Buy Back Options On Phuket Property Explained

There has been a noticeable trend that has developed over the last couple of years that has seen developers start to introduce a “Buy Back” option to their investors. Are these buy back options set in stone or, like a lot of things that involve buying property in Thailand, should they be put under the microscope a little more?

Let’s explore how appealing these buy back options are to customers and why a developer would offer such terms in the first place.

Phuket’s real estate sector still remains fairly buoyant and as a result, more developers have flocked to Phuket’s golden shores and set up shop. This has lead to more and more properties being marketed specifically to foreign nationals and with the noticeable increase in the Islands real estate competition, developers are offering their own special incentives that will attract a larger audience of potential investors.

Rental income was always a guarantee on properties in Phuket and was used as reason to entice potential buyers, the new buy back program offers a guaranteed return. The terms may very depending on which project you look at but the crux of the offer often remains the same with the developers agreeing to buy back the current owner’s unit after a period of time has passed, normal somewhere around 5, 10 or 15 years. You will find that most developments also offer a guaranteed rental return %. On paper this will look like an attractive investment.

So What Exactly is a Guaranteed Buyback?

Guaranteed Buy Back is a form of contract that is made between the project developer and the customer that wants to buy the unit within said development. It will state that the developer will buy back the unit in question after a fixed time period. The contract will go on to confirm the exact timeframe in which the guarantee will last and the price that the developer will pay for the unit. This will either be a return of the buyer’s total outlay, some of the capital appreciation (profit) may be included.

These terms will vary depending on either the developer and / or the project but typically they will involve the following:

The Term: Common terms are 5, 10 or 15 years (or even 6, 7, 8 years, etc).
The Offer: This will range from a buy back offer depending on the purchase price up to a 30% profit for the buyer (this depends on the timeframe of the agreement).
Ownership Structures: This is available on Leasehold & Freehold Condos, Leasehold Apartments and occasionally available on a Leasehold or Freehold villa project.
Locations: These developments will tend to be featured in prime locations on the Island such as the West Coast or with views off the East Coast.
Rental Returns: It’s common for buy back projects to offer a guaranteed return % throughout the life time of the ownership. The % will vary depending on the development.

How Good Does a Guaranteed Buyback Sound to Potential Owners?

On the surface level, a buy back option will look appealing to potential investors and if the buy back goes according to plan, it’s guaranteed that you will make money on your investment. An example of this is if an investor was to purchase a 5 million Thai Baht condo that has a guaranteed income of around 7% P.A over 15 years. The rental would then, on paper, represent a return of 105% of their initial investment, doubling the investors money after 15 years with a buy back option. Throughout this period the investor would also be able to access free holiday accommodation that has a free stay allowance of up to 30 days per calendar year.

After the 15 years of healthy rental income and free Phuket holidaying has come to an end, the investor has the option to sell the unit straight back to the project developer for the 5 million Thai Baht that was originally invested.

Let’s break that down:

– 105% return on investment
– As much as 450 days free stay
– Return of original capital
– Potential for capital gain on buyback

We appreciate that this sounds like a great offer, but it’s important that investors ask a number of pertinent questions, such as:

– Why would the developer offer this in the first place?
– How will they afford to buy back in 15 years?
– Does the Buy Back promise hold up in a court of law?
– Can the owner sell the property during the 15 year period?
– Will the developer still be around in 15 years?
– Is the property covered by Freehold or Leasehold?
– What happens if the owner of the property passes away in the 15 years?

The concept of a Buy Back has only been introduced to Thailand in the past few years (at the time of this article). The idea itself may have been borrowed from other various dynamic property markets across the globe, where this arrangement is more common placed. As soon as the first developer in Thailand began to offer this to promote their development and encourage sales, others soon noticed the excellent marketing power that the Buy Back scheme offered, and adapted it into their sales process.

The Phuket Property Market is currently looking very vibrant but in turn, the competition in the market is extremely high. Using the Buy Back sales strategy may put them one step ahead of the competition. With many developments relying on agents to sell their properties, this strategy really becomes a necessity. A property agent will always be drawn in by developments that they believe will be easy to turn around and sell on quickly with most agents willing to pave over any of the negatives, or at least potential negatives, when it comes to selling a property. A sales person must maintain a healthy, positive mind set in order to be successful and when they can offer a property with any kind of guaranteed return, it makes their job much easier.

It seems that no one is question that other than for the purpose of marketing, a developer would entertain this deal in the first place. Buying back a property that you’ve already sold and profited from seems like an alien concept. Perhaps the best way would be to ask the developer after a few drinks as it doesn’t seem to make financial sense for a developer to do so when you factor in the amount of money that would be required in the first case to buy back any of the units sold when they were only completed a short amount of years ago.

Perhaps there is the belief that natural property price inflation will rise so much so after the 5, 10 or 15 year period that the developer would then be able to “flip” the units once again for an immediate profit after the Buy Back is completed. A great idea in theory but with no actual guarantee that the developer will be in a position to provide sufficient funds when it comes to the Buy Back.

Sadly, their is the possibility that when the guarantee period has ended, that the developer has passed away, moved on, gone bankrupt or just hit hard times. There could of been a complete change of company shareholders who are not willing to fulfil any promises made by the previous directors of the project.

After developers finish and sell out on a building project, they will leave the day to day running of the project to a management company or the CJP and move onto the next project. They will then have little to nothing at all to do with the project itself once all the units are sold. The developers may also simply believe that no customers will want to initiate the Buy Back option. This would appear to be the most logical premise.

However you look at it, as a buyer you will be offered what is being sold as a risk free way to capitalise on your investment in the Phuket real estate sector with a sort of “get out” clause included in your purchase. It’s important to be aware that what your being offered is in fact a false sense of security with hopes of you being afforded a low risk purchase that you are able to simply sell back if it doesn’t work out. The 5 or 10 year period will look particularly appealing in this case.

So How Can They Afford to Do It?

Condominium projects are incredibly lucrative with the right construction company, even more so in Phuket’s bouyant property market, so there is always a large possibility that the developer of the project will have every intention to fulfil their obligation to Buy Back. Some developers choose to only offer a limited amount of units that are included in their Buy Back program which will have already been budgeted for when the project was priced originally. Even with a budget for let’s say around 30% of the total units as Buy Back, they will still see a huge payout that has to be made when it comes time to honour the Buy Back proposal.

Taking the time to do the sums on just how much it would take for a developer to buy back say a 100 unit condominium project, it doesn’t matter the time frame whether it’s 5, 10 or 15 years, the total cost is frightening. Regardless of the total profit that the developer will make from a project, securing the financing for such an outlay often rests on some quick sales of units.

Buying back 100 units with a cost of 5 million Thai Baht per unit will cost an eye watering 500 million Thai Baht, roughly $17 million US Dollars. For arguments sake let’s say that the Buy Back options are only for half of the units that are sold, that’s still $8.5 million US Dollars. Even at a third of the development we’re still looking at $5.7 million US Dollars. At 10% Buy Back of 100 units, we’re still over a $1 million US Dollars – frightening.

Furthermore this is only relevant to a 100 unit development. Some projects on the Island have over 200 units. The more units, the larger the financial burden of a Buy Back will be if even a small percentage of owners decide to take that offer.

The Attraction of a Leasehold Unit Buy-Back Contract

Leasehold condo units sometimes come available with a Buy Back option as only 49% of a Condo project is ever available as Freehold to foreign nationals. The remaining 51% can be owned by Thai nationals outright but often the developers will find that it’s more difficult to sell Condo’s to Thai nationals with houses typically being cheaper and larger. This opens up the option that the remaining 51%, or at least some of it, can be instead offered to Foreign investors on a Leasehold bases. This is typical arranged via a 30+30+30 Leasehold Contract – these are technically illegal though.

This does however make the Buy Back option on a Leasehold property slightly more obvious and appealing as that well before the initial 30 year lease period has expired, the current owner has the option to offload the unit back to the developer.

With Leaseholds being less extensive in comparison to Freeholds (lower costs to register the property), a guaranteed return on rentals over a fixed period does make a Leasehold property seem as attractive as owning a Freehold, providing that their are identical terms in both structures.

If the developer has only offered the Buy Back option on their Leasehold Units, it also increases the appeal for potential buyers as it is an excellent way for the developers to find buyers of their inventory of unsold Leasehold units. Not every resort will be structured as a Condominium project with both Freehold and Leasehold units available to Foreign investors. Some with have an entire resort composed of Apartments. In Thailand, Apartments are only available in the form of a Leasehold property, regardless of the nationality of the buyer.

Projects like that will not fall under Thailand’s Condominium Act and as such, the do not offer the same protections as regular Condo developments do. Once again, this is where a Buy Back option becomes a huge selling point that will attract potential investors.

A lot of Foreign nationals who buy an apartment instead of a condo may not of even realised that their is a significant difference between the two, failing to get the correct legal advice which in turn is a huge mistake.

Competent Lawyers will more often than not advise against purchasing property like this but if the client is adamant that they want to go ahead with the purchase, stringent due diligence would be performed on the clients behalf in regards to the developer. All contracts between buyer and sell would be heavily scrutinised, ensuring that it’s legally airtight and in favour of the Foreign buyer.

Have Any Buy-Back Clauses Been Honoured So Far?

While we cannot answer this with 100% certainty due to the amount of developers on the Island, we do know of one developer that honoured a Buy Back. It’s worth noting that there is a possibility of the funds used to re-purchase the units was taken from other projects that are currently in development. In short, it could be a case of “Robbing Peter To Pay Paul” as the saying goes.

We do know of one developer that has honoured a buyback. However, there is a possibility that the funds used to re-purchase the units from owners came from money being collected on others projects currently under development. Similar arrangements where funds are not from the same development projects (this includes paying guaranteed return %) can resemble a Ponzi Scheme.

Bare in mind that this is only a possibility though and we would like to think that this is not the case at any development on the Island. It’s certainly a legitimate risk though and one that must be considered. We openly welcome any developers that have honoured Buy Back options in the past to contact us and set the record straight on how frequent and successful these Buy Back schemes have been.

Having complete transparency and the knowledge that the funds used to Buy Back units are not placing other projects in jeopardy would offer great peace of mind.

Can a Buyback Be Legally Enforced?

We’ve been asked before about the consequences for a developer that chose not to follow through on their agreed obligation to Buy Back a unit from the current owner – Is there really any legal recourse if the agreement is chosen not to be honoured?

Taking any form of legal action against a developer would require to still be around and active in 5, 10 or 15 years time, making it a hard question to answer. Other factors would depend on the contract and whether it is with the developer itself, the developers parent company or a company that has been established specifically for the construction, marketing and sales of said project.

This should go without saying but the wording of any contract should be closely scrutinised (please, use a lawyer). This is something we’re often forced to repeat and is another shining example of one of the many reasons that a competent and reliable Lawyer is essential when buying property in Phuket.

What About Real House Price Inflation?

Another important question to ask yourself is that is it not better to simply watch your property rise in value? If you’ve done the due diligence and purchase wisely, perhaps buying into a new development in one of the many high demands areas in Phuket, the chances of your property rising in value and being easy to sell are quite high.

This is another pertinent question to ask yourself. If you purchased wisely, buying into a development in a high-demand area of the island, then the chances are you will be able to sell your condo relatively easily.

The following two graphs show Thailand’s house price index (blue) and condo price index (purple) over the last ten years, up until 2019.

Source: www.ceicdata.com & www.tradingeconomics.com

Nationwide house prices reached a new high in 2019 while condo prices dropped off slightly. This shows the strength of Thailand’s growing property market (Pre-Covid) over the last decade. There is an inherent bias towards Bangkok’s metropolitan area which saw the housing market come under some pressure in 2019.

Phuket’s real estate market is less reliant on the current economic situation in the countries capital of Bangkok as overseas investors are more common to the island. Phuket’s growing infrastructure improvements have been steadily increasing over the past two decades and have kept pace with it’s growing real estate market.

In turn this has become of the many reasons Foreign investors and Residents have been attracted to the Phuket real estate market. The biggest impediment in Phuket when it comes to re-sales is unfortunately the greed of some current owners with their personal assessment of property value being a little off. This naturally means that properties that are offered at more realistic prices are snapped up quickly.

After researching the area in question (Phuket) you may find that it is more prudent to go for a project or property that offers a guaranteed rental return / rental pool facility. This can ensure that you capitalise on your investment’s value appreciation over a 5, 10 or 15 year period.

The guaranteed Buy Back option, if it comes to fruition, will take all the hassle that comes with selling a property. Selling straight back to the developer takes out the additional costs such as advertisement and agent commission fees. This also means that you will not need to pay much attention to market cycles. Where you may miss out on a booming market and a larger profit margin, you also do not need to worry about a soft market and a loss on your investment.

Conclusion

The idea of a guaranteed Buy Back option is an attractive proposal for investors that are contemplating a real estate purchase in Phuket, or other parts of Thailand. As a buyer, you must also understand that in Thailand, the Real Estate version of the word “Guarantee” is also used somewhere liberally. The reality of it is that a Buy Back cannot be 100% guaranteed.

The promise is an attractive one but as an investor it is your duty to understand that there is no foolproof way of ensuring a Buy Back being an option at the time stated in any agreement. Your investment may turn into a lucrative rental property and in turn an excellent investment, but you should also accept that from the moment you purchase the property, the guarantee of a Buy Back could well be as thin as the paper that it is printed on.