Buying Real Estate Property in Japan as a Foreigner, Part 3 - Negotiations & Due Diligence

Following through from our previous article in this series, and assuming you’ve established some key relationships with local realtors in your areas of choice (more about choosing these locations in coming publications) – sooner or later, you will most likely come across a potential deal which will suit your criteria. The process, from here on, is quite similar to what you’d expect in any country, but with a few important differences.

 

1. Making your Offer

Each real-estate property agency will have their own particular offer forms, that you would be expected to fill in, then email (or, in some infuriating cases, fax) to the realtor in charge of the listing. 

It is important to note that the market in Japan moves extremely fast, and attractive deals can be gone in a matter of days, and in some cases, within hours from listing. What this means in practice, is that you cannot afford to perform thorough due diligence on any particular deal before submitting your offer, but will have to quickly run the numbers and, if these appear favorable, submit your offer without having the complete information at your disposal. And since, as mentioned previously, pulling an offer back with no apparent reason will burn your relationship with that particular realtor and seller, it is essential that you do not submit more offers than you can practically proceed with, should due diligence turns out to be satisfactory.

It is, however, perfectly acceptable to specify conditions for the purchase on the offer form, which would normally include the following:

A) The price you are willing to pay: Generally speaking, price negotiations of 10-15% at most may be acceptable in Japan, but only in cases where there is some tangible cause to request such a reduction – these include, but are not limited to, such things as a condo unit being on the first floor (less attractive for female tenants); 3rd floor or above without an elevator; in the case of a reinforced concrete structure, if it was built prior to the latest earthquake-resistant building standards (builds approved for construction before June 1981), in cases of properties meant for singles/couples, if they are within a distance of more than 10 minutes walk to the nearest train/subway/tram station,  in cases where there are clear and obvious renovations or repairs required, and so forth.

In popular cities, where prices have been going up, the seller will know fully well that they will be able to receive their desired price if they wait another week or two at most, hence may not agree to negotiation.

B) The deposit you will pay at contract signing: Traditionally 10% – you can offer 15-20% if you want your offer to stand out – this is a particularly a good strategy in cases where the realtor has informed you that the seller is selling due to a need for urgent, liquid cash.

C) Preferred date of settlement: The earlier, the better, of course – just bear in mind that, in case you are not physically present in Japan, all documentation will take longer to arrive at its destination – it is wise to allow approximately 6 weeks for documentation to be prepared, executed and have it arrive at the realtors’ or property lawyers’ offices – 4 weeks at a minimum perhaps – provided you’ve done this before, and know how quickly you can produce the required documents.

D) Source of funds: if you are a non-resident foreigner and have no access to local funding, you’ll most likely be paying cash, which is a big advantage – make sure you specify this, as all sellers will always prefer to know they do not need to rely on any bank approvals, which can result in last minute cancellations if the loan falls through (cash is king!)

E) Special notes and conditions: This is the most important part of the offer, and is where you will always note the following – 1. that your offer depends on the structure’s renovation history (if these exist); 2. in case of an individual condominium unit in a co-owned building, the total amount in the reserve funds pool (which will be essential to pay for any future renovations), in cases of tenanted properties – 3. the tenancy information, and in cases of entire structures, you may also want to include 4. the result of a structural and/or land solidity inspection (if the seller agrees to this – less likely the older and cheaper the property is).

This will ensure that, should any of the due diligence information received later on be less than satisfactory, you will be able to justify pulling back or amending your offer without “losing face”, which is essential to maintaining your relationship with the realtor handling the sale (see “Part 2: Building and Maintaining Relationships“).

F) Contact details: As mentioned in the first installment in this series, it is assumed that you will be using a native Japanese employee or partner, who will be handling all contacts on your behalf – make sure that, while your name and address appear on the offer form, the realtor knows how to reach your Japanese representative, and has viewed a written and notarized authorization, such as a power of attorney document, accompanied by an ad-hoc translation to Japanese. Again, it is essential that all Japanese professionals involved in the purchase be assured that they will have a local Japanese entity to deal with in all matters, as direct contact with foreigners will often result in them shying away from dealing with you.

 

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2. Conducting Due Diligence

Once your offer has been accepted (or rejected and re-submitted at a higher price, then accepted), the realtor will begin providing you with due diligence information. At first, this will be in the form of simple e-mails or information relayed via telephone calls – so it is essential that you then verify all of it prior to signing the contract (more on that below).

You want to ensure the following:

A) In cases of individual condominium units in co-owned blocks – that the building’s renovation history and status of its reserve funds pool correlate.

Essentially, this means that if the building has gone through some major renovations over the last ten years, it is acceptable for the funds pool to be mostly depleted – as no major renovations are likely to be required at any point in the near future. Major renovations normally include either the exterior of the building (painting, re-strengthening, repairs), its roof (water proofing, repairs) and elevator systems, if these exist (mandatory for building 6-floors or higher). If none of these major renovations have taken place over the last decade, you would want to ensure that at least a third of the purchase price per unit is available for such renovations, or for any natural disasters which may occur – this being Japan, this refers mainly to earthquakes, which are quite common.

If at least one of these two or three big ticket items has been performed in the last decade, half of the amount (15-17% of the purchase price per similarly priced unit) should suffice. Additionally, a large list of smaller maintenance and repair items will tell you that the build is well-maintained, which will be helpful when the unit becomes vacant and you want to attract new tenants. Should any of the above information not be forthcoming, you may want to reconsider the deal, as the building management company may be mismanaging funds in one way or another.

B) For tenanted properties – that the tenant has been in place as long as possible, or if not, that they are of a reliable profile. Generally speaking, in Japan, the best possible tenants would be single females over 30 (who, sadly but truthfully, do not tend to experience any major changes in their life circumstances  due to marriage, promotion etc in Japan); elderly pension receivers or single, full-time employees of large companies (as both do not tend to move around as well, as a general rule). Part-time staffers, foreign students, small business employees, sole traders (“one man” business owners such as food stall operators, etc) or the chronically unemployed (including younger government welfare recipients) tend to be more risky, but can still be reasonable tenants, if the proper securities are in place (see below).

C) That the tenant has reasonable securities. In order of preference, these are:

i). Rent insurance/guarantee company (which will cover any or all non wear and tear damages, rent payment issues, post-tenancy cleaning and lock replacement, and in some cases even early lease terminations);

ii). A security deposit of 1-3 months rent (which will help cover most of these costs)

iii). If none of the above is available, personal guarantors. The latter may not mean much in other countries, but assuming these guarantors are still alive and are financially stable, the Japanese fear of public shaming will, in most cases, mean they’ll do their best to fulfill their obligations as guarantors.

D) In cases of vacant properties, you will want to either receive a recent inspection report of the interior and structural integrity of the property – since most sellers will not have conducted these inspections, you may ask the seller for permission to organize and pay for these inspections out of your own pocket as a condition for proceeding with the purchase. Depending on the location and age of the property, you may wish to also conduct a soil solidity inspection.

If all of the above proceeds smoothly, or at the very least can be sorted out to your satisfaction, following several rounds of exchanges with the realtor, it’s then time to move on to the actual purchase itself. More on this in our next article in this series – stay tuned!

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