Double-end commission still at high levels

According to an article in ZAi Online, some of Japan’s major real estate agencies are collecting double-end commissions on over half of their sales. Collecting brokerage fees from both the buyer and seller may be illegal in some countries, but is a legal and common practice in Japan. Many times the buyer or seller will be unaware as there are no duties to disclose this to the customer.

In some companies, the agency has represented both the buyer and seller for as many as two-thirds of all transactions. Agencies are heavily dependent on this practice as it makes up a significant portion of their annual sales, and it is not likely that heavy regulation will be introduced to curb this behavior.

In early 2016, the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) introduced reporting requirements for agencies that use the REINS online listing database. Agencies with exclusive-listing agreements are obligated to update the status of the property on the database if an offer has been received. This is an attempt to boost transparency in the real estate market, but appears to have had a limited effect.

Developer loses 6 billion Yen in fraudulent land sale

Major property developer Sekisui House has reported to have lost as much as 6.3 billion Yen (approx. 58 million USD) to scammers in a fraudulent land sale in central Tokyo.

According to a public announcement made by Sekisui earlier this month, they had agreed to purchase the property from a company that claimed to have already signed a tentative sales agreement with the alleged property owner. On the day of settlement, the property title was to be transferred from the original owner to the middle company and then to Sekisui. After the money had changed hands, the registry office (the government agency responsible for recording official changes in property titles) rejected the deed-change application because the title and identification documents from the alleged seller were falsified. By this point the ‘seller’ and associated parties had fled with the money and could not be contacted.

Three arrested for fraudulent sale of land in Minamiazabu

Three men and women have been arrested for the alleged fraudulent sale of a 300 square meter block of land in Tokyo’s upscale Minamiazabu neighbourhood.

According to the police department, the suspects forged the identity of the landowner and collected a 240 million Yen (approx. 2.15 million USD) payment from a buyer in early 2014. Depending on the location, a block of land of that size in Minamiazabu could have had a potential market value of 350 million Yen and upwards, and certainly a higher value today.

Real estate investors: Beware of sales talk

First-time property investors across Japan are starting to find themselves with poor performing investments that don’t meet what they were promised by salespersons. Despite cashflow-positive claims made at investor seminars, some buyers are finding out that their rental property is running in the red, which means they pay cash out of their own pocket each month just to keep up with loan repayments. Some are then convinced by salespersons to buy additional properties to help offset their current losses. The newly suggested properties may appear to be cashflow positive on paper, but in reality they also turn out to run at a loss, only worsening the investor’s situation.

A common tactic is for a salesperson to provide a scenario of the potential return assuming the longest mortgage possible (resulting in lower monthly payments), and not warning the buyer about the possibility of interest rate hikes, monthly building fees increasing in the future, or large-scale building repairs and maintenance that need to be carried out at the owners’ expense. The simulations may also incorrectly assume that rents will remain unchanged and not factor into account future vacancy or a decrease in rents.

Some sales pitches include promises to buy back the the property for the same amount after a fixed period of time, or promising a guaranteed rent, only for the promises to be broken after the sale. Salespersons might also fail to inform the buyer that by taking out investment loans now, they may find it more difficult to get a home loan for their personal residence in the future, especially when they have borrowed at their maximum capacity.

Sublease lawsuits on the rise

Disputes on sublease agreements for rental properties are on the increase across Japan.

A sublease or rental guarantee agreement is where a company, often a real estate agency, leases an apartment building or block of flats from the property owner to sublease out to tenants. The owner is guaranteed a fixed rent each month and does not have to worry about any vacancies, although the rent they receive will be lower than market rates. These sublease agreements are often long-term with periods ranging from 10 to 30 years. While landlords may be promised secure and stable rental income, the contracts often contain clauses allowing the sublessor to reduce the rent or even to cancel the agreement.

Foreign buyers of real estate in Japan still lack adequate support from agents

As a foreign buyer of real estate in Japan, whether living abroad or in the country, you may find that there are only a small number of real estate agencies that are capable and experienced in working with foreign clients. Even if the language barrier is not an issue, finding an agent who has worked with foreigners and can understand and explain the key differences and intricacies about Japan’s property market is essential.

We have heard of nightmare stories from buyers who have purchased properties without receiving full explanations or even incorrect explanations of property details, resulting in some very bad investments. With a growing number of foreign buyers, these bad practices are only going to increase.

Sublease and rental guarantee agreements causing problems for first-time investors

Starting September 1, companies* offering sub-lease arrangements to investors and landlords will be obligated to include a clause in pre-contract documentation to warn the property owner that future rent may be subject to change.

The new rule has come after a recent spike in complaints from landlords who, at the advice of real estate brokerages and construction companies, built apartments under the expectation of leasing them for a guaranteed rent. After completion, however, the sub-leasing company would either cancel the rental agreement (a relatively easy task since rental law is strongly in favour of the tenant) or decrease the rent offered to the landlord. Some investors were promised that rents would continue to rise 3% annually, only to find out after purchase that the sublessor would only offer a rent of 10% below initial estimates.

Beware of agency-arranged building inspections

Recently, several of Japan’s major real estate brokerages have started offering home inspections on properties they list. In some cases the agency will offer to provide coverage for up to two years following the sale for any defects, but the fine print usually requires the property to already be free from defects and for the agency to act on behalf of both the buyer and the seller resulting in a double commission (a full commission collected from each party).

This poses a serious conflict of interest, since agents have a vested interest in the sale. Buyers should be cautious about relying on these reports. There may be cases where inspection reports arranged by the seller’s agency receive passing grades but fail to include obvious defects.

An agent’s disclosure obligations regarding stigmatised properties

Under Article 47 Item 1 of Japan’s Real Estate Brokerage Act, agents are prohibited from intentionally failing to disclose any matters relating to the building that may have a serious affect on the client’s decision to proceed with the transaction.

This means that real estate agents are obligated to notify clients of defects to a property, such as suicide, murder or other unnatural deaths, but only if the agent is aware of these defects at the time. There may be times when an agent is unaware, in which case they cannot be held liable. This can occur if the landlord or seller was purposely withholding this information from the agent, or if there was an unnatural death or murder that was not reported to the property owner or management company. The owner of the property, however, may be held responsible even if they were unaware of the defect.

Consider earthquake resistance when buying real estate in Japan

Kumamoto Earthquake 2
An apartment building in Kumamoto City

Nowadays Japan has some of the most rigid earthquake codes, however that wasn’t always the case and older buildings may be more susceptible to earthquake damage than some buyers realise.

Picking a location

Choose a property on solid ground.

Properties on reclaimed land, flood plains, former lakes, ponds, riverbanks, rice fields, or marshes are more susceptible to collapse and tilting from liquefaction. Even newer homes may not be protected from the danger of being built on soft soil.

Building age

Choose a property built after June 1981.