As a general matter, real estate in Thailand can be an excellent investment. Unfortunately, however, horror stories are not rare enough. But if you adhere to our following nine points, such tragedy can be avoided.
- Beware of real estate agents
“Real estate agents”, “estate agents”, or (as they are more properly referred to under Thai law) “brokers” are middlemen who make their living by being paid a commission for putting a buyer and seller together. Only when the deal completes, the agent gets paid. Thus, agents have a financial interest in every deal completing.
That is the reason why agents are commonly regulated in developed countries such as those in the Europe, the US, and Singapore. Such regulation generally imposes a “fiduciary” duty on the agent to act in the best interests of their clients with significant penalties applicable if they do not. This makes sense since such agents (like lawyers and accountants) hold your finances in their hands during a deal and they should not be allowed to knowingly guide you into making an unwise investment for the sake of their commission.
In Thailand, however, agents are not regulated. We have first hand experience of far too many agents putting the interest in their commission above the interest of the buyer. We should emphasize that we are not saying not to use an agent but rather that you should be aware that it might be the case that your interests might not be the top priority of your agent. Therefore, if you intend to use and agent and you start to feel uncomfortable with too many statements like: “this is how its done in Thailand”, “it is standard that the agent holds the deposit on the sale”, that do not make sense, trust your instincts and walk away, or at the very least get other competent independent/non-interested advice.
We explain more about real estate agents in Thailand here:
Beware of estate agents.
- Get competent legal counsel
One of the best protections you can find when investing in real estate in Thailand is competent legal counsel. This should be obtained rather sooner than later (certainly before you sign any agreement with an agent or seller).
However, “competent” is the key. We are often amazed by what people say they were told by law firms in Thailand. Thailand actually does have a well-developed set of laws (most mirroring Western law). Thai law for the most part fits together logically, just like in most fully developed countries. Further, almost all the relevant Thai law is available in its English translation. Thus, if what you hear from a law firm in Thailand about Thai law sounds like it does not make any sense, if it sounds illogical, there is a good chance you are right. In such case, ask them to show you the law in question to read it yourself. If they are unable to explain their point then with the text in front of you both, or if they refuse to do so, you are well advised to find another law firm that will.
Furthermore, “competent” counsel doesn’t just know the law—competent counsel is also ethical. By ethical we mean compliance with internationally recognized standards for lawyers.
Thus, you should expect that your law firm has a fiduciary duty to you, in other words, that they will put your interests first, even above theirs, including their financial interests. In this regard, you should expect that your law firm does not and will never have any conflict of interest in representing you. They should not have any interest (including any of their own) the advancement of which would be detrimental to yours.
For example, your law firm should never accept commissions from others, like real estate agents or developers, to refer you to them.
Nor should you law firm represent both you and the other side in a transaction. There is no such a thing as a “non-conflicted transaction”. Every contract is a give and take and your lawyer should be looking out solely for your interest.
An initial evaluation is easy enough. Ask your prospective counsel to show you their formal legal credentials. Then ask them what code of professional legal ethics they are bound by and to show them to you. If they do, verify those credentials and review their professional code. If they cannot, or if you find their response unsatisfactory (for instance, “I have lived in Thailand a long time, I speak Thai, and I know many government workers”), you should find other counsel.
Finally, do not assume you are going to get the easy or correct legal advice from Thai government officials. They are very often wrong even about the law they are charged with administering. We explain more on that here: http://www.duensingkippen.com/thailandpropertylawblog/?p=75
Hire a good lawyer.
- Do your due diligence
Due diligence means checking for any negative legal issues with the property you are planning to buy. Due diligence is a must anywhere in the world, but especially here in Thailand. Once you’ve bought the property you’ve also bought any legal liabilities it might have.
More than once we have heard a remorseful purchaser tell us they did have a due diligence done: “my lawyer got a copy of the deed from the land office and translated it. The deed showed that the seller was the owner and there was no mortgage on the property.”
That, is not due diligence.
The minimum essential components of a real estate due diligence should include:
- a full check of the entire history and validity of the title deed. Just because the deed is issued does not mean it was legally issued. A current title deed can later be found to be legally invalid. That can and does happen in a number of ways one of which we explain here: http://www.duensingkippen.com/thailandpropertylawblog/?p=68 ;
- verification that the property has legal access rights;
- if you are planning on building on the property, a full report on all land use laws and regulations governing construction on the land;
- if there is already a building on land, a villa perhaps, then a check into the legal validity of the structure’s building permit. Just because a building has a building permit does NOT make it legal and if it is not it can be ordered demolished, as we explain here: http://www.duensingkippen.com/thailandpropertylawblog/?p=77 and here: http://www.duensingkippen.com/thailandpropertylawblog/?p=135 ;
- if you are planning on purchasing a property that requires special licensing like a condominium or a unit in a building that will also function as a hotel, then verify that the project is planned or built to properly qualify for such licensing. This does happen even in very high-end projects were you would not expect it. For example in Phuket a project was market and sold as a seaside condominium development that won awards for “best condominium project”, only later it was “discovered” that its access was not wide enough to qualify for a condominium license. It is now a hotel; and
- if you are planning on “buying” a property by buying a company that owns such property (something that is generally not recommended) then a check of all corporate, accounting, and legal records of the company is required.
Do your due diligence.
- Be aware that a “lease” does not = “own”
Because foreigners are generally restricted from owning land in Thailand they commonly enter into a lease for such property instead. It is important to understand that leasing a property is not the same as owning it. Leasing is “renting” something pursuant to the terms and conditions of an agreement or contract with the person who really owns it. If you break any terms of your lease agreement the real owner can terminate the agreement and evict you from the premises.
Hence, a lease is just a contract to use something in exchange for payment—but for how long? A peculiarity of Thai law is that real estate can be leased for a term of no longer than 30 years. Such a term can be renewed by means of a “renewal clause” in the lease contract. However, and crucially, if the real owner (the lessor) changes (i.e. dies, goes out of business, sells the property, etc.) during the lease, then the new real owner will not bound by the renewal clause.
This means common real estate leases with renewal clauses in Thailand are not a long-term secure investment. As a result many developments marketing to foreigners what they call a “secured” or “collective” lease. It is neither of those as we detail here: http://www.duensingkippen.com/thailandpropertylawblog/?p=36
If you do wish to invest in a long-term lease, a better and completely legal and secure structure for your investment, renewal terms, and resale value is easy enough to arrange, as we detail here: http://www.duensingkippen.com/thailandpropertylawblog/?p=171
Beware if you lease you do not own.
- Be aware building permits do not = ownership
You may hear someone tell you that having their name in a building permit means they own that building…hopefully that (mistaken person) will not be you.
Although foreigners generally cannot own land in Thailand, they can own structures such as villas. In the past it was quite common for real estate developments marketing to foreigners to sell them “ownership” of a villa by promising a building permit in their name. Whether or not this was for “tax planning purposes” (selling a building permit incurs no real estate transfer taxes for the seller) or not we can only speculate. What is certain is that buying a building permit gets you nothing as we explain here: http://www.duensingkippen.com/thailandpropertylawblog/?p=49 .
Your name in building permit means nothing other than you have government approval to build an approved structure, at a given location, during a given period of time (full stop). And, although it is less common, we still find sellers, including developers, selling building permits.
Building permits—don’t be fooled.
- Do not use a company only to own real estate
Although common, using a company to own real estate in Thailand is generally unwise.
It is true that a company registered in Thailand can own land, by having at least two Thai shareholders who own more than 50% of the company’s share capital. However, those Thais may not be mere “nominees”(i.e. in name only), they must be actual investors in the company having actually paid for the share capital that they hold and own.
If the authorities find that the Thai shareholders are not actual investors then both those Thai “nominees” (i.e. shareholders in name only, not real shareholders) and any foreigner who benefitted from a Thai acting as a nominee will be subject to imprisonment, fines, or both. In such case, the company can also be shutdown and the land office can force the company to divest itself of any land that it owns.
Furthermore, Thai law does not recognize “holding companies” (i.e. companies set up only to own assets but that not to do actual business). If a Thai company is not actually doing business (and as a practical matter, paying taxes) it will be subject to closure.
Using a Thai company to own property could also cost you a lot more than you expected, for example:
- every year a Thai company must pay for: (1) an accounting to be prepared, independently audited and filed; (2) an annual tax return to be prepared and filed; and (after the first company’s first year) (3) a semi-annual tax return to be prepared and filed;
- a Thai company must have a registered address. If the company does not have a qualifying property the company will have to pay for one;
- if the company owns any real estate from which it earns rental income or from which is should have earned rental income (including, e.g. if the company’s director/you stay in the company’s villa or condo with or without paying), the company will be subject to taxes that you would not have been if you would have simply owned the villa or condominium unit in your own name, as we explain here: http://www.duensingkippen.com/thailandpropertylawblog/?p=91; and here: http://www.duensingkippen.com/thailandpropertylawblog/?p=93 ; and on resale of the villa or condominium unit
- the income tax applicable to the sale is generally much higher for a company than for a personal owner; and
- under Thai tax law if you personally own a villa or condominium unit for five years or more, then on transfer a tax equal to 0.5% of the sale price is applicable. However, if a company owns the same property for five years or more, the applicable tax will be 3.3% of the sale price amount. We explain all the taxes applicable to the sale of real estate here: http://www.duensingkippen.com/thailandpropertylawblog/?p=12 .
Off-shore companies such as those registered in tax-havens like the British Virgin Islands are not a solution. While such a company does not entail the legal liabilities we mention it DOES implicate all of the commercial liabilities (except perhaps for the accounting and tax return but will certainly have annual running costs no matter where the company is registered).
And an off-shore company cannot own land.
With few exceptions there is simply no good legal or commercial reason to use an off-shore company to own real estate in Thailand.
Options Without Liabilities
Foreigners can own structures like villas and condominium units outright. And foreigners can lease land and that such leases can be structured in such a way as to legally secure the investment—without the liabilities above.
Don’t use a company to own real estate.
- Document the money you bring into Thailand correctly
When investing in real estate in Thailand it is very important that you document the transfers properly. This process begins when you are sending the money. So you should be sure to understand all the requirements before you send your first transfer. You will need to obtain the proper relevant documentation of the transfer from the receiving bank in Thailand. What that documentation is will depend on the amount transferred and its purpose.
Once obtained these documents should be saved in a secure location. If you are a foreigner buying ownership of condominium unit in your own name, you will need these correctly detailed documents (for every purchase price transfer) to complete the purchase. And if and when you sell your condominium unit or villa, you will need them in order to send the money back out of Thailand.
Document your money transfers.
- Pay your taxes
“If it goes without saying, don’t say it.” True, but in Thailand for some reason many people seem to think paying the correct taxes is not a serious issue. They are wrong. If you do not pay your taxes, for example income taxes from rental that was (or that should have been earned as detailed above) your property or your company’s property can be seized and sold.
We have mentioned most of the relevant taxes above with links to our other articles detailing them. However, one we have not and that is the all too common decision to under-declare the sale price of real estate to the authorities at the time of purchase. Besides the fact at this is criminal tax fraud, it is also commercially stupid because whether the property is owned by a company or a real person, you will almost certainly incur far greater tax liability on resale that what you “save” if you agree to illicitly under-declare your purchase price…not to mention the tax authorities could go after you for the under-declaration (and, if necessary, your property) while you own your property.
Pay your taxes.
- Use arbitration
Finally, no one entering any agreement or contract, including one to invest in real estate expects nor certainly wants the deal to go bad and end up in a dispute. The fact is that it does happen and probably more often than you think. If that happens to you, and particularly if you are a foreigner, you almost certainly will be far better of (EVEN IF YOU LOSE) settling your dispute by legally binding arbitration than doing so in a Thai court. By “better off” we mean the process will be quicker, less costly, documents and proceedings can be in, e.g., English, the decision will be enforceable worldwide, and more as we explain here: http://duensingkippen.com/thailandcontractdisputeblog/?p=55
However, because binding arbitration requires the agreement of the parties, and because agreement about anything is unlikely once parties start to fight, you should be sure to include a well-drafted arbitration clause in you real estate investment contract(s).
Stay out of Thai Courts, use arbitration.
DUENSING KIPPEN is an international law firm specializing in business transaction and dispute resolution matters, with offices in Bangkok and Phuket, Thailand and affiliated offices in 45 other countries. Visit them at: duensingkippen.com