Understand the Bai-bai Keiyaku

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When it comes to buying real estate in Japan, making sure you fully grasp the property sales contract is essential.

Indeed, not fully understanding the document you will sign can lead to financial losses, including the forfeiture of deposits, payment of penalties, unexpected costs, legal expenses, and potential poor investment decisions.

We've heard countless stories of people making costly mistakes when signing their property agreement in Japan. We want to help you avoid the same experience.

We'll give here a very brief overview regarding the property sales contract in Japan ; if you want a full checklist, please check our property pack for Japan.

What is the Bai-bai Keiyaku in Japan?

In Japan, the property purchase agreement, locally known as "Bai-bai Keiyaku" (売買契約), is a crucial document in real estate transactions.

This agreement outlines the terms and conditions of the property sale, including details like the price, payment schedule, and property specifics. It's a legally binding contract, meaning once you sign it, you're legally committed to the terms stated.

This agreement serves as a guarantee for both the buyer and the seller.

For the seller, it ensures that the buyer is committed to purchasing the property. For the buyer, it provides a detailed record of what they are purchasing, including the condition of the property and any other agreed-upon terms.

There are specific considerations for international buyers or non-residents. Japan does not impose significant restrictions on foreign property ownership, but understanding the language and legal nuances is crucial.

The signing of this agreement usually occurs after the buyer has conducted due diligence, like property inspections, and is ready to commit to the purchase.

It's common practice to pay a deposit upon signing the agreement. This deposit, known as "Earnest Money" (手付金, Tetsukekin), is typically around 5-10% of the purchase price. This amount can vary depending on the property and the agreement between the buyer and seller.

In comparison to other countries, the Japanese real estate transaction process is quite meticulous, with a greater emphasis on formalities and paperwork.

For example, the role of real estate agents and legal representatives is more pronounced in Japan, and they are often heavily involved throughout the process, from negotiations to the signing of the agreement.

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What should be included in the property purchase agreement in Japan?

In Japan, the property purchase agreement, or "Bai-bai Keiyaku," is governed by the Civil Code of Japan (民法, Minpō).

This legal framework outlines the essential requirements and clauses that must be included in any real estate transaction.

The agreement should contain several key elements:

- Identification of both parties (buyer and seller) including their names and addresses.

- A detailed description of the property, including its location, size, and any unique characteristics.

- The agreed-upon sale price and the payment schedule.

- Details about the transfer of ownership, including the date when the property will be handed over.

- Information on any existing mortgages or liens on the property.

Some mandatory clauses typically include:

- This guarantees that the seller has the legal right to sell the property.

- This ensures that the property is free of any undisclosed debts or legal issues.

- This confirms that the property meets all necessary building regulations and standards in Japan.

Additional clauses might cover aspects like:

- Agreement on who pays for specific taxes and fees associated with the transaction.

- Arrangements for necessary repairs or maintenance to be done before the transfer.

Conditions or contingencies are often included to protect both parties.

These might involve:

- A satisfactory property inspection.

- The buyer securing financing or a mortgage.

- Confirmation that the property isn't affected by any zoning changes or planned developments.

In Japan, the property purchase agreement does not need to be notarized. However, it's common to have a judicial scrivener (司法書士, Shiho Shoshi) involved.

These professionals handle the legal documentation, including registration of the property transfer, and ensure that the agreement complies with Japanese law.

Real estate agents in Japan play a significant role in the transaction. They often facilitate negotiations between the buyer and seller, assist in drafting the agreement, and sometimes even hold the deposit in escrow until the deal is finalized.

It's important to note that real estate agents in Japan must be licensed and are governed by the Real Estate Transaction Business Law (宅地建物取引業法, Takuchi Tatemono Torihiki Jigyō Hō).

What's the signing process like?

In Japan, the signing process of the property purchase agreement, or "Bai-bai Keiyaku," is a formal and structured procedure.

This agreement is bilateral, meaning it requires the signatures of both the buyer and the seller. It's possible for multiple people to be involved as either buyers or sellers, such as in the case of joint ownership or a property being sold by multiple family members.

Before the signing, both parties need to prepare certain documents and information.

The seller must provide proof of ownership, details of the property including any encumbrances, and potentially recent utility bills or tax documents to prove their claim over the property.

The buyer, on the other hand, should be ready with their personal identification and, in cases where applicable, proof of financing or mortgage approval.

The signing process typically follows these steps:

There is no strict legal deadline for signing the property purchase agreement in Japan.

However, market dynamics often dictate the pace. Once signed, the agreement is binding unless specific contingencies are not met.

The duration of validity is usually until the completion of all sale conditions, like payment and transfer of ownership.

Regarding registration, after the agreement is signed and the property is paid for, the transfer of ownership needs to be registered with the local Legal Affairs Bureau (法務局, Hōmukyoku).

This process typically involves a judicial scrivener, who ensures that all necessary paperwork is accurately completed and submitted.

Amendments to the contract after it has been signed are not common and can be challenging. Any changes would require agreement from both parties and potentially a new contract or an addendum to the existing one.

The timeframe for completing all necessary paperwork and approvals varies but typically takes a few weeks to a couple of months after signing.

This includes obtaining any necessary governmental approvals, completing financial transactions, and registering the transfer of ownership.

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How is the payment handled when signing a property purchase contract in Japan?

In a real estate transaction in Japan, understanding the financial aspects, particularly those related to the property purchase agreement, is crucial.

When you sign the sales agreement, a deposit, known as "Earnest Money" (手付金, Tetsukekin), is typically required. This amount varies but is generally around 5-10% of the property's sale price. This deposit acts as a sign of your commitment to the purchase.

The typical down payment for a property sale in Japan, aside from the earnest money, is around 10-30% of the purchase price.

However, this can vary based on the lender's requirements and the buyer's financial situation.

There are upfront fees associated with signing the sales agreement. These can include agent fees, legal fees, and potentially a fee for a judicial scrivener (司法書士, Shiho Shoshi) who handles the registration of the property transfer.

The exact amounts can vary based on the property's value and the professionals involved.

The payment of earnest money is usually made to an escrow account managed by the real estate agent or a legal representative, not directly to the seller. This adds a layer of security to the transaction.

The payment due dates will be outlined in the sales agreement.

Generally, the earnest money is paid upon signing the agreement, with the remainder of the down payment due at a later specified date, often close to the property handover.

There are tax implications associated with the transaction. Property transfer taxes apply, and the amount depends on the property's value and location.

Additionally, both buyer and seller may have other tax obligations related to the sale.

You can negotiate the down payment amount with the seller, although there's often not much flexibility due to standard practices and lender requirements.

If the sale falls through, the earnest money's refundability depends on the conditions outlined in the agreement.

Generally, if the sale falls through due to a failed inspection or financing contingency, the earnest money can be refundable.

However, if you, as the buyer, back out without such conditions being met, the seller might keep the earnest money.

Using a mortgage loan for the down payment is uncommon. Typically, the down payment should come from your personal funds.

Real estate agents or attorneys play a vital role in handling the payment process. They ensure that payments are made according to the contract and help manage the escrow account.

You should request and will receive a receipt or confirmation of payment for the down payment. This is important for your financial records and any subsequent legal requirements.

For tax implications, the buyer often faces acquisition tax and registration and license tax, while the seller may be subject to capital gains tax on the profit from the sale.

What are the potentials risks and pitfalls?

You might be interested in reading our article about the common risks and pitfalls surrounding a property transaction in Japan.

In Japan, the property purchase agreement, or "Bai-bai Keiyaku," comes with specific risks and pitfalls that both buyers and sellers should be aware of.

Withdrawal from the agreement is possible but can be complicated. If a party wants to withdraw, the conditions for doing so must typically be outlined in the agreement itself.

For instance, a buyer may have the option to back out if they are unable to secure financing.

However, this needs to be specified as a contingency in the contract. If a party withdraws without a valid reason outlined in the agreement, they may face legal and financial repercussions.

Japan does have a cooling-off period for certain types of real estate transactions, especially those involving door-to-door sales or certain types of solicitation.

However, this cooling-off period does not typically apply to standard real estate transactions. The duration of this period, when applicable, includes weekends and public holidays.

If one party fails to fulfill their obligations as outlined in the agreement, the consequences depend on the specific terms of the contract. Penalties can range from forfeiting the earnest money (in the case of the buyer backing out) to being subject to legal action for breach of contract.

If the buyer backs out, the earnest money is typically kept by the seller as compensation. If the seller fails to fulfill their obligations, the buyer may be entitled to compensation, including the return of their deposit.

Comparatively, real estate transactions in other countries can differ significantly. For example, in the United States, earnest money deposits are common, but the amount and conditions for forfeiture may vary.

The U.S. also has more standardized processes for inspections and disclosures, and the legal implications of backing out of a contract can differ.

In Japan, potential risks and pitfalls with the agreement include:

- Unforeseen property defects discovered after signing.

- Misunderstandings or misrepresentations about the property's condition or legal status.

- Delays or failures in securing financing.

- Legal disputes arising from unclear terms in the contract.

Disputes during the agreement process are not exceedingly common, but they do happen. When disputes arise, they are typically resolved through negotiation, sometimes involving mediators or legal professionals.

In more severe cases, disputes can lead to litigation, where the matter is settled in court.

If the property is discovered to have defects or issues after signing, the buyer may have legal recourse depending on the nature of the defect and the terms of the agreement. If the seller knowingly withheld information about defects, this could be grounds for legal action.

However, the specifics would depend on the evidence available and the exact wording of the contract.

The process for resolving disputes usually involves first attempting to settle the issue through direct negotiation. If this fails, the parties might turn to mediation or legal arbitration.

The role of legal professionals, like attorneys or judicial scriveners, can be crucial in these scenarios.

This article is for informational purposes only and should not be considered financial advice. Readers are advised to consult with a qualified professional before making any investment decisions. We do not assume any liability for actions taken based on the information provided.