Property Bulk Purchasing ..Good or Bad? Part 2

POTENTIAL ISSUES: In Part 2, we look at several reasons why joint purchases may not be everyone’s cup of tea

Last week, we covered the first part of my thoughts on joint purchase of properties. To recap, we are talking about the pros and cons of joint purchase between non-family members and I covered the benefits as follows:

• Greater cumulative purchasing power

• Leverage on others’ knowledge and expertise

• Shared risk or risk diversification

• Leverage on others’ financials and credit

• Future credit advantage

So this week I intend to cover what the possible risks of joint purchases are. If I could sum everything up, I feel that a joint purchase carries substantial risk primarily due to its human factor. There are just too many uncontrollable factors that will crop up when huge money is at stake. When it comes to money, siblings can fight and long-time friends can be enemies, let alone a few strangers. Mahatma Gandhi once said:

“There is sufficiency in the world for a man’s need, but not a man’s greed.”

Gandhi is absolutely spot on. There are a few reasons why I don’t fancy joint purchases such as:

1. Too many ‘human’ uncertainties — Let’s assume you shared a purchase of a commercial property with three other friends. Let me just illustrate a few scenarios how people can get stuck when they share:

• One of the partners dies shortly. What’s going to happen to his part of the commitment? Who will be forking out an additional sum every month on behalf of the deceased? What if his will is under dispute, including his share in this shared commercial property?

• One partner got sued by his ex-spouse, who then filed a caveat on this property.

• One partner ended up bankrupt.

• Or just a plain and simple issue, one partner ran out of money and needed to exit the arrangement to pursue other priorities?

• What if the property was a bad buy and the partners could not find a tenant or buyer after 1–2 years? Will all the partners have the patience to wait it out? What if some partners decide to cut their losses but some still plan to hold on? What if one or two partners refuse to pay the monthly installments anymore after months of bleeding cashflow?

I’ve always advocated that anyone who invests in properties needs to have a medium- to long-term holding period. For myself, I’ll only buy a property that I am prepared to hold for a minimum of 5–10 years. A lot of things can happen within five years’ time, and chances of any of the five scenarios above to materialise are very, very real.

2. Shared risks equal lower profit — When you diversify your risks, you are also diversifying your profit. Let’s say you form a joint purchase with three friends to buy a RM1 million shop-house, with all four of you becoming guarantors for the RM800,000 loan. Three years down the road, the shop-house was successfully sold for RM1.3 million. Once you pay the agent fees, early penalties, RPGT (Real Property Gains Tax) and other incidentals, you guys will have a net profit of RM240,000. Sounds a lot, but once you divide among four partners, that’s only RM60,000 perperson, assuming that everyone gets an equal share. Personally for me, I wouldn’t want to make a RM1 million bet just to make RM60,000 after three years.

3. Inflexible arrangement — A partnership only works if everyone sticks to the original plan. All the partners need to have the discipline to last it out. But what happens if something turns up and you yourself need to go for a premature exit? For example, you need money to pay medical fees for an ill family member? Or you saw a once-in-a-lifetime business/investment opportunity (talking about real opportunities, not the gold Ponzi scheme types). You now have to rely on other partners to share your plight and arrange a cordial exit for you. But what if they don’t care about your problems and tell you to stick around or lose everything you have paid? Yes you could make an agreement for this but more often than not, anyone who opts for early exit will normally have to pay a hefty price for causing inconvenience to the other partners.

With single ownerships, one can do as they please. If I needed the money, I can just sell the property. Or else I’ll keep it. It’s that simple. I don’t need to beg others to understand my plight, I don’t need to pay “penalties” to other partners, and more importantly, I have the full freedom to make decisions that work best for me.

4. Additional costs incurred — If you want to have a water-tight partnership, forming a private limited company (Sdn Bhd) will be inevitable. You and your partners can document and officially decide on purchase, exit, early withdrawal penalties etc. However, this means that there will be additional cost incurred such as set-up, annual maintenance and accounting fees, which can amount to thousands of ringgit every year.

5. Encouraging hasty decisions due to perceived low risk — Amongst the benefits of joint purchase are higher purchasing power and shared risks. This in my opinion is a double-edged sword. When it’s your own money and its 100 per cent your decision, you are normally a lot more cautious as a mistake can thoroughly break you. But because the risk is shared with a few others, people often loosen up a bit and get a bit careless. Thanks to the new cumulative purchasing power, they can now dare to enter a world that’s previously unknown to them. There are many instances where I see complete strangers forming a joint-venture to buy a property that they can never afford to alone, say shop-houses or prime offices. Everyone in the venture thinks somewhat that their risk is lower simply because the risk is shared. Actually the risk remains the same, it’s just that now you have company if the whole thing tanks.

6. CCRIS (Central Credit Reference Information System) disadvantage — This is true if you are lending your financial capabilities for the venture to obtain borrowing. For some lenders, they don’t care if you only have 25 per cent share of the venture, but so long as your name is being used to obtain say a RM1 million loan, they take it that you borrowed RM1 million. This could be a hindrance for you to obtain borrowing later in the future, and you could end up missing better investment opportunities coming your way.

My personal opinion
In summary, I’m mainly against joint purchases due to potential issues that could arise from this arrangement. Most of the time, it’s often not worth the hassle. The shared profits from such ventures are often small compared to the risk one has to undertake. Joint purchases are certainly not for beginners, and it should be one’s last resort once all attempts to buy the property on your own capability have failed, and you are 100 per cent sure that the property is a great buy with limited downside.

Till then, invest safely.

The above article is extracted from nst.com.my @16 November 2012