How to avoid serious problems when buying property in Thailand

Based on my almost ten years of experience in the Thai real estate industry, I would like to give some advice to potential buyers on how to avoid default, loss of investment or simply not very legal investment schemes.

Who is the developer?

The logical starting point is who the developer of the project is.

Don't limit yourself to the information on the site, ask yourself fundamental questions. Have they completed other projects and were those projects successful? What is their reputation? Is the company a public company, a developer with many projects under one wing, or is it a new company without any background?

In Thailand, it is extremely important to have a serious Thai shareholder in the project. What if it is an LLC with foreign founders and Thai nominees? This does not mean that there are no good foreign developers in Thailand, but in the event of a project default, the real opportunity to return the investment often depends on the presence of a serious Thai partner. If a nominee structure is used, what assurance can buyers have that they have the financial resources to complete the project?

The main question that needs to be asked and given a reasoned answer is whether the developer has the financial ability to complete the construction and whether he has access to bank financing. If this is not the case, and the developer is looking to finance the project with cash flow from sales, the risk to buyers is extremely high.

Guaranteed income. Too good to be true.

For buyers focused on condominiums or other investment properties, a guaranteed income strategy is a powerful incentive to purchase. Even experienced buyers who have found out that projects include guaranteed income payments into the price still often believe that they are reducing risk by receiving at least 30-40% of the apartment price guaranteed.

How wrong they are.

First, buyers need to understand whether the warranty is backed by an escrow or trust account, or is it simply a contractual obligation? They should also be aware that most warranties range from two to five years, although in some cases we have seen projects offering terms of up to ten years. COVID-19 has also been a major challenge for many buyers as force majeure provisions have come into play, eliminating guaranteed returns or, in some cases, non-payment by developers without any explanation.

It is naive to expect that a guaranteed income for the first 3-5 years will subsequently become your long-term source of income with a similar profitability. It often happens that once the guaranteed income expires, actual income often falls and harsh reality takes over. A red flag for guaranteed income is the promise of an extension to the guaranteed income contract. If it's too good to be true, it probably is. Buyers must understand that when developers offer a guaranteed income, they cover the cost of this by increasing the value of the property or are not prepared to support these incomes in the long term with negative cash flows.

Hotel license

Properties in Thailand that promise income from short-term rentals require a hotel license. In my experience in this area, I have seen many different scenarios, ranging from projects that implicitly advertise short-term rentals and have no intention of obtaining a hotel license, to those that often have no legal way to obtain such a license, such as villa complexes that simply do not meet the legal requirements to obtain a hotel license.

Unfortunately, the law governing hotel operations in Thailand is not clear enough on all licensing rules, and often the licensing of projects is subject to interpretation by authorities in different provinces and even individual municipalities. Condominiums, for example, can obtain a hotel license as long as 100% of the buyers agree, and the license requires changing the project's use from residential to commercial, which can only be done after construction of the project is completed.

In a nutshell, buyers who invest in planned hotel condominiums or residential complexes under one hotel brand or another are at risk if the project ultimately does not receive a hotel license. It is important to note the fact that developers cannot obtain a hotel license for a property that is still under construction. The best protection for buyers in this case would be a guarantee in the contract to obtain a hotel license within a certain period, and if this does not happen, the possibility of early termination of the purchase and sale agreement and a full refund should be provided.

Hotel operator

Buyers of apartments in projects managed by various hotel brands should carefully consider who will actually manage the rental after construction is completed. Is it the developer himself, an international hotel operator, or a company created specifically for the project? If it is a third party management company, buyers need to have access to the management agreement and this should be written into the purchase agreement.

A red flag in this case is when a developer with no experience is preparing to manage rental operations. There are many nuances to managing a hotel, and it is likely that most developers will not have the necessary experience or resources to manage it effectively, which can lead to revenue and operational issues.

Land inspection

An essential part of any transaction is a clear understanding of the status of the land plot under the project. In Thailand, the most secure way of owning land is CHANOT, but in some cases Nor Sor 3 Gor ownership is acceptable. First, make sure that the developer owns the land on which the project is located. Secondly, whether the land was mortgaged and whether a mortgage was registered on it with the land department.

An absolute red flag for any project (which has unfortunately become a fairly common problem lately) is being encumbered with collateral from non-bank lenders. Basically, it is money borrowed against land from individuals or other companies, in Thai it is called "Kai Fak". The pledge itself is legal, but the rates on such loans are higher than in banks, and the buyer must be aware of such an encumbrance. Personally, I always have one logical question: will a developer who turned to private individuals for financing and was unable to get a bank loan be able to complete the project?

Payments

One of the most common payment schedules for projects under construction is related to the construction stages - prepayment, foundation, raw building and project delivery. Variations are possible, but plus/minus is always the case.

Buyers should carefully track construction progress and ideally check in person that invoices are in line with actual progress. The worst case scenario is when the buyer has paid 100% of the cost upfront in exchange for a discount, but construction on the project is delayed or never begins. The red flag here is developers who offer significant discounts for full payment, as they are likely financed only from pre-sales and the risk of default is high.

Rental yield forecasts

First and foremost, if you are purchasing a condominium unit that will operate as a hotel, ask for their rental yield projections and a detailed explanation of how the management company wants to achieve those numbers. This is a serious investment on your part, and you have a right to expect more than just a ten-year forecast that shows earnings going up and up and up.

Red flags begin to appear with forecasts that show high occupancy rates and high rental rates from the first year. New hotels take time to develop, usually taking from 2 to 4 years and due to many factors.

If a developer compares his future earnings in the first years of operation to the general rental market, this is incorrect. Another point is when they compare their future rates with those offered on Agoda or Booking.com. For hotels, real rental rates are often 30-40% lower than those you see on aggregator sites on the Internet, so this is another test of the reality of promises.

The best way to estimate revenue is to consult with a hotel professional, or at least talk to someone you know in the hotel industry to check the developer's forecast. And be sure to look at the fine print. It is best to understand from the outset that forecasts are unlikely to be backed by a guarantee in the contract. Make sure the sales documentation package contains a management agreement between the owners and the developer that is comprehensive.

Resale

Most buyers think about selling their property at some point. For condominiums or projects managed by hotel chains, there is a risk that the sale price will be the same or even lower than what was paid at the time of purchase. If rental income is low, it is unlikely that you will be able to sell it profitably. Potential buyers may carefully study the profitability of the property and simply refuse to purchase. Another aspect is that some condominium owners do not want a hotel in their building due to noise and other disturbances. If they wish, they can achieve the cancellation of the hotel license, which will reduce the income of investors.

My main advice to all buyers is to hire an experienced local attorney. It will help to draw up a contract correctly and without “pitfalls”, which can then hit very painfully at the most inopportune moment.

Don’t be lazy to check all the points described above, because your money is at stake.

In the history of the real estate market, there have been many cases of successful investments and colossal losses. I sincerely wish you to be among those who invest wisely and receive not only the pleasure of owning real estate in a world-famous resort, but also a good stable income.

Leonid Ustinov