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Owning a piece of paradise

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The only thing better than visiting paradise, is owning a piece of it, and every year many of the visitors who step off planes in Bali leave thinking how fantastic it would be to own a property here. This trend is evidenced by the large number of real estate developers which has mushroomed up all over the island and the dizzying array of schemes now available to eager buyers. So where do you start and how do you go about buying a property? Read on....

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									Owning a Piece of Paradise - Daniel O’Leary

The only thing better than visiting paradise, is owning a piece of it, and every year many
of the visitors who step off planes in Bali leave thinking how fantastic it would be to own
a property here. This trend is evidenced by the large number of real estate developers
which has mushroomed up all over the island and the dizzying array of schemes now
available to eager buyers. So where do you start and how do you go about buying a
property? Well the first thing not to do is to rush it. I have met folks who expended
significant effort getting the best deals on flights and hotels to ensure a cheap holiday
only to head back home having bought a ridiculously priced timeshare from a sleek high-
pressure marketing outfit and then afterwards wonder aloud “what the hell have we
done here?” It’s amazing how many people fall for the “don’t wait to buy real estate, buy
real estate and wait.” pitch line. But then which of us hasn’t bought things on holiday
that we regretted afterwards, a dodgy shirt or outlandish shoes perhaps. However, those
are generally a much easier souvenir to rationalize than an overpriced holiday home with
dodgy paperwork.

The good news is that buying a piece of property or holiday home here can be a relatively
smooth transaction and a good investment to boot. However, it is important not to
assume that the real estate and legal system here is similar to home. It’s not. That’s why
it is crucial to firstly familiarize yourself with your basic property rights as a foreigner
under Indonesian Law by arranging a consultation with a Notaris, Lawyer or Legal
Consultant who speaks your language. Lay out what you propose to do and have them
give you step-by-step direction. A single consultation should be enough to get you off on
the right track, take notes and have them verified to ensure that what you understood
from the meeting to be correct. There is a lot of free information available on the web
but the problem is identifying what is objective and current. The old adage holds very
true at this stage of the process - If you think hiring a professional is expensive, wait
until you hire an amateur.

Basically, there are four types of certified deeds of property ownership in Indonesia.

• Hak Milik (HM) – Right of ownership or Freehold, Certificate only in the name of an
Indonesian entity – Valid indefinitely.

• Hak Guna Usaha (HGU) – Right to use for Agribusiness, Certificate only in the name of
an Indonesian entity – valid for up to 35 years, extendable. Most commonly used by
plantation owners and other commercial farming enter prises.

• Hak Pakai (HP) – Right to use, deed may be in the name of an Indonesian or foreigner
domiciled in Indonesia - valid for 25 years, extendable.

•   Hak Guna Bangunan (HGB) – Right to construct and

    possess building on land not owned by HGB holder.

    Certificate only in the name of an Indonesian entity – valid for 30 years, extendable.

You may conclude from the above that Hak Pakai title is the only legal deed of ownership
that may be held privately in the name of a foreigner. However, many foreigners buy HM
properties in the names of Indonesian citizens and then use Nominee agreements such
as Power of Attorney, Loan Agreements, etc, to enable the Indonesian national to
transfer all rights to the property over to the foreigner. The land law states clearly that
HM title may not be transferred directly or indirectly to a foreign entity so should you
have a dispute with your Nominee you would most likely lose your investment. Freehold
title may be converted to HP so why risk everything when you can hold HP in your name.
A Notaris who is PPAT licensed (registered to process land Titles) can handle the deed
conversion at the Government Land Office. Extending a HP involves paying a small fee at
Department of Lands just prior to expiry of initial period. Hak Pakai title is also accepted
by most lending institutions as collateral for lending.
The government is in the process of revising laws on foreign ownership of land and
though nothing has yet been signed into law it is widely expected that the current
maximum single period will be extended significantly upwards from 25 years. There are
wild claims being made by some real estate brokers and developers as to the inflationary
effect this revision of the law will have on land prices, however one has to understand
that in effect foreigners can already hold long term rights to land through HP extensions
and consecutive leasehold contracts.

If you are not familiar with Bali or haven’t had much exposure to the workings of
Indonesia, then choosing a property offered by one of the big multinational real estate
agents could be a good option. These companies at least carry out limited due diligence
on the properties on their books and charge fixed fees for their services. They are also
usually owned/managed by foreigners, though that doesn’t mean that you can drop your
guard, but at least it facilitates easier and better communication. There are a few such
large companies in Bali who also have offices in other countries in the region. They
generally charge fees of 5% to 10% of the purchase price which are payable by the
seller.

Once you have identified some properties of interest get the “crocs” on and look at some
similar properties for sale in close proximity being marketed by other agents or privately.
Make sure you are comparing like with like and by doing this homework you are likely to
observe how prices can vary dramatically within a small area. For example in Sanur, land
on the Renon side of the bypass may cost less than half that on the beach side, literally
just across the road. It’s important to forget what “a property like this would cost back
home” and ignore the claims of property agents who tell you Bali is the next Hawaii. Just
focus more on how similar properties in that area or down the road compare.

Once you have chosen your property and agreed on the price you need to find a
reputable Notary (Notaris), preferably one that speaks your language and that is
independent of the property agent you are using. To verify ownership they should ask
you to obtain the following from the owner:

•   Land title (Akta),

•   Identity card of the owner and owner’s spouse if married,

•   Proof of up-to-date payment of land tax.

The Land deed will include a site sketch showing the location, boundaries and the total
area of the site. It would be wise to personally survey the location to ensure the property
you were shown by the vendor matches that on the Deed. If the land does not open onto
a public road, ask for proof of right of access and also submit that data to your Notaris
for verification. Access can be a common problem in these types of transactions. In
addition, have your Notaris verify that the land you are purchasing is zoned for your
intended purpose e.g. residential or commercial. Discovering the land you bought for
your dream home was in a Green Zone where all types of development are forbidden
would be a bummer!

DO NOT transfer any funds until everything has been verified by your Notaris/ Legal
advisor. A deposit may be required by the seller to hold the property while you arrange
funding / payment and the Notaris drafts the purchase agreement. Final payment is
usually made when final transaction agreements are signed at the Notaris office. The
Notaris is legally obliged to collect 10% government tax from value of transaction at
time of signing purchase agreements with the buyer being liable for 5% and seller for
5%.

Acquiring a long-term lease of land through contract is a more common option taken by
many seeking to build their own place in Bali. A foreigner is currently allowed to lease
land for a maximum of 25 years at a time, however this period can be in effect be
extended through consecutive contracts. Real estate agents would have many leaseholds
on their books. Valuation is usually quoted at a Rupiah value per Are (100 sqms) per
Year. Though you may only plan to lease for 25 years you should also consider having
your Notaris include renewal or extension options in the lease agreement. This gives you
a potential asset to sell at the end of the initial lease period. Often the payment for the
extension occurs years in advance of the end of the first lease term. The renewal rate
(price per Are per year) used to calculate the lump sum amount payable is generally
derived using one of three ways in Bali:

•   Value is indexed to price of gold.

• Value is indexed to price of rice.
• Value is based on the then prevailing market rates for similar leaseholds as determined
by a professional valuer.

A simplified example of how this might work in the case of gold would be – Lets assume
the price per Are per year at time of the contract for the initial lease term is 10,000,000
rupiah which would buy 10 grams of gold at that time. Then at renewal when the
extension option is being exercised, the new rate will be 10 grams times the prevailing
price of gold per gram at that time, in rupiah.

When buying a lease you must apply the same caution as you would when buying Hak
Pakai, even more so, as in many cases the property may be subleased from the original
leaseholder. This makes the chain of ownership longer and more complex and you will
need to provide your Notaris with copies of the subleasor’s agreements along with copies
of identity cards and proof of land tax payment by sub leaser in addition to the owner’s
documents. The extension options on the agreement between the owner and primary
leasor will dictate the maximum extension periods available to you. Again, do not
transfer any funds until your Notaris/Legal Consultant has carried out the necessary due
diligence on the additional documentation.

A question often asked is: so what is the difference between Hak Pakai and leasehold,
both may be held by foreigners for 25 years, right? A leasehold is a contract between you
and the owner of the rights to the property, your name will not be on the title or deed
whereas with Hak Pakai you are the actual owner of the property, there is only one title
or deed and it is your name that is on it. With leasehold, you agree compensation with
the owner for the period mentioned in the contract. Any extension period will also
involve compensation to the owner at an agreed price per Are. In the case of HP, you
make no further payments to anyone once the title is on your name. There is an
administrative fee to be paid to the Government on extension.

Another common type of real estate purchase made by foreigners in recent times is a
luxury villa from a developer who has a management program in place to rent the
property on your behalf when you are not using it. This is a tried and tested concept in
many parts of the world though where it often falls short is when guarantees of
unrealistic rental levels and returns are made for these investments. This is the classic
case of buying a two-story house....one story before I bought, and another after. I have
read some ridiculous claims being made by developers/agents who clearly know that the
touted returns are unrealistic.

When buying a house you also need to have due diligence done on the land on which it is
built. You need to establish that the contractor/developer had Planning Permission
(IMB) for the structure and that the completed structure actually conforms to the
dimensions on the Planning Certificate. You also need to ensure that utilities are
connected and charges for usage will be billed directly to you. Getting utilities connected
here can be a much longer and less straightforward process than it is back home. As
mentioned previously, verify that your right of access is secure and if your property is
part of a larger development, ensure that areas designated for facilities like pool, green
areas, sports complex, etc have not been converted to housing instead. And again the
11th commandment is - don’t pay anything until cleared to do so by your Notaris or Legal
advisor.

The vast majority who have bought properties in Bali are blissfully happy with their
investment so one shouldn’t get put off by the horror stories, which are often the result
of little or no due diligence. Adapt a cautious approach, get the best professional advice
available and follow it. Don’t get pressurized into paying before you and your advisor are
satisfied that the deal is sound and don’t take short cuts just to save a few rupiah, as it
could cost you dearly in the long run. Property has been appreciating consistently in Bali
so any investment you make is likely to turn a healthy profit.

As regards how to avoid the other common pitfall of a Bali holiday - how to avoid arriving
home with shirts that look like there was an explosion at the local Benetton factory,
sorry mate, can’t help you there.

Daniel has lived and worked in Indonesia for 25 years, holds Indonesian citizenship and
is the Director of IndoAdvisors, a company based in Bali offering Business and Legal
advisory services - www.indoadvisors.com

								
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