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Buying property in Indonesia: scams and pitfalls

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Indonesia's affordability and growth potential make it an attractive choice for foreign real estate investors.

For those who aren't familiar with the area, getting into the property market there can be quite a challenge. You may encounter unexpected issues and pitfalls, so it's essential to stay vigilant.

Our community of property buyers and local collaborators have communicated several issues to us. We've listed them all in our Indonesia Property Pack.

This article will give you a quick overview of some of the potential pitfalls you could face.

Is it safe or risky to invest in real estate in Indonesia?

Indonesia, like many countries, presents both safe and risky aspects for property investment.

While it is relatively safe, scams involving fraudulent land titles and property ownership have been reported. One notable example is the prevalence of "ghost titles," where individuals sell properties they do not legally own.

These scams highlight the necessity of thorough due diligence and legal counsel to confirm property legitimacy.

Indonesia's property market is not without its pitfalls. A significant challenge for foreigners is the restriction on direct freehold ownership (Hak Milik).

To circumvent this, many resort to nominee arrangements, which can be risky if not executed correctly. Unscrupulous middlemen can take advantage of these arrangements, leading to potential legal troubles for foreign investors.

While Indonesia has made strides in improving property laws, the legal system can be cumbersome. For example, resolving property disputes can be a lengthy and costly process, with cases sometimes languishing in the courts for years.

A specific example is the complex inheritance laws, which can lead to disputes among heirs and complicate property transactions.

Transparency in the Indonesian property market has improved but may not match the standards of more developed countries. For instance, comprehensive property records and easily accessible information can be challenging to obtain in some regions.

This lack of transparency necessitates extra diligence from buyers to ensure they have a clear understanding of the property's legal status and history.

The Indonesian legal system's efficiency and fairness in property matters have been subject to criticism by some foreigners. Inefficient bureaucracy and potentially long legal battles can deter investors.

One illustrative case involved a foreign investor who faced an arduous and costly legal battle over land boundaries, emphasizing the importance of seeking legal counsel and conducting thorough due diligence.

Foreign buyers must undertake rigorous due diligence to mitigate risks. This includes verifying land titles, conducting background checks on sellers, and scrutinizing property documents.

A pertinent example is the need to cross-verify land certificates and ownership documents with the National Land Agency (BPN) to ensure their authenticity.

Government policies in Indonesia can significantly impact property ownership, especially for foreigners. For instance, regulations on foreign ownership may evolve, affecting the types of properties foreigners can invest in. The government's influence on property market dynamics necessitates ongoing awareness and adaptability.

Foreign buyers have shared their experiences navigating the Indonesian property market. Challenges include difficulties obtaining building permits due to bureaucratic hurdles, disputes over land boundaries, and the intricacies of the inheritance system.

These real-life scenarios highlight the need for thorough research and local expertise.

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Avoid these pitfalls when purchasing property in Indonesia

The concept of "Hak Pakai"

When purchasing residential property in Indonesia, a common pitfall specifically relevant to foreigners like you is misunderstanding the "Hak Pakai" title.

This is crucial for you to be aware of because it's unique to Indonesia.

Hak Pakai is a type of title that allows you to use and build on land. It's often confused with "Hak Milik," which is the freehold title but is only available to Indonesian citizens. As a foreigner, you're not eligible for Hak Milik, and you should not be misled by any claims suggesting otherwise.

In the context of buying property, you might encounter situations where developers or agents promise the possibility of converting Hak Pakai to Hak Milik in the future. You should be cautious here.

This conversion is not straightforward and involves a complex legal process.

There's no guarantee that such a conversion will be successful, and depending on future changes in Indonesian property laws, it might become more challenging or even impossible.

The frequency of this misunderstanding is quite significant, especially in tourist hotspots and major cities like Bali or Jakarta, where property sales to foreigners are common.

Developers and agents, in their bid to make a sale, might downplay the limitations of Hak Pakai or overpromise on the prospects of converting it to Hak Milik.

The risks related to "Izin Mendirikan Bangunan"

Another specific pitfall for you to be aware of when buying residential property in Indonesia is the issue of "Izin Mendirikan Bangunan" (IMB).

This is a building permit required for all constructions in Indonesia, and it's essential to understand its nuances, especially as a foreigner.

The IMB is not just a permit for construction; it also specifies the type of building that can be constructed on a plot of land. For example, a property might have an IMB for a residential house, but this does not permit the owner to convert it into a commercial space like a guesthouse or a restaurant.

As a foreign buyer, you might be interested in properties for mixed use, especially in areas like Bali or other tourist destinations.

You should be very careful to ensure that the IMB aligns with your intended use.

A common mistake is assuming that properties come with a valid IMB or that obtaining or modifying an IMB is a straightforward process. In reality, this process can be quite complex and time-consuming.

Sometimes, properties are sold without a proper IMB, or with an IMB that is outdated or doesn't match the current structure. This can lead to legal issues, fines, or even demolition orders from local authorities.

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"Right of Way" or "Hak Guna Usaha" issues

Another unique and often overlooked pitfall when buying residential property in Indonesia, particularly relevant to foreigners like you, involves understanding and dealing with the "Right of Way" issues, known locally as "Hak Guna Usaha" (HGU) or "Hak Guna Bangunan" (HGB).

These are land titles that might affect your property rights, especially in rural or semi-rural areas.

HGU is typically associated with agricultural land, while HGB is more for construction purposes. The challenge arises when the land where you're planning to buy a property is adjacent to or near areas with HGU or HGB titles.

In these cases, there might be pre-existing agreements or local customs that grant certain rights to locals or companies to use part of the land for specific purposes, such as access roads, irrigation, or other utilities.

For a foreigner, it's crucial to understand these nuances because they can significantly affect your property's usability and value.

For example, you might purchase a property and later find out that there is a legal obligation to allow a path through it for local farmers, or that a part of your land is actually under HGB and is leased from the government, thus limiting your full ownership rights.

These Right of Way issues are not uncommon in Indonesia, particularly in areas where new residential developments are encroaching on traditional land use patterns.

You are advised to thoroughly investigate any potential Right of Way issues before finalizing your property purchase.

This investigation should include checking the property's land title, understanding local land use practices, and seeking information from neighbors and local authorities.

"Adat" laws or customary rights

Another unique pitfall that you, as a foreigner, need to be aware of when buying residential property in Indonesia is the potential for conflicts related to "adat" laws or customary rights.

This is particularly relevant in rural or community-based areas.

Adat laws are traditional laws that govern many aspects of life in Indonesia, including land ownership and community rights. These laws can vary significantly from one region to another and are deeply rooted in local culture and customs.

The main challenge for you as a foreign buyer is that adat laws are not always formally documented, and they can sometimes override national or provincial laws regarding land ownership.

For instance, you might find a property that seems perfect and is legally available for sale according to national laws. However, there could be adat claims on the land that are not immediately apparent.

These claims might involve local community rights to use the land for certain purposes, like traditional ceremonies or agriculture. Ignoring or being unaware of these rights can lead to conflicts with local communities, which can be difficult to resolve.

These adat law issues are particularly common in regions with strong traditional communities, such as in parts of Bali, Sulawesi, and Sumatra.

As a foreign buyer, you might not be initially aware of these local customs and laws, which can lead to unintended disrespect or legal complications.

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The risk containing "nominee structures"

An additional pitfall, specific to Indonesia and crucial for a foreign buyer like you to be aware of, involves the complexities surrounding "nominee structures" for property ownership.

In Indonesia, direct foreign ownership of land is heavily restricted. To circumvent these restrictions, some foreigners resort to a nominee system, which can be fraught with risks.

In a nominee arrangement, an Indonesian citizen (the nominee) holds the title to the property on behalf of the foreign buyer. Legally, the nominee is the owner of the property, and this relationship is often underpinned by a series of legal agreements designed to give the foreign buyer control over the property.

These agreements might include a lease agreement, a power of attorney, or a loan agreement.

While this approach is commonly used by foreigners to acquire property, particularly in areas like Bali, it's important for you to understand the inherent risks. The primary risk is that, in the eyes of Indonesian law, the nominee is the legal owner of the property.

If a dispute arises between you and the nominee, you might find that your legal standing is weaker than you expected. Moreover, changes in the nominee's personal circumstances, such as death, bankruptcy, or legal issues, can significantly affect your property rights.

The use of nominee structures is a gray area in Indonesian law. While not strictly illegal, it's not explicitly recognized or protected by Indonesian property law.

This uncertainty adds an additional layer of risk to your investment.

Given the high risks associated with nominee structures, you should consider alternatives. One such alternative is purchasing property through a foreign-owned company (PT PMA) if your investment meets certain criteria and capital requirements.

This option provides a more secure legal footing, although it comes with its own set of complexities and requirements.

If you still consider using a nominee structure, it's imperative to engage with reputable legal counsel experienced in Indonesian property law. They can help draft robust agreements to protect your interests as much as possible.

However, you should be fully aware of the risks involved and have contingency plans in place.

The risk of "Musyawarah Masyarakat"

One more specific pitfall for you as a foreigner purchasing residential property in Indonesia is underestimating the impact of the local community's approval or "Musyawarah Masyarakat" process.

This aspect is particularly unique to Indonesia, where community consensus plays a vital role in many aspects of life, including property transactions.

Musyawarah Masyarakat refers to the local community's discussion and consensus process. In many parts of Indonesia, particularly in rural and semi-rural areas, the local community holds significant sway over what happens within their area.

This means that even if you have legally completed a property transaction, the local community's acceptance and approval are crucial for a harmonious and trouble-free ownership experience.

In some cases, foreigners have purchased property only to find out later that the local community was not informed or did not agree with the sale.

This can lead to various issues, ranging from minor disputes to more serious conflicts, and can even affect your ability to develop or use your property.

The importance of this process can be underestimated by foreigners, especially those accustomed to more individualistic property rights.

In Indonesia, the communal aspect of life is deeply ingrained, and the Musyawarah Masyarakat process is a reflection of this.

To navigate this potential pitfall, it's advisable for you to engage with the local community early in the property buying process. This might involve attending community meetings, formally introducing yourself, and explaining your intentions regarding the property.

Gaining the community's trust and approval can be a significant factor in ensuring a smooth experience.

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"Sertifikat Hak Milik" or SHM risk

An additional, often overlooked pitfall for foreigners like you purchasing residential property in Indonesia relates to the nuances of "Sertifikat Hak Milik" (SHM) conversion for mixed marriages.

In Indonesia, there are restrictions on property ownership based on citizenship. If you are married to an Indonesian citizen, navigating these restrictions can be particularly complex.

SHM, or the freehold title, is typically only available to Indonesian citizens. As a foreigner, even if you are married to an Indonesian, you cannot directly own property under SHM. However, some couples attempt to circumvent this by purchasing property solely under the Indonesian spouse's name.

While this might seem like a straightforward solution, it can lead to significant legal complications, especially in the event of a divorce or the death of the Indonesian spouse.

In the case of divorce, the Indonesian law tends to favor the citizen in property disputes, which could leave you with limited recourse to claim ownership or rights to the property. In the event of the death of your Indonesian spouse, the property might not automatically transfer to you as the surviving foreign spouse.

Instead, it could become part of the estate, subject to Indonesian inheritance laws, which might favor other family members.

The frequency of issues arising from SHM conversions in mixed marriages is not insignificant, particularly in areas with high expatriate populations.

To avoid this pitfall, it is crucial for you to understand and plan for these potential scenarios.

One approach is to establish a prenuptial agreement that clearly outlines property ownership and rights. Indonesian law recognizes prenuptial agreements, but they must be in place before the marriage.

For couples who are already married without a prenup, a postnuptial agreement might be an option, but its legal standing can be more complex.

Alternatively, as a foreigner, you can explore owning property through a long-term leasehold agreement or via a foreign-owned company structure (PT PMA), as these options provide more security for foreign investors.

"Rencana Tata Ruang Wilayah" or RTRW risk

Another subtle yet significant pitfall that you, as a foreign buyer, need to be aware of when purchasing residential property in Indonesia involves understanding and complying with local zoning laws and regulations, known as "Rencana Tata Ruang Wilayah" (RTRW).

These laws can be quite complex and specific to each locality, often catching foreign investors off guard.

RTRW outlines the land use planning and zoning regulations for different areas. This is crucial because a property that seems perfect for your intended use might actually be in a zone where that use is not permitted.

For example, you might buy a property intending to build a commercial villa, only to discover that the area is zoned exclusively for agricultural or residential use.

This pitfall is particularly relevant in Indonesia due to the country's diverse zoning regulations, which can vary significantly from one region to another. For instance, the RTRW in a rapidly developing area like Jakarta can be vastly different from that in a culturally protected area like Ubud in Bali.

These zoning laws can also change, and areas that were once zoned for residential use can be rezoned for tourism or vice versa, affecting your property rights and values.

The frequency of issues related to RTRW non-compliance is notable, especially in areas with rapid development and changing land use patterns.

Foreign investors may not be fully aware of these local zoning laws or may rely on outdated or incorrect information.

To avoid this pitfall, it's imperative for you to conduct thorough due diligence on the zoning regulations of the area where you intend to buy property.

This includes consulting with local authorities, engaging with a knowledgeable local real estate agent, and possibly seeking the advice of a legal professional who specializes in Indonesian property law.

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The risks regarding "Land certification"

Yet another unique challenge you may face as a foreigner purchasing residential property in Indonesia involves the complexities of "land certification" processes.

In Indonesia, land ownership is documented and confirmed through a certification process overseen by the National Land Agency (Badan Pertanahan Nasional, or BPN). Understanding and navigating this process is crucial, as it is markedly different from land registration systems in many Western countries.

The challenge lies in the fact that not all land in Indonesia is certified. In many areas, especially rural or less developed regions, land ownership may still be based on traditional or communal claims, not officially recognized by the BPN.

As a foreign buyer, if you purchase uncertified land, or land with unclear or disputed certification, you could face significant legal challenges.

These might include disputes over land boundaries, ownership claims by local residents, or even conflicts with government development plans.

Moreover, the process of land certification itself can be lengthy and complex, involving multiple steps and requirements. There's also a risk of encountering bureaucratic inefficiencies or corruption, which can further complicate the process.

The frequency of issues related to land certification is not trivial, particularly in areas where rapid development is occurring or where traditional land use practices are still prevalent.

As a foreign investor, you might not be fully aware of these issues or might underestimate their impact on your property rights and investment security.

"Tanah Wakaf" or Wakaf land

Another specific and critical pitfall for you as a foreigner buying residential property in Indonesia is related to the understanding of "Tanah Wakaf" or Wakaf land.

This is an Islamic endowment of land, often overlooked by foreign buyers, but it's a significant aspect of land ownership in Indonesia, which has a large Muslim population.

Wakaf land is land that has been donated for religious or charitable purposes according to Islamic law. The ownership of this land is transferred to a religious or charitable entity, and it is meant to be used perpetually for the benefit of the community.

The key issue for a foreign buyer like you is that Wakaf land cannot be bought, sold, or owned by individuals, including foreigners.

The challenge arises when properties are incorrectly or fraudulently marketed as being available for sale when they are actually situated on Wakaf land. As a foreigner, you might not be familiar with the concept of Wakaf or its implications in land ownership.

This can lead to situations where you invest in a property, only to later discover that it is on Wakaf land and, therefore, cannot be legally sold or transferred to you. This type of issue is particularly prevalent in areas with significant Muslim populations and where land has been historically donated for religious or community purposes.

The risk is higher in regions where land ownership records are not well-maintained or where local knowledge of land status is crucial for understanding ownership rights.

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