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Why due diligence is important for vendors

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Over the last few years, we’ve written many blogs and articles about legalities, permits, taxes and so on regarding buying property in Bali.

But we keep on running into properties and land deals that often have multiple issues associated with them.

Let me share one fictitious example with you, which is made up of different experiences.

The example deal I’ll use to illustrate things is for a villa for sale somewhere in Seminyak near Canggu – both very popular areas and I’ll use the industry recognized term for a seller, which is Vendor, just in case you were confused with what that means.

On the surface after a quick check of the most relevant documents it seems to be a nice deal … good location, good price, nice vendor.

We go through the negotiation process with the buyer who makes a reasonable offer subject to some bargaining, of course. But part of our internal due diligence process has started to drop some red flags.

Here’s what we find …

Red Flag 1

It turns out the property is “owned” under a nominee structure.  This is risky because we all know this is, and always has been, illegal.

Sure, it’s still possible to transact, but in this particular case the deal involves a mortgage, and in Indonesia, the banks will only agree to a mortgage and transfer to an account held by the name on the certificate.  Sorry, that means no nominees.

Sure, there are ways to work this out if you are lucky enough to have a cooperative nominee.  But the question is why doesn’t the vendor try to do this before they try and list their property?

It’s true that many vendors did try to resolve issues under the recent tax amnesty, but many others didn’t.  And for those that didn’t there were (and will be) tax issues to sort out, where the vendor is liable for income tax handed down from the nominee.

Red Flag 2

The nominee system may complicate the possibility of transferring money out of Indonesia, as the underlying source of funds is not clear.  And receiving money in the country of origin may also give rise to tax issues and invite some unwelcome and uncomfortable questions.

We continued our internal due diligence and check the tax value of the property to get a clearer picture of any tax implications for both buyer and the vendor.

Red Flag 3

And we discover the property has never been reported under the tax amnesty.  This is still something that can be worked out, BUT depending on the tax subject’s tax position, this will end up being either 12.5-percent or 30-percent of the value of the property.

We dig deeper … not because we like to rain on parades, but because it’s vitally important for all legal paperwork and documentation to be correct so that the process is as smooth as possible for all parties concerned. And if there’s one problem, there may be two, or three and so on.

Red Flag 4

We find another problem without having to dig very far at all! It’s clear there are more serious issues with the land and building taxes because it turns out taxes were only ever paid on the land and NOT on the building! This isn’t unusual by the way. And again, why didn’t the vendor consider this before putting their villa on the market?

Things don’t get any better.

Red Flag 5

Turns out there’s also a problem with the build permit, called an IMB. This is an absolutely necessary part of the paperwork and the process. And this property doesn’t have one.

This is a problem but, again, it isn’t the end of the world and it’s a problem that can be solved, but it’s going to take some time … and most importantly additional costs.

By now, the buyer, who’s keen to make the purchase, is understandably frustrated.

Some reasons why things have gotten to this stage are that the vendor may not have been aware of the legal status of the property. It’s unlikely and there’s no justification for it, but it’s still a possibility.

Or the vendor maybe be having some issues issues with the nominee, whose name was used to buy the land in the first place.  In our experience, this is the more likely scenario.

The bottom line is the buyer, quite rightly looks for another villa; one with all legal documentation in order, and the vendor is now left with cleaning up a mess that should never have happened in the first place. And they lose a buyer who was ready to complete.

So, my advice to anyone seriously looking at selling their land or villa in Bali is this – if you want to sell, take the time to make sure all of your paperwork is in order before you try and do it.

Or at least get someone to check it for you before you go to market, because nine times out of ten, in situations like this, buyers will go cold and your property will be sitting there gathering dust.

Part of our internal due diligence process is designed to save everyone time and frustration. It’s meant to make the experience of buying property in Bali more memorable, because it can be. It doesn’t have to be a nightmare in paradise!

Other aspects to consider in checking your paperwork are the access road; is it clear who owns it? Is it commonly owned?

Operational permits; do you have them? Especially if you’re considering renting your villa for short-term holiday rentals. Are you in the right zone for this and does your IMB reflect this? Are you legally allowed to conduct business in a particular area? And yes, short-term holiday rentals are considered a business.

If you’re interested in having a chat about this, or the property business in general, please feel free to touch base anytime. We’d love to help.

 

Harcourts Seven Stones is a property company headquartered in Bali, Indonesia, with a mission to help people who are interested in buying and selling residential and commercial real estate.

If you’re thinking about property, ROI, capital gains or lifestyle investments in Bali, Jakarta, Surabaya, and Indonesian’s Eastern Islands and need some friendly advice and guidance then why not email hello@sevenstonesindonesia.com or check out Seven Stones Website | Seven Stones Linkedin | Seven Stones Facebook

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