Thursday, December 5, 2013

Cash In Lieu of DIBs

Now that developers cannot offer DIBs, it seems to be putting a damper on sales. Many buyers dread the monthly commitments they have to make in purchasing a property during the construction period because there is no income generated from the property. Usually investors like you and me use the rent collected to finance a property purchase. 

In lieu of DIBs, developers are now putting cash into your hands in the form of a 2% to 5% rebate on downpayment. Is this reasonable compensation for the interests borne during construction? Let's investigate....

Take for example a property with a Sale and Purchase Agreement price of RM555,555... And assuming you got a 90% BLR-2.4% loan over 30 years and the amount is disbursed as the table below suggests, the total interests is worth almost 10% of the loan amount or 8.7% of the SPA price. 

This interests amount will be larger of course if you got a lousier interest rate (e.g. BLR - 2%) or if you are old and only qualify for less than 30 years term. So, 5% is really nothing. You should demand for at least 8% rebate.

Why rebate and not a discount off the SPA price?

Developers (and investors) seem to think that a lower SPA price will suppress the resale value of the property. But I don't think this is the full picture. As far as I am concerned, I refuse to buy properties that are over-valued. So, no matter what was the original SPA price, if the value isn't there (i.e. in terms of rental yield), the resale price will still be suppressed.

Having a higher SPA price simply means the loan amount is higher and subsequently, the buyers need to serve higher interests. This is definitely not in the buyers' interests.

So, now that DIBs have been taken away and we now see developers offering cash in lieu of it simply goes to show that property prices have been inflated in the 1st place. And the fact is, banks have been in collaboration with developers to over-value the properties. As we know, the government's objective with all these measures is to control the rise of property prices, we should not be surprised if some properties bought earlier under DIBs may "re-adjust" in value downwards - something that rarely happens in Malaysia.

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