Tips for purchaser
Guidelines for New Mortgage
- What is the normal procedure for buying a residential property in Hong Kong in the secondary market?
Once you have found a suitable property and agreed on the terms and conditions of sales and purchase, your real estate agent should provide you with information on the designated property prescribed by the government. After confirming the identity of the vendor and existing registered encumberance on the property through an up to date land search, your real estate agent will usually draw up a Provisional Agreement for Sales and Purchase specifying the address of the property, purchase price, payment terms, completion date, inventory of furniture and appliances included in the sale and any other terms agreed. You will usually pay down a preliminary deposit (usually between 3-10% of the purchase price) when you sign Provisional Agreement.
Usually you will sign an Agreement for Sales and Purchase in your solicitor's office within two weeks and pay a further deposit (usually balance of 10% of the purchase price, i.e. you will usually have paid up to 10% up to this stage).
On the completion date (usually between six to eight weeks but can be shorter or longer as agreed between the two parties in the Agreement for Sales and Purchase) you will draw down the mortgage loan if have arranged for one, pay the balance of the sales proceed and complete the purchase in you solicitor's office.
- What is the normal procedure for buying a new residential property directly from the Developer in Hong Kong?
After you have found the suitable property, you will choose from the payment plans offered by the Developer at that time. The plans may differ in the payment terms, additional financing options and discount/premium/rebate associated.
Based on the plan you have chosen, the other terms of sale is normally not much negotiable. Most Developer will even want you to use their solicitors also. If you are buying a property under construction, the completion date is normally only a target date and the Developer will usually have enough escape clauses in the Agreement to give them the protection when there is a delay in delivery.
- What are the common financing options available?
Many banks and financial institutions provides residential property mortgage. The Hong Kong Mortgage Corporation and the insurance arm of some banks provide additional financing to qualified borrowers. Before agreeing to the mortgage, the bank will normally need to evaluate your credit and also do a valuation on the property. The maximum percentage they can lend is governed by Government directives at that time. It may be different for properties of different price range and whether the purchase is for investment or for owner occupied.
If you are counting on mortgage financing to complete the purchase, you are strongly advised to talk to the bank as early as possible. Based on your situation, they can advise you on what is the price range of the property that they can support you to buy. Before you put down a deposit for any particular property, you should check with your bank to make sure that their valuation can support your intended purchase price. While it is not normally practicable to get a written approval from the bank before you purchase, you should at least get a verbal approval from them for their loan amount and their view on the likelihood of you getting the second mortgage you need based on their experience.
After you have signed the Provisional Agreement for Sales and Purchase, you should shop around for the mortgage deals because different banks can be more or less competitive at different point of time. Since you are now a real prospect rather than just an enquiry, the banks are a lot more interest in giving you their most competitive offers. Your real estate agent should be a good source of help in this shopping exercise.
- What are the other major cost and out-goings associated with the purchase of a property?
The three major cost for purchaser are stamp duty, legal fees and agency commission.
Purchaser will have to pay a stamp duty to the Government. The rate is based on the purchased price of the property and is on a progressive scale which is subjected to change from time to time. At the time of writing, it ranges from $100 for purchase of under $2M and 4.25% for properties of over $22M. There may be other types of stamp duty applicable for some transactions. At the time of writing, purchaser of residential properties will be required to pay an additional 15% Buyers Stamp Duty unless the purchaser is a Hong Kong permanent resident. Residential properties sold within 36 months of purchase are also subject to a Special Stamp Duty. You should check with your real estate agent or solicitor for the stamp duty applicable to you before you make the purchase. Stamp Duties are payable upon signing the formal agreement but your solicitor should usually be able to help you to postpone the payment to completion date of the transaction.
Legal fees will be negotiated between you and your solicitor. Depending on the size and complexity of the transaction, different solicitors charge different rates.
The current industry standard for agency commission is 1% each from the purchaser and vendor respectively. Any fee to be charged by your agent should be clearly stated in the Estate Agency Agreement he signed with you when he introduced the property to you. However, if you are buying new property directly from the Developer, you will normally not be required to pay commission to your agent as he is paid solely by the Developer.
If you are taking a second mortgage on top of the bank finance, you will have to pay an insurance premium for the mortgage. Most banks will allow you to add that to your mortgage so that will be no additional up-front cash requirement.
- What information on the property should I expect to get before I sign the Provisional Agreement for Sale and Purchase?
Your real estate agent should provide you with the following information on the property you are about to purchase:
- owner particulars and outstanding registered encumberances on the property
- saleable area
- age of the property and remaining terms of the existing government lease
- any restriction of usage
- any existing tenancy details
- vendors statement about any known unauthorised structural changes, outstanding maintenance/renovation/rectification work required by the government or local city management (vendor may opt not to make the statement)
- To whom shall I make the deposit payable to?
Normally you will make the deposit payable to the owner. Depending on the existing encumberances on the property, your real estate agent may advise you to make the deposit to a solicitor (normally the vendor's solicitor) as stakeholder who shall only release the money to the vendor upon meeting certain conditions.
- Is the Provisional Agreement for Sales and Purchase legally binding?
Yes, it is usually binding to the extent that if the vendor want to cancel the Agreement after accepting your deposit, he shall return your deposit plus an equal sum to you as liquidated damage. If you change your mind, your deposit will be forfeited to the vendor. Moreover, the defaulting party shall be responsible for both the vendor and purchaser's commission to the agent. Sometimes, the two parties may agree to remove the back out clause in the Provisional Agreement to make it completely binding.
The Agreement for Sales and Purchase Agreement that you sign at your solicitor's office will be binding for specific performance.
- What should I watch out for if I am buying a property with existing tenancy?
If you are buying a property with existing tenancy, it may not always be possible to arrange for an inspection of the property before you purchase. Before you sign any agreement, your agent should get a statement from the vendor declaring whether there are any unauthorised building works on the property. If the vendor refuses to make a statement, you will have to make your own assessment before you proceed.
Since you will inherit the tenancy agreement, you should review the tenancy agreement carefully before you put down your deposit.
You should also check with your bank if you intend to use a mortgage because banks may have different lending policy for property under tenancy.
- What factors should be considered in deciding the completion date?
The normal completion date is 6-8 weeks from the date of Provisional Agreement to give the purchaser's bank enough time to process the loan application. It is possible to have a longer or shorter completion date as long as both the vendor and purchaser agrees. The vendor will usually prefer a shorter completion date especially if the flat is vacant. If you need mortgage financing, you should check with your bank before agreeing to any shorter completion date.
On the other hand if you want a longer completion date, you must also check with the bank to see if they can approve your loan for such late draw down. Normally bank mortgage is approved base on the valuation and the bank cannot be held onto a valuation for too long. Therefore, if property price drops before completion and the bank may lower the valuation of the property at that time. You may not be able to get the mortgage loan you are counting on upon completion if that happen.
- What is the implication of buying a property with “Unauthorised Building Works”?
All “Unauthorised Building Works”(UBW) are subject to re-instatement at the owner’s cost if so required by the Government or relevant bodies unless the works are exempted or are subsequently approved (which normally involves employing an authorized person to check and make the filing for you).
It is not uncommon for properties to be purchased with the “unauthorized building works”(UBW) in it. In fact sometimes, the purchaser chooses the property because he likes the works done and may even pay a premium for it. However, if you purchase a property with UBW on it, you have to understand that one day you may be required to re-instate the property to its original plan at your cost. You may wish to at least get an estimate of the cost of such re-instatement works for reference. If the UBW is structural in nature, you have to understand the safety implication and need to know that any liabilities arising out of such works will be yours once you are the new owner. There may also be other implications if the mortgagee bank is aware of such UBW.
Having said so, it is still a commercial decision of whether you will want to buy that property with such UBW. If you want the property but do not want the UBW, you should offer to buy with the condition that the vendor should re-instate the property before completion. Alternatively, you can make allowance for the cost of re-instatement in your offer price. Of course, it is also a commercial decision for the vendor to accept your offer or not. After understanding the implications, if you still wish to buy the property, you can still do so legally but you should get a more experienced real estate agent involved to draft the provisional agreement and may wish to consult your solicitor if in doubt.
- I take the measurement of the property I purchased and it is very different from the size quoted by the Developer, why is it so?
In Hong Kong, Developers used to sell properties by what they call gross floor area. Unfortunately, there are no laws governing how they measure gross floor area. Over the last three decades, Developer are getting more and more aggressive in quoting the gross floor area to make the per square foot price of their new development seems more attractive.
A more objective measure is the saleable area. There are agreed ways to measure saleable area. They are different from what you will be able to measure inside the flat because they include things like thickness of the walls. This is the measurement the Rating and Valuation Department will use and is what your agent has to provide to you before you buy a residential property.
Therefore it is more important to believe in your eyes rather than the numbers when you are comparing value of two different properties especially if they are of different age or from different developers.
- What is the Estate Agency Agreement and should I sign it with the agent?
Under the Estate Agents Ordinance, an estate agent is required to enter into a standardized Estate Agency Agreement with any client he/she serves. This agreement establishes the agency/client relation and clearly specify the responsibilities of each party. Under this Agreement, there are certain things that your agent are not allowed to do and there are certain duties he/she has to perform to protect your interest as client. In return,you agree to pay the agent the agreed commission if you buy any of the properties listed in the Agreement during the validity period of the Agreement. If you do not buy any of the properties he introduced to you, you do not have to pay him any commission.It also does not limit you to use another agent for other properties.
If you have chosen to work with an agent (at least for the properties he/she introduces you), you should sign the Agreement for better mutual protection.
- Can I use more than one agent?
You can use as many agents as you want. However, you should not employ more than one agent to serve you on any one single property. Otherwise, you may end up having to pay commission to more than one agent if you purchase that property.
- How is Hong Kong law with regard to capital gain?
There is no capital gains tax in Hong Kong. However, if your buy and sell behavior is looked upon as trading activities by the Inland Revenue, the Government may charge you profit tax on your trading profit. However, this should not affect normal investment property or property you purchased to live in. However, the Government will levy a Special Stamp Duty on sale of any domestic properties which is to be sold within a certain period (36 months at the time of writing) of purchase. Therefore, you should check with your estate agent before the sale/purchase if you are in doubt.
- Can anyone buy in Hong Kong?
Yes. There are no restrictions in Hong Kong upon ownership of property or land by any individual or corporation whether domestic or overseas, except if there is a specific legal disqualification on that particular property. However, it can be difficult to get a mortgage if you do not have Hong Kong income to support it. Moreover, the Government has recently introduced a new Buyer’s Stamp Duty for domestic properties purchased by Corporation or non-HK Residents. You should check with your estate agent before the purchase if you are in doubt.
Disclaimer: Whilst every effort has been made to ensure the accuracy of the information provided here, it is intended as general guidance and should not be not be regarded as a substitute for appropriate professional guidance and legal advice.