We all know how difficult it is for we “unsavoury” foreigners to get financing/mortgages from Thai banks.
I’ve had a few customers over the years who have managed to secure financing for 50% of the bank’s estimated value of the property (usually around 80% of the actual selling price).
But, speaking from personal experience, it’s not an easy process to go through. Having said this, there are a couple of private finance companies in Thailand such as MBK Finance that make more traditional financing more achievable – something you may want to look into.
However, today I’ll be focusing on private seller financing.
In the past, if you haven’t been in a position to pay the full agreed selling price, your best option was to buy something (house or condo) off-plan and at least be able to make staged payments throughout the build period (typically nine-18 months for houses and between 12 and 48 months for condos).
But what if you want to buy something that’s already built and ready to move into? This is where seller financing comes into play, and it’s becoming more common than ever before. It is a quite easy, safe, legal and affordable solution to many buyers and sellers. It can be fully registered at the land office and is even indicated on the back of the title deed (chenote), much like a registered lease.
Seller financing really can work well for both the buyer and the seller. From the seller’s point of view, the benefits are really three-fold:
(1) Your property is appealing to a broader customer base
(2) With the interest collected, your return is much better than having your money sit in the bank
(3) If the buyer defaults on the agreement during the course of the finance period, the property is yours again with all monies collected in pocket (minus your fees paid out to your friendly neighbourhood realtor, of course).
From the buyer’s perspective, there are four major benefits:
(1) The current market interest rates are the lowest in 10 years
(2) You can avoid tying up all of your investable cash in one asset, which allows you to diversify into other investments that offer good returns
(3) Financing gives the buyer time to sell off other assets to possibly pay back the mortgage faster
(4) A flexible pay back schedule can be negotiated so that the buyer does not over-extend themself.
So how does it really work – let’s start at the beginning
We have a seller who wants to sell their property with the option of financing. Most sellers we have been dealing with are interested in financing an average of 50% of the total cost of the property. So let’s say the property is Bt6m. We manage to secure a buyer for the property who can put down Bt3m up-front and wants to have the balance financed by the seller for five years. The seller is asking an interest rate of 6% per annum.
There are a couple of options for how the money is paid back. Some owners aren’t too fussed if they get back any of the Bt3m principal during the five-year period – only have the interest paid to them during the finance period with the Bt3m principal paid in full at the end. Meaning they would make payments of Bt180,000 per year as interest with Bt3m paid at the end of the five-year term.
The most popular option works the same way a fixed bank mortgage would work – as in the payments are amortised over the five year period (first year – Bt3m x 1.06) x (Second year – Bt3.18m x 1.06)…etc., etc…Whereas the total sum of five years of amortised interest and the principal are divided into 60 monthly payments.
There are several variations on the payback setup. In some cases, the buyer may want to settle the entire amount after only a couple of years. Amendments to the mortgage contract can allow provisions for this. A legal mortgage contract can be drafted at several reputable area law offices for a small fee of about Bt10,000-15,000.
Now it comes time for making it all very legal. Both parties would go to the land office as usual. The regular transfer fees are paid (who pays these fees is up to what is negotiated) and an additional fee of 1% of the amount being financed is also paid. Now, on the chenote (title deed), the property will now be in the name of the new buyer, but underneath it will show that there is an outstanding mortgage owed to the old owner (seller). If you have ever transferred a property at the land office where the seller has a bank mortgage on the property, it’s essentially the same thing.
Once the mortgage has been paid off, both parties convene at the land office to have the mortgage removed from the chenote…and that’s that.
I’ve had a couple of sellers who have asked to have their mortgage agreement remain private. The seller doesn’t want to transfer the property whatsoever until the full amount has been paid back to them. In this case, it is easier for the seller to take back their property should the buyer default on their payments. From the buyer’s perspective, they may feel they don’t have the same sense of security as when you register the mortgage at the land office.
Having said this, a solid contract can be drafted and notorised that clearly outlines the terms and conditions of this private agreement. Most instances we’ve been involved in like this would allow 60-90 days for the buyer to get all payments up to date before officially going into default. Also in this instance, the title deed would generally be held by an agreed third party (typically a lawyer) who could hopefully contain a situation should either party default.
An important item of note. There are basically two ways of registering a loan at the land office. These go by the Thai terms Kai Faak and Jaam Nong (excuse the English phonetics).
Kai Faak is basically a loan that, if defaulted on by the party getting the loan, would automatically revert the ownership of the property to the lender. If you’ve ever heard of anyone getting a short term high-interest loan against a property in Thailand, chances are this the type of loan they’re registering. Obviously as the lendee you want to make sure you’re on the ball with this type of registered loan as if you have a lendor chomping at the bit for you to default you could be in a lot of trouble.
If you were to default on a Jaam Nong type of loan, the property would end up going through the courts who would generally force a sale in order to gather funds to pay back the lendor. Beggers can’t be choosers, of course, but this is really the type of loan you want to be registered if you’re the one doing the borrowing.
By Stu Sutton
Stu Sutton is managing director of Jomtien Property and has worked exclusively in the Pattaya/Jomtien real estate market for 16 years.
Please feel free to contact him with any queries, compliments or good jokes at
086 108 6575, [email protected]
or visit Jomtien Property’s website at www.jomtien-property.com