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Owning a Piece of Paradise

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 afterward 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 afterward, 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 enterprises.

• 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.

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