A property buy back guarantee is a written contract between a property developer and a property owner. The contract states that the developer will re-purchase the customer’s property after a set time period. What’s more, the contract can also state the guaranteed price increase in the property value.
For example, a Developer may sell a condominium in Bangkok for 1.75 million Baht to their client. As part of this sale, the developer and client agree on a buy back guarantee scheme. The developer guarantees to re-purchase the client’s property after a 5 year period for 120% of the original 1.75 million baht. This means that in 2023, the client could sell back their property to the developer for a guaranteed 2.1 million baht. The developer can then sell the property on again for hopefully an increased price, and the client benefits from a profit of 350,000 Baht – everyone’s a winner! This is different to a property rental guarantee, whereby a certain level of rental year is guaranteed, usually for a time period of around 3-5 years.
Property Buy Back Guarantees in Thailand
In Thailand, many developers are offering buy back guarantees. For example, the new Pentafield City Residence in Sukhumvit, Bangkok, is offering the exact buy back guarantee mentioned above – 120% re-purchase after 5 years. (They are also offering a rental guarantee of 7% per year).
Many property developers are now offering similar deals. Throughout the last 5 years, the Thai property market has boomed and thus competition has increased. Developers must utilize techniques such as these to make their properties appear more attractive to potential customers.
What will a typical buy back agreement in Thailand contain?
The intricate details of a buy back guarantee will depend entirely upon the developer. In Thailand, however, there are some commonalities:
– Usually between a 5-10 year period before re-sale
– Usually between 110% to 125% guaranteed re-sale value
– Most common on condominiums, apartments or resort complexes
– Customer will usually own the property fully until the re-sale date
Common areas that have been known to have buy back guarantees include the major cities such as Bangkok, Pattatya, Phuket and Chiang Mai. The following are some examples of past buy back property deals in Thailand:
– Pentafield City apartments Bangkok: 120% re-purchase after 5 years
– Twin Sands condos Phuket: 130% re-purchase after 5 years
– Condo development, Pratumnak, Pattaya: 110% re-purchase after 10 years
– Condo development, Choeng Thale, Phuket: 110% re-purchase after 10 years
Advantages and Disadvantages of Buy Back Guarantees
If a buy back agreement looks favourable to you, you must consider the pros and cons. It never pays to walk into an investment opportunity blind. The following are the pros and cons relating to buy back guarantees in Thailand:
Advantages of a Buy Back Guarantee
The main advantage is that you are guaranteed a return on your investment. Unless the development company goes bust there is no legal way you can make a loss. The following is a breakdown of the other advantages:
– Guaranteed profit regardless of the economic climate
– No need to actively market the property yourself
– Can provide you with a lump sum of cash for future investment
– Can rent the property out until the buy back date is due to earn extra income
Disadvantages of a Buy Back Guarantee
Although a buy back guarantee looks promising, there are cons too. One of the main concerns is how can you guarantee that the developer will honour their agreement? What if they go bankrupt? What if the company has dissolved when the buy back date arrives? Yes, you are purchasing a guarantee, but in reality, there can never be a guarantee.
Moreover, the second main issue is your return on investment. You have to weigh up if the buy back percentage increase is more than what you could potentially earn through natural property price inflation. Looking at the market trend, house prices in Thailand have been on the increase for the last 10 years. Many analysts predict prices to rise in 2018 by a further 8%. Would a buy back price of 120% in 5 years time create more profit than annual increases of 8%? You have to ask yourself, would a developer risk tying themselves into deals whereby they could potentially lose millions by purchasing property at an inflated price.
Buy back vs. Thailand property market inflation
Let’s look at a quick example. We have a property valued at 5.4 million baht. This has a buy back guaranteed of 120% after 5 years.
Buy Back – 120% after 5 years = 6.48 million baht (1.08 million baht profit) Annual house inflation of 8% over 5 years = 7.93 million baht (2.53 million baht profit)
As you can see, the buy back guarantee is actually less attractive and earns much less in comparison. You have to weigh up which you would prefer. Do you prefer the guaranteed but lower profit margin? Or would you prefer to bank on the Thai property market maintaining growth, netting you a considerably larger pay day at a later date?
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