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7 Potential Risks of Purchasing Residential Real Estate in Vietnam as a Foreigner

Outlined below are 7 potential risks of purchasing residential real estate in Vietnam as a foreigner.  While they are not exhaustive, foreigners are encouraged to obtain accurate legal advice pertaining to their specific situation or transaction.

This article, however, primarily serves as an informative guideline for foreigners, providing necessary information for preliminary preparation to ensure that any purchase transaction of residential property as an investment or for commercial use, will not result in aa dispute.

Risk # 1 Projects that have not met precedential conditions for selling to buyers/investors, but project developers insist on doing so as a norm

Apart from the established property, it is evident that whenever and wherever buyers come, real estate brokers boast the project as a good location – perfectly designed for a new lifestyle with a plethora of endless high-end benefits that buyers will savor upon purchasing the project.

But! Buyer beware! What are the shrewd questions that buyers should ask?

→ are the project developers allowed to sell properties to buyers pursuant to prevailing laws at moment? If yes, then

→ which documents should buyers request to investigate other than the PR and marketing materials only?

2 valuable questions that buyers should ask whenever an off-the-plan property is being advertised

The answer to the first question is that normally, project developers ARE NOT allowed to sell properties to buyers pursuant to prevailing laws. The sale of properties by the project developers of an off-the-plan property to buyers in particular, requires a minimum condition such as the physical project completion; financial arrangements maintained by the financing entity; and approval of the sample of the off-the-plan sale contract, etc. must be met.

Details of the conditions that project developers must meet in order to sell properties under the off-the-plan sale contract arrangement, may be seen here at  https://cnccounsel.com/insights/selling-off-the-plan-housing-in-vietnam

Common practices indicate that all-too-often project developers sell properties ahead of those conditions to be met. Succinctly, project developers tend to accelerate the process of selling the real estate, which might be considered a breach of prevailing law at the point of selling such properties.

The answer for the second question is that although the provisions of the project’s legal status are mandatory, in some other projects that the project developers respect their reputations and the brand on, allow buyers/investors to investigate (review) the project’s legal documents without allowing them to have a copy. For others, access to those documents is cumbersome and buyers normally find it difficult to have a look.

Outlined below is the typical process of selling property that project developers normally adopt

Possible phases of selling properties

Risks arise once the buyers purchase properties when the project developers are not allowed to sell the properties or when the access to the project legal documents is limited. The so-called “selling/buying properties without firm legal basis”.

What are the possible solutions if one purchases the properties ahead of the precedent conditions to be met? The possible solutions for those circumstances might be:

→ Cancel the contract and demand the project developer refund any payment that buyers have made

→ Endlessly wait for conditions to be met prior to the sale and purchase agreement of the real estate are signed.

→ Adjust the contract in favor of the buyers (such as adjusting the ratio of advance the payment, to the terms of payment and adjust the interest rate accordingly, etc.).

→ Report the situation to the competent authority for their involvement and further actions.

→ Initiate a lawsuit against the project developers.

In any event, it shall further cost the buyers for their transaction. Some solutions might cost-time and present a painful process and buyers are therefore hesitant to take necessary legal action.

therefore, our short recommendation is “always remember to diligently check and investigate relevant documents that justify the project developer’s entitlement to sell properties to buyers”. Until those conditions are met, the project developer is unable to collect the money/payment from buyers under any kind of arrangement. The collection made before the establishment of the conditions to sell is prohibited.

#2 The second risk is the unclear functions of the properties

Due to a variety of reasons, both subjective and objective, the function(s) of the property are not clear enough for buyers/investors to understand. Some project developers fail to declare the real functions of their units, while others provide misleading information about ownership to buyers.

The reality is that the functions of the properties are classified into various purposes and depend on countless number of factors such as:

→ the ownership of the project developers: whether the project developer is a foreign-owned enterprise or a locally domestic company. The difference in the ownership of the project developers, results in various functions of the properties and other features, including any restrictions or limitations of use, operation, freehold, terms, etc., of the properties.

→ the way, based upon which the project developer obtains the land use right certificate: whether the project being developed is based on an allocation or a lease.

→ the objective of the project: whether the project being developed is for resettlement and compensation purposes. Confirmed only if buyers/investors have the approval document from the competent authority on the project plan when it was initially proposed by the project developers.

→ the functions of the project: whether the project being developed is purely for residential purposes only or mixed use, or non-defined purpose (condotel, office-tel, to name as a few properties that require legal framework).

→ finally, whether the foreign owner could eventually lease out the property: Most often foreign-owned enterprises believe that their properties may be leased out for commercial purposes. However, this is only true for foreign individuals whose properties are designated as residential. Foreign-owned enterprises are allowed to use their properties for accommodating their staff only.

The function of real estate plays an important part in (to a certain extent) generating profit for that investment, in mitigating the risk of transferring and assigning the benefits and/or obligations, and in the ability to use properties legally.

Factors that affect the functions of properties

#3 The third risk is absolutely about the pink book

Buyers should clearly understand the difference between the eligible conditions to purchase properties and the condition to grant the pink book to foreign prior to entering into any property transaction in Vietnam.

Although the conditions to purchase property by foreigners in Vietnam quite easy, open, and transparent, granting of the pink book to foreign buyers is a complicated procedure that some foreigners have given up any hope of their owning an apartment unit in which to live permanently.

It is worth noting that the issuance of the pink book is precisely dependent upon the following conditions:

→ the rightfully constructed property by the contractor pursuant to prevailing law (especially the construction permit or other approval for that project). Failure – by either contractors or project developers – to comply with any aspect of zoning, planning, and safety will result in a denial of the pink book application by the competent authorities.

→ the project employer’s fulfillment of financial obligations plays an important part to ensure any proper application to be approved and/or accepted. Relevant financial obligations between the project developer and the buyer are described in Section 5 below.

→ any change in legislation or leadership of a particular area could be a very costly issue. Currently, in Ho Chi Minh City, until further instruction/guidance, or decision from an upper level management body, no further pink book will be granted to foreigners.

→ disputes between project developers and contractors (including any consultants to the project – project manager, supervision consultant, design consultant, etc.,) will definitely result in denial pink book issuance – insufficient documents preparation – until such disputes are settled.

As an example of how challenging it is for foreigners to obtain the pink book for their properties, the current number of foreigners who have obtained the pink book since 2014 to date is 750[1] in comparison to the 80,000 foreigners in Vietnam.

This statistic clearly evidences the likelihood of being denied or rejected for pink book issuance by the competent authority and foreigners should take this seriously.

While the foreigner is still the owner of the properties (evidenced by sales and purchase agreements) without the pink book, but exploitation of the property commercially, such as obtaining a loan, establishing a permanent place to live, etc., becomes much more challenging.

This issue becomes even worse when the project developers apply for the pink book and the buyers/investors have only the ability to sell that property under a promissory agreement whereby the actual sales and purchase agreement between the buyers (sellers) and sub-investors/buyers shall only be initiated or commenced upon under the the presence of the pink book. 

#4 The fourth risk is about assigning the sales and purchase agreement prior to the pink book being issued to new buyers

As previously indicated in item 3, any delays involved in the pink book being issued, the likelihood that buyers will encounter challenges. In the event that the project developer has not applied (submitted dossiers) for the pink book and the project developers are assisting the foreign buyer(s) to transfer/assign the property to, a strict process – that involves the buyers and the new purchasers –  must be followed as outlined below:

Step 1: obtain confirmation of the project developer’s assignment of the contract to a third party.

Step 2: sign and notarized (at a notary office) an assignment agreement (sales and purchase agreement).

Step 3: pay tax and relevant governmental charges.

Step 4: sign a new sales and purchase agreement with the project developer.

The process of assigning a sales and purchase agreement

In this aspect, there are two common risks that purchaser must bear in mind, once is the possibility of assigning/transferring the sales and purchase agreement and the other is the costs resulting therein by the buyer.

Law regulations during 2010 to 2014 did not allow the owner to transfer or assign the sales and purchase agreement with the project developers to a third party[2]. If so, it would become a nightmare to those who change their plan or desire not to continue working, living or investing in Vietnam, as the sale of such properties is cumbersome, if not impossible.

#5 The fifth risk is the financial obligations

Obviously, financial obligations are one of most serious issues that foreigners must acknowledge. More specifically, the dispute between a Phu My Hung firm and their clients/customers of My Vien Apartment is a typical case whereby neither party (Phu My Hung or its customers) agreed to pay fees for land use rights.

Many reasons – objective and subjective included – caused the dispute. Some occurred as a result of a change in legislation, or at least there is no clear provision for such financial obligation. Others reasons transpired from the project developers’ express intentions to exclude its obligation from their financial obligations to the government and shift such financial obligation on to the buyers, and some reasons came about because the buyers did not have the luxury to review the entire contract properly and ultimately signed the contract under the assumption the financial obligations would be paid by the project developers.

Another financial obligation that foreigners must know about, is the fees, costs, or charges for permanent residence. These fees, costs, and charges include, without limitation to management fee, maintenance fee, waste disposal, pink book issuance, insurance fee, parking fee, so on and so forth.

Let take parking fee as an example. Everyone seems to understand that this fee/cost is easily determined and thought to have been clear at the point of the contract signing date, but it is not. The reality recognizes circumstances where the buyers and the project developer argue about the parking place: is that the joint property and that buyers should have the entitlement to park or they can only park provided that they buy the parking lot?

While the list of financial obligations not identifiable, financial obligations is one thing that owners/buyers should understand and acknowledge. Financial obligation is based upon the actual square meters of the property. The higher the square meters are, the greater the possible financial obligations are.

So, it is wise to check and confirm whether or not the contract price includes or excludes such costs, fees, or charges to ensure that financial obligations are not an issue when the apartment units are handed over.

Risk 6 – transactional costs, fees, and/or governmental charges etc.

Presumably, an owner whose property in Vietnam but s/he must transfer the property to third party/new buyer (due to his/her work requirement, relocation of employment, intention to invest in Vietnam, misc. investment opportunities etc.), then how much will the transaction cost the owner to sell that property?

The cost for this real estate transaction might be surprisingly higher than what the owners have ever imagined. Under normal circumstances, the following costs are likely incurred and either the buyers/sellers have the obligation to pay:

→ broker commission: about 1.5% – 2% of the selling price or negotiable between the sellers and the broker,

→ legal services: $2,500.00 USD to $8,000.00 USD

→ notary fees: < $400.00 USD

→ licensing fees (state tax): 0,05% of the selling price

→ personal income tax: from 2% to 4% of the selling price.

The commission fee for broker(s), the legal service(s), and the notary service typically vary from case to case, and from time to time. Under certain circumstances, whereabout Vietnam and the foreigner’s home country has not agreed on the double tax avoidance treaty, then other taxes that have been levied, may impede the sellers on both ends for the income that the sellers receive from the transaction.

Additionally, if the owner departs from Vietnam then authorization allowing the authorized person to sell the property is required and is seemingly the only legal mechanism that will help the owner in this context.  Nevertheless, please keep in mind that the Vietnam government does require payment of dual-personal personal income tax, e.g. initially two percent (2%) to four percent (4%) of the transferring contract price. 

#7 The seventh risk is about the fluctuation and the foreign currency exchange

In the event a foreign buyer is required to pay in Vietnam Dong, it means his/her current currency must be exchanged and doing so is likely to result in the buyer’s loss between exchanging foreign currency. This loss worsens if the property is considered to possess a high value.

Again, whenever buyers sell properties and wish to remit funds abroad to his home country, then the selling and buying exchange rate and loss occurs.

It is meaningful to get to know that the deficit between Vietnam Dong and other currency, especially United States Dollar, European, the Sterling Pound, Singapore Dollar, Hong Kong Dollar, and Canadian Dollar are those common currency transacted.

Foreign exchange risks

Further assistance

As an emerging economy, Vietnam is a potential market for those who wish to invest in the property, or at least a wise and eventually an investment if expats purchase a property but risk is implicated and foreigners are highly recommended to obtain proper legal advice before placing any money in.

Further assistance could be assisted by calling us at +84-28 6276 9900 or mailing us at contact@cnccounsel.com

References:

[1] See more at https://e.vnexpress.net/news/business/why-foreigners-aren-t-buying-houses-in-vietnam-3665707.html

[2] See Art. 18.6(a), Circular 16/2010/TT-BXD dated 01/09/2010.

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