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Buying property in Malaysia: scams and pitfalls

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Everything you need to know is included in our Malaysia Property Pack

Malaysia's strategic location and growing economy are making it an appealing destination for foreign investors in the real estate sector.

If you're not a local resident, dealing with the property market in this area can be a bit of a maze. Be prepared for potential obstacles and surprises.

Both our property-buying clientele and our local partners have raised several common concerns with us. We've listed them all in our Malaysia Property Pack.

This article provides a brief overview of potential pitfalls that may arise during the property buying process in this country.

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

Malaysia generally offers a safe environment for property investments, but that doesn't mean it's immune to scams and fraudulent activities.

One prevalent scam that plagues both locals and foreigners is the sale of properties with unresolved legal issues or multiple claims of ownership. For instance, a buyer might unknowingly purchase a property that has unresolved inheritance disputes or unsettled debts, leading to a legal quagmire.

A notorious case involves the sale of "abandoned properties" by unscrupulous individuals who misrepresent themselves as legitimate sellers. These properties are often purportedly owned by foreigners who have left the country, making it difficult for the real owners to claim their assets.

Buyers must exercise utmost caution and conduct meticulous due diligence, involving trusted real estate agents and lawyers, to avoid falling victim to such scams.

Malaysia's property market has its unique set of challenges, some of which can be particularly daunting for foreign investors.

The issue of land titles is a case in point. The country's historical land tenure systems can result in convoluted ownership structures, making it essential to ascertain the legitimacy of property titles before making a purchase.

For example, Malay Reserve Land and Bumiputera Lots are subject to ownership restrictions, which can be challenging for non-Malaysians to navigate.

Moreover, Malaysia's property market can be influenced by external factors such as global economic trends and currency fluctuations. These factors can impact property values and rental income, creating a certain level of volatility that investors must carefully consider.

Malaysia has established a comprehensive legal framework for property transactions, providing a structured and transparent process for buyers. The National Land Code and Housing Development Act are pivotal in safeguarding the interests of property buyers.

However, it's important to note that while the legal system is generally considered fair, the efficiency of the legal process can vary, and resolving property disputes may prove time-consuming.

For instance, property disputes can sometimes linger in the courts for years, causing financial and emotional strain for all parties involved.

Foreign buyers must conduct thorough due diligence when investing in Malaysian property. Verifying property ownership, checking for outstanding taxes or utility bills, and ensuring compliance with zoning and land use regulations are all critical steps.

Engaging a local lawyer well-versed in property transactions is indispensable. They can guide foreign buyers through the intricacies of Malaysian property law and help navigate potential legal challenges.

The Malaysian government actively encourages foreign investment in the real estate market, offering programs like the Malaysia My Second Home (MM2H) initiative, which allows foreigners to reside in Malaysia while owning property.

This government support has contributed to the growth and stability of the sector.

Nevertheless, foreign investors should remain vigilant about policy changes and new regulations that may affect their investments. For instance, changes in foreign ownership restrictions or taxation policies can impact the attractiveness of the Malaysian property market to foreigners.

Foreigners who have purchased property in Malaysia have reported various challenges, including grappling with the intricacies of the country's land tenure systems.

Additionally, cultural differences and language barriers can pose hurdles in negotiations and transactions.

Understanding local customs and practices is vital to forging successful real estate deals.

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Potential real estate buying mistakes in Malaysia

The concept of Bumiputera lot quota

When buying residential property in Malaysia, one specific pitfall you should be aware of is related to the Bumiputera lot quota.

This is a unique aspect of Malaysian property law that often catches foreigners unaware. In Malaysia, a certain percentage of properties in any development are allocated as Bumiputera lots. These are reserved for the indigenous Malay population, known as Bumiputeras, as part of affirmative action policies.

As a foreigner, you need to ensure that the property you are interested in is not a Bumiputera lot.

Sometimes, developers may inadvertently or mistakenly market these lots to foreigners. If you purchase such a property, the transfer of ownership could be voided, leading to significant legal and financial complications.

This mistake can occur especially in cases where there is a communication gap or misunderstanding with the property agent or developer.

It’s not a frequent issue, but it’s significant enough that you should be vigilant. Always ask directly and ensure that the property is not a Bumiputera lot before proceeding with any purchase.

Additionally, having a local lawyer or property agent who is well-versed in Malaysian property laws can be invaluable in navigating these unique aspects.

The risks related to "Lesen Pemaju" and "Permit Iklan"

Another pitfall specific to Malaysia that you should be aware of when buying residential property is the issue related to the Developer’s License and Advertising Permit, known locally as "Lesen Pemaju" and "Permit Iklan."

In Malaysia, every property development project requires a Developer’s License and an Advertising Permit issued by the local authorities.

You should ensure that the property you are interested in is being developed by a licensed developer who holds a valid Developer’s License and Advertising Permit. These permits ensure that the developer is legally authorized to construct and sell the property.

Buying a property from a developer without these licenses can lead to serious issues, such as project abandonment or legal disputes.

This situation might occur if you are dealing with less reputable developers or are not thoroughly checking the legal documentation.

Although this is not a frequent problem, the consequences can be severe, including losing your investment or facing long legal battles.

To safeguard yourself, you should verify the Developer’s License and Advertising Permit before making any commitment or payment. It's advisable to conduct this verification through a lawyer or a trusted property agent who understands the intricacies of Malaysian property law and the local real estate market.

This step is crucial to ensure that your investment is secure and the property purchase process is legally compliant.

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The "Cukai Tanah" issue

A less commonly known but significant pitfall in buying residential property in Malaysia, particularly for foreigners, is the issue related to the calculation of quit rent, locally known as "Cukai Tanah."

Quit rent is a form of land tax imposed on property owners in Malaysia. What makes this tricky is that the calculation of quit rent can vary significantly depending on the location and type of property.

The quit rent in Malaysia is not a flat rate and can differ based on factors such as the size of the land, its use (e.g., agricultural, residential, commercial), and its location. For instance, quit rent in urban areas like Kuala Lumpur might be higher compared to more rural areas.

Additionally, the method of calculation and the rates can change, which might not be immediately apparent to a foreign buyer.

This can be a pitfall for you if you do not account for this variable expense in your budgeting.

Quit rent might seem like a small amount, but for larger properties or properties in prime locations, it can add up to a substantial annual cost.

To avoid this pitfall, you should inquire about the current and historical quit rent for the property you are interested in. It's also wise to ask about any anticipated changes in quit rent rates or calculation methods in the near future.

This information is typically available from the local land office or your property agent.

Minimum Purchase Price or MPP policy

Another specific pitfall in Malaysia's residential property market, particularly relevant to you as a foreign buyer, is related to the Minimum Purchase Price (MPP) policy for foreigners.

In Malaysia, each state sets a Minimum Purchase Price for properties that can be bought by foreigners. This policy is in place to ensure that affordable housing remains accessible to Malaysians and is not disproportionately purchased by foreigners, who may drive up prices.

The MPP varies from state to state and can be updated periodically.

For example, in Kuala Lumpur, the MPP might be different from that in Penang or Johor. This variability can be a significant pitfall if you're not aware of the latest MPP in the state where you're looking to buy property.

If you purchase a property below the MPP, your transaction could be invalidated, resulting in financial loss and legal complications.

To avoid this, you should always check the current MPP for the specific state where you're interested in purchasing property.

This information can usually be obtained from the state's official website, local property agents, or legal advisors.

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Real Property Gains Tax or RPGT

An additional unique pitfall in buying residential property in Malaysia, particularly relevant for foreigners, is the issue of compliance with the Real Property Gains Tax (RPGT).

The RPGT is a form of capital gains tax levied on the profit gained from the sale of property in Malaysia. It's crucial to understand that the rates of RPGT can be significantly higher for foreigners compared to Malaysian citizens.

The RPGT rate for foreigners is higher, especially if the property is sold within a certain number of years after purchase.

This rate can change, and it's important to be aware of the current rates at the time of your property transaction. If you plan to sell the property within a few years of purchasing it, the high RPGT rate can substantially reduce your profit.

This becomes a pitfall if you are not planning your property investment with a long-term perspective.

Foreign buyers sometimes overlook this tax aspect when calculating potential returns on their property investments in Malaysia.

To avoid this pitfall, you should familiarize yourself with the current RPGT rates for foreigners and factor these into your investment calculations.

It's advisable to consult with a tax advisor or a property lawyer who is experienced in Malaysian property law to understand how RPGT will impact your specific situation.

"Strata Title" and "Master Title"

Understanding your requirement for more specific detail, a unique and often overlooked pitfall in buying residential property in Malaysia, particularly for foreigners, is the issue related to the "Strata Title" and "Master Title."

In Malaysia, many residential properties, especially apartments and condominiums, are sold on a strata title basis.

A strata title is a form of ownership devised for multi-level apartment blocks and horizontal subdivisions with shared areas. The pitfall arises when a property is bought under a master title instead of an individual strata title.

The master title means the developer or a single entity holds the title for the entire development, and individual units are not independently titled.

As a foreign buyer, purchasing a property without an individual strata title can lead to complications in ownership rights, especially if the developer faces financial difficulties or if there are disputes among the unit owners.

There can also be delays in the issuance of individual strata titles by the developers, impacting your legal ownership and rights to the property.

To mitigate this risk, always check whether the property has an individual strata title issued.

If it's under a master title, understand the risks and timeline for the conversion to individual strata titles. Consult with a lawyer specializing in Malaysian property law to understand the implications of buying a property under a master title.

Perform thorough due diligence on the developer's track record, particularly their history of converting master titles to individual strata titles.

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The issue of Malay Reserve Land

Another unique and important pitfall to be aware of when buying residential property in Malaysia, especially as a foreigner, involves the issue of Malay Reserve Land.

In Malaysia, certain parcels of land are designated as Malay Reserve Land, which means they are reserved exclusively for ethnic Malays and Bumiputera.

As a foreigner, you are legally prohibited from purchasing property on Malay Reserve Land. This type of land is often more affordable due to these restrictions, which might make it seem attractive.

However, any attempt to purchase such land will be void and can result in legal complications.

The challenge arises because the status of the land is not always immediately apparent or clearly stated in property listings. Therefore, it’s essential to verify the land status before proceeding with any property purchase.

Ensure that the land is not designated as Malay Reserve Land. This can typically be verified through a land search or by consulting with a knowledgeable local lawyer or property agent.

Also, be aware of the legal framework surrounding Malay Reserve Land.

Purchasing such property is not only illegal for a foreigner, but it can also lead to financial losses and legal disputes.

The concept of the Goods and Services Tax

Certainly, another important pitfall to be aware of when buying residential property in Malaysia is the Goods and Services Tax (GST).

While Malaysia introduced GST in 2015, it was later repealed in 2018 and replaced with the Sales and Service Tax (SST). However, there can still be some confusion, especially for foreigners, regarding the applicability of GST or SST when purchasing property.

The pitfall here is related to understanding whether GST or SST is included in the property's price.

This can vary depending on whether you are buying a new property from a developer or a secondary market property. Failure to clarify this aspect can lead to unexpected additional costs.

When buying a new property directly from a developer, inquire whether GST or SST is included in the purchase price. Developers may sometimes advertise prices without specifying whether taxes are included, leading to potential surprises during the transaction.

On the other hand, when purchasing a property in the secondary market, it's important to clarify whether GST or SST liabilities from the previous owner have been settled.

Failure to do so could result in unexpected tax liabilities falling on you as the new owner.

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The risks related to the MM2H program

Another unique and often overlooked aspect when buying residential property in Malaysia, particularly for foreigners, is the issue related to the Malaysia My Second Home (MM2H) program.

While this isn't a direct part of the property buying process, it significantly impacts your property purchase decisions.

The MM2H program is designed to allow foreigners to live in Malaysia on a long-term basis. This program often comes with certain incentives, such as the ability to buy property at a lower minimum price than normally required for foreign buyers.

However, the regulations and benefits of the MM2H program can change, and these changes can directly impact your property rights and investment.

For instance, there might be shifts in policy that could affect your eligibility, the minimum required stay in Malaysia, or the benefits associated with property ownership under this program.

Such changes can happen without much warning and could substantially alter the attractiveness or feasibility of your property investment.

As a foreigner, if you are considering buying property under the MM2H program, you should stay very well-informed about the current regulations and any impending changes. Regularly consulting the official MM2H website and maintaining contact with a legal advisor familiar with Malaysian property and immigration laws will be crucial.

This ensures that you're making decisions based on the most current information and that your investment aligns with your long-term residency and lifestyle goals in Malaysia.

The awareness of the Zakat payment

Another specific and less commonly known issue for foreigners considering buying property in Malaysia is related to the Zakat payment on properties.

Zakat is an Islamic religious levy, and in the context of property ownership, it refers to a form of tax on property that can apply under certain circumstances, particularly relevant in states where Islamic law is more prominently applied.

In Malaysia, if you own a property and lease it out, there might be a Zakat payment applicable on the rental income. This is particularly significant for foreigners who may not be familiar with Islamic financial practices.

The amount of Zakat varies depending on the state and the specific calculations based on Islamic law.

The pitfall here lies in the potential oversight of this obligation.

As a foreigner, you may not be aware of or understand the intricacies of Zakat, leading to unexpected financial obligations. This can be especially complex if you own multiple properties or generate significant rental income.

To navigate this, you should seek advice from a local financial advisor or a lawyer who is knowledgeable about Islamic finance and property laws in Malaysia.

They can provide guidance on whether Zakat applies to your property and how to correctly calculate and make these payments.

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