Too good to be true: The risk of high yield properties

My clients sometimes send me links from other property sites advertising high yield properties and ask why I’m not sending them these properties.

In most cases I am already aware of the property they sent however when I first saw it, upon looking closer I realized that there was a reason the property was yielding so high; the price was cheap for an unsolvable reason.

I’ve noticed throughout my career that problems with a property usually come in one (or more) of four types; specific location issues, age of structure, some illegality with the property and the structure being on leasehold land.

The following looks at three in detail with the fourth being addressed in a separate series of articles.

Specific Location

It isn’t enough to look at the property and see what station it is near. 10 minutes from Omotesando deservedly catches the eye but not if the property has no direct street access for example.

Another specific location example is proximity to graveyards. Japanese and east Asian clients are sensitive to the sight of graveyards and it is important to remember that when you turn around and sell your property, the buyer then will most likely be Japanese.

The age of the structure

Designed prior to June of 1981 with construction mostly completed prior to June of 1982 uses lower quality seismic resistance standards. This will make banks hesitant to lend buyers full borrowing capacity on the property.

Lower borrowing capability means less buyers available for a property which in turn means less demand. Less demand means lower pricing.

That said, if one has a good relationship with a bank then it is possible for the bank to stray from their policies and lend more then they normally would on a pre-1982 property.

However, these types of buyers are few and far between and even if you, the owner, are one of them there is no guarantee that when you sell the property your future buyer will have the same type of relationship with a lender.

Illegality & irregularity with the property

This is the most complicated and common issue with properties that we see and deserves it’s own series of articles.

Leasehold Land

Basically, we only introduce freehold land properties to our clients. Leasehold properties do exist however the price you see advertised is only for the structure, not any land rights. Since structures are depreciating assets in Japan, then naturally the price advertised will be relative to the age of the structure and value zero.

That said, you can achieve the same rent on leasehold properties as you can in freehold properties as tenants don’t care about the land ownership structure when they rent.

Again, banks are very hesitant to lend on leasehold property as in the event of a default, the property they are left with will no doubt be sold at lower than what was lent. This creates low demand and thus lower pricing.

The combination of lower pricing due to leasehold rights and average achievable rents in place are the two factors that create a higher yield.

Conclusion

Good deals do exist but anything truly good doesn’t exist online. Most of the great deals in the city never make it to the web as the Japanese distressed seller will go to great lengths to limit their selling agent’s ability to market a property.

This is why it is important as a buyer to have your method of purchase always sharp and ready (either pre-approved bank financing or cash liquid and ready to use).

It is also very important to have regular contact with your buyer’s agent to update them on your situation so they can send you the most relevant off market deals that fit your criteria.

Remember – if you see it online, be skeptical and look for issues as outlined above. If in doubt, we are always just an email or phone call away.

 
 

Editor’s Note: Shirley is Sales Director for Housing Japan. She has sold billions of yen of real estate and arguably has the highest client satisfaction rating in the industry. Shirley writes a weekly column for Housing Japan readers to help illustrate common challenges buyers and sellers have when trading Tokyo residential property.