuket Property

2020-09-30T09:47:19+00:00
Phuket Property Buyer Risks

It should stand to reason that someone making a major purchase, especially one as large as a property, will endeavour to do the relevant research before they sign on the dotted line. Anyone who is not inclined to conduct the necessary due diligence themselves should employ the services of a competent lawyer to do it for them, but a surprising number of people do neither.

Generally speaking, risk and reward are inseparable – the higher the perceived reward, the greater the risk we are willing to take. Any buyer of Phuket property should be aware of the risks that exist, while adopting sensible solutions to mitigate said risks.

A lawyer obviously has the resources to dig even deeper, but here are a few tips anyone can follow to ensure their property investment is sound.

INHERENT RISKS TO THE PHUKET PROPERTY BUYER

Regulatory Risk

In most countries, with most investments, you can count on regulatory protection. Unfortunately, the real estate industry is largely unregulated in Thailand. This means foreign property sales agents are pretty much left to their own devices.

Real estate agents can by and large tell you whatever they like, regardless of the risk it may expose you to, just to get the sale. If a disreputable agent thinks that telling you a fib (or withholding information) will put money in their own pocket, some of them will not hesitate to keep you in the dark.

Therefore, it is of paramount importance, that buyers of real estate in Thailand, especially Phuket, are fully aware of the risks associated with using either the wrong Phuket real estate agent, or not seeking professional advice from an experienced lawyer.

You can learn more about the risks associated with Phuket Real Estate below, or you can read our comprehensive summary here:

A Comprehensive Summary of the Risks Associated with Buying Real Estate in Phuket 

Developer Reputability

There are a number of competent developers in Phuket, both foreign and local, with plenty of expertise in the market, but no one is infallible. Every company, even large corporations, can face difficulties if there are any hiccups in the market. Unfortunately, a buyer assumes the corresponding personal risk if anything goes wrong with their chosen developer.

Developers range from small local and small foreign companies to large local and large foreign ones. Some local developers are listed on the Thai stock exchange, while some international developers are listed on the exchanges of their home countries. It is relatively easy to check the balance sheet of a listed company, but the fact that a foreign company has a solid balance sheet at home does not mean they would hesitate to pull the plug on an overseas venture that ran into trouble.

The finances of private companies are less easy to assess, but that is not to say that private companies are a bad choice. A good private company with audited accounts obviously has nothing to hide. Provided the accounts are in order, it is likely the company is well-run.

Nevertheless, size can make a difference, especially to local buyers. The projects of some well-established Thai companies sell out very quickly based on reputation alone, and they have no need to negotiate price because their developments tend to be in high demand. This also has relevance for foreign buyers, given that 51% of any condominium must be Thai-owned. The strong demand and price in elasticity of projects from these established developers translates into a certain stability for foreign buyers or investors.

A buyer is exposed to much less risk from established companies than from a “one man band” developer, especially one launching their first project. Many developers rely on their reputation to attract new buyers for their future developments, and those who have built a solid reputation deserve the acclaim they receive. But anyone can make mistakes, and the reasons developers may experience financial woes can range from the unforeseen to the self-inflicted to the unlucky.

A company could be feeding the personal habits of its shareholders, overextending itself with debt, or simply mismanaging a project. A good developer might be unlucky in their choice of location, or with a changing regulatory or zoning assessment stopping a project at any stage of construction (See EIA Approval below).

One other risk buyers run when dealing with smaller developers is “Key Man” risk. What happens if the managing director, senior partner or owner dies? Is there any insurance in place to cover the premature death of a “Key Man”? The reality is that key people very rarely, if ever, make provisions to protect the company or the investors should anything happen to them. Buyers should ask about these provisions when dealing with a private company.

In summary, previous developments and reputation should therefore not be the only criteria used when selecting a property. Private developers may potentially expose buyers to greater risk, but this does not mean they should be discounted. If thorough due diligence is conducted on every developer, the risk of anything going wrong is greatly diminished. If an investigation of the developer still leaves you unsure, there is an old investment adage you should listen to: “If in doubt, stay out.”

Legal Representation

Buyers always run the risk of receiving poor legal advice, which is why it pays to use a lawyer who comes highly recommend by a friend or acquaintance, and is known for their honesty, integrity and reputation. Most importantly, their advice should be independent and have no ties to the agent or the developer.

Crucially, you must use a lawyer. If a real estate agent/advisor says you don’t need a lawyer, then what you really don’t need is that agent. Immediately seek another company to help you with your purchase.

The best lawyers are rarely the cheapest, but a property purchase is not the type of transaction to scrimp on. In a country where most foreign buyers are not familiar with the laws, or the pitfalls encountered by others in the past, the best representation is worth its weight in gold.

Once you have chosen the right lawyer, by all means listen to them and heed their advice. Many people choose to ignore sound legal advice because it is not what they want to hear. This is a common – and massive – mistake. Maybe they have fallen in love with a property, or simply run out of time on the island and are rushing into a decision. Whatever the reason, there is no excuse for failing to heed legal counsel.

While a lawyer may not be able to check everything, they can certainly do enough to tilt the scales further in favour of the buyer. Just as experienced lawyers will be able to warn the buyer against any shenanigans, choosing a lawyer with insufficient experience could have disastrous consequences for any buyer.

Real Estate Legal Representationrta

EIA Approval

The Environmental Impact Assessment, or EIA, has been around since 1981, and is a process which determines the potential negative repercussions a development may have, but not only on the environment. An EIA also establishes the measures a developer must take to ensure that resources are used efficiently, that the project is beneficial to Thailand economically, and that it is in accordance with the continued development of the Kingdom.

Developers are fond of mentioning the fact that they have EIA approval, especially when they are selling a development off-plan, and the land is still an overgrown area of weeds and trees. But while EIA approval is important, it is only an indication that the ball is rolling. It is possible for EIA to be rescinded if the project does not comply.

In other words, it is about protecting the environment, in the near and long-term, and determining whether a development is for the good of the area and the Thai people. The assessment may have a broad purview, including air quality, ground pollution, how waste water will be removed or treated, noise pollution, how it affects the surrounding natural environment, how it affects the neighbours and whether the development is visually acceptable. Depending on the size, most but not all developments do require EIA approval, although receiving it is not a guarantee. The green light is only given on the condition that it complies with all the regulations throughout the construction process, and the ability to do so can literally change with the weather.

A condo built on a hillside might run into problems if excessive rains cause soil run off, and with it a change in assessment. If design modification scan bring the project back into compliance, it may yet go ahead. If not, it may never be completed.

In fact, one changing regulation in Phuket caught some developers unaware in December 2018. Development on a gradient/slope greater than 35% will no longer be allowed on the island(with an exception for single or single-detached houses not exceeding six meters). Companies which had not already secured a building permit were prevented from proceeding with construction, leaving some “early bird” investors, who had purchased units off-plan, out of pocket.

A cancelled project can leave investors in financial difficulty, and it may be outside of the developer’s control to do anything about it. If construction is halted by a ministerial/regulatory decree, the developer (as the recipient of an administrative order) may file for compensatory claims against the government. The buyer can, in turn, make a claim against the developer, but rather than seeing a completed home in 1-2 years, the buyer may instead still be waiting for their money back.

Most people agree that attempting to safeguard the environment during construction is a net positive for everyone. While it is incredibly rare, a project could be abandoned because of changing environmental impact assessment – whether the entire structure is finished, or the first brick has yet to be laid.

Dirty Land

Because a fresh assessment can always give a developer the green light, a project lacking EIA approval is not necessarily a lost cause. A project built on Dirty Land, however, is another story altogether – a horror story.

The absolute worst situation in which an investor can find themselves is one where they have been persuaded to purchase a unit in a project built on national forest or government land. Some condominium developers, either knowingly or unknowingly, have built on land that was involved in land corruption cases going back over 30 years (known as “dirty land”).

There is no statute of limitations on the government reclaiming this land, and we fully expect any encroached land to be reclaimed at some stage in the future. But this is not just our opinion, most lawyers are sure this will transpire sooner or later.

When the government returns this land to the forestry department or the Royal Navy, illegal buildings will be knocked down, the land bulldozed over, and new trees planted. And when that happens, anyone who bought there could possibly lose 100% of their investment.

Buying Off Plan

Buying Off-Plan

For any would-be property owner, the riskiest way to purchase property is to buy it off-plan. It is a common enough practice, and in a buoyant market, the development may even be sold out before the foundations are laid. There are pluses and minuses to the practice, and it is important for every buyer to understand both.

The benefits should be obvious. The buyer is looking at a potentially great property, typically at a reduced initial offering price, and is motivated by scarcity and discount. If the buyer waits, there may be nothing left to buy, or what there is will certainly be more expensive.

Generally speaking, off-plan developments entice investors looking for immediate capital appreciation, rather than those looking for a home to live in. On brand new projects, buyers usually have the opportunity to purchase a unit (or more than one) before the actual construction has started. It may be that the completion date is months, or even years away, but buying off-plan usually comes with attractive discounts for the buyer.

The “early birds” also get the prime choice of units. The first buyers in always get the highest floors, the views of the sea and/or the rooms facing the swimming pool. If an investor is not in early enough, and does not have a prime unit, they may find it hard to resell. This is especially true when so many other developments are available, some possibly offering better views. Another downside of buying off-plan is the risk the development is never completed. If the buyer’s lawyers conduct the necessary due diligence, this risk is greatly reduced. But unexpected bankruptcies can still occur, and extreme misfortune can result in EIA approval being rescinded (as above).

In some cases, Phuket properties have been sold at slightly inflated prices, in an attempt by developers to “build in” sales and marketing fees, guaranteed returns and even additional profit. Where there is initial overvaluation, it could take a few years before price inflation alone can recoup someone’s investment if they decide to sell the property.

Unfortunately, there have been enough horror stories over the last 20 years for investors to have learned from. Sadly they have not. That’s because most buyers are new to the island and haven’t been here long enough to have experienced what can go wrong, and what has gone wrong in the past.

But provided due diligence is carried out on the desired project, the pre-construction discounts when buying off-plan make it very attractive to buyers/investors, especially if they are seeking capital appreciation.

If you would like to read more on this subject, you may also like to read our articles here:

The Benefits of Buying a Phuket Condominium Off Plan

The Risks of Buying a Phuket Condominium Off Plan

The Perception of Risk

Everyone has different perceptions of risk, mainly because they come from unique backgrounds, both in terms of life experiences and financial standing.

A multi-millionaire will buy a condominium in Phuket and suffer no real emotional or financial loss should anything go wrong with their purchase. After all, the amount they stand to lose may equate to the interest they earn in a single day. Conversely a retiring couple may have just enough money for a condo, and a well-planned subsistence in retirement. If such a purchase were to go wrong, it could financially cripple them.

The problem most property investors face is different still. They cannot earn money by leaving it in the bank, a concept that is relatively new to anyone over the age of 30. They are instead forced to seek out alternative ways to grow their money because they fear a different type of risk – inflation risk, which eats away at the spending power of any money left idle in the bank.

Historically, people would accept 5% interest from their local bank, building society or credit union, rather than be lured into higher-risk investments. But in the West, traditional deposits and interest bearing instruments are no longer paying this type of yield. In China, on the other hand, many simply wish to diversify their wealth across other currencies, and are actively seeking ways to get their capital out of Yuan.

We all want to avoid risk, but most people are aware that some level of risk will always exist. The question is: how is that risk being managed? In the Phuket property market, risks can be mitigated – or even eliminated – by following the correct guidance and advice. And this starts by working with the right people, and making sure that the best legal representation has been sought.

Placing a Reservation Deposit

There has been some negative press about holiday makers who have rushed into a purchase, only to change their minds and request their deposit back. In some cases they made an emotional decision, only to be faced with buyer’s remorse; in other cases they discovered they had been misled about the purchase.

A deposit should never be placed without seeking legal advice, and it is imperative that any deposit be refundable. An experienced lawyer will insist on this, thus protecting the buyer against any change of heart. The seller/agent should not object to time being given for a lawyer to check over the agreement to ensure that this and other essential clauses are spelled out.

The lawyer should take every necessary step to ensure that the law is on the buyer’s side should the due diligence turn up anything that would warrant pulling out of the purchase. These exit clauses should be clearly worded so that the developer or seller is bound by law to return the deposit.

It is important that the title deed be checked prior to paying a deposit. However, if this has not been done, the examination of the clear title should be a prerequisite for the sale to proceed to the next level. A lawyer can also advise on other necessary clauses, which may relate to either the buyer’s situation, or to the specific property or development in question.

In Phuket, as elsewhere, there are always new developments coming on line for an investor to consider. Acting on a “sense of urgency” when spending money on a property is not the recipe for a successful investment. But if a decision to buy has been made on impulse, it is important to build these safeguards into the agreement before transferring the deposit.

In a Nutshell

The real estate market the world over has proven to be dependable, though not guaranteed. Please be aware of the source and nature of the risks which could undermine your ideal investment property, and take all the necessary steps to mitigate, if not eliminate, these risks.

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Phuket Property Guide 2020 – Table of Contents

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