Property buying is a lucrative investment, especially in the long run. It has also long been the general consensus that if well selected, commercial properties bring better gains than residential properties.
The biggest concern of purchasing a commercial property is the initial cost, but there is in actuality little difference in purchasing a commercial or residential property.
This guide entails the procedures of purchasing commercial properties.
It will cover the legal documents that need to be signed, such as the Sales & Purchase documents, valuation fees, real estate agent fees and Memorandum of Transfer (MOT) fees.
Also covered will be how to find suitable commercial properties, and then the loan documents that will be required for the purchase of a commercial property.
Thereafter, there will be a guide to the documents that need to be signed for the purchase of a property and finally what happens after a property is purchased.
Within this guide, readers will be able to find out how to plan their budget, and the cost of the loan documents required.
Commercial property buyers will also be able to learn the property buying criteria for buying a commercial property, the mortgage loan documents required, and what happens after signing the documents.
Planning Budgets & Costs Of Loan Document
The purchase of commercial properties is usually thought to be reserved for those of better financial status.
This stigma is due to the number of new commercial developments that are very highly priced. Affordable commercial properties can, however, be found in the market.
There are however some charges that differ from purchasing residential properties, as detailed below:
- Utility Bills: Utility bills charges are higher in commercial developments as compared to residential homes. For example, the electricity bills for commercial developments are usually 30% higher than for residential developments. The rates for electricity can be viewed on the Tenaga Nasional website.
- Assessment Fees: Charged twice per year, the assessment fees for commercial developments are higher than that of residential developments at approximately 2.5 times the typical commercial rates.
- Quit Rent: Charged once per year is the Quit Rent of a property. These fees are also generally 2.5 times higher than that of Residential rates.
- Internet Rates: Service providers also usually charge commercial developments higher rates for their services. For example, TMNet charges almost double the usual rates to commercial properties as compared to residential properties. While the minimum package for residential properties are RM168 per month, the minimum package for commercial developments are RM295 per month as of June 2017.
- Astro Packages: Even cable TV has commercial rates. Astro charges almost double the residential rates for commercial developments.
Aside from the above mentioned items, purchasing a commercial development is almost no different than purchasing a residential development.
Below then are the other charges that a buyer will need to take into account when purchasing a commercial property.
Commercial property buyers usually require higher capital, as the maximum loan allowed to them is only 80%.
Purchasers will therefore need a minimum of 20% downpayment for the property assuming that they are able to get an 80% loan.
Another difference is that unlike purchasing a residential property, the purchaser will not be able to withdraw funds from their EPF Account II to pay for their property if it is under Commercial title.
2. Valuation Fees And Cost
Depending on whether the buyer is purchasing a new development or subsale one, they may or may not have to bear the valuation fees themselves.
If purchasing a new property, the value of the property would have be obtained by the developer, while if buying a subsale one, the cost will be borne by the buyer.
If borne by the buyer, the fees will follow a price chart based on the price of the property.
3. Real Estate Agent’s Fees
The Real Estate Agent’s fees is another fee that will not need to be borne by new commercial property buyers.
These fees are only applicable to the subsale property market, which the seller will have to bear the cost of approximately 2% or 3% of the property purchase price.
2% is usually considered to be the norm, and 3% higher than the norm. Usually borne by the seller, this cost can however sometimes be transferred to the buyer instead.
4. Sale And Purchase Agreement Fees (SNP/S&P)
Applicable across the board is the Sales & Purchase agreement fees. These documents will serve as proof of purchase of the property.
The charges for these documents are the same as for Residential developments. They will follow a price tier, which is based on the purchase price of the property.
5. Memorandum Of Transfer (MOT)
The Memorandum of Transfer is payment for the transfer of the property’s title from the seller to the buyer.
These fees can only be paid upon completion of the development, hence buyers of subsale properties will need to pay these fees immediately upon purchasing their new development.
While new commercial property buyers will have to wait for the development to complete before they can make the payment.
The rate for these fees are also charged based on price tiers that follow the selling price of a property.
Also chargeable to the buyer is the 6% government tax on the fees, and disbursement charges of between RM1,000 - RM1,500.
6. Loan Agreement Legal Fees
One of the final fees that will need to be borne by the buyer are the Loan Agreement Legal Fees - otherwise known as the Lawyer Fees.
As per the other fixed fees, the Loan Agreement Legal Fees also follows a fixed tier which is based on the property’s selling price.
There will be Stamp Duty charges on the Loan Agreement Legal Fees, usually 0.5% of the loan amount.
These fees are also 6% government tax chargeable, and disbursement fee chargeable at between RM1,000 - RM1,500.
7. Miscellaneous Costs
The rest of the costs are similar to that of purchasing a Residential titled property. Buyers will need to prepare a sum of money for the below:
- Mortgage Reducing Term Assurance (MRTA) / Mortgage Level Term Assurance (MLTA)
- Fire insurance
- Loan Instalment
- Utilities deposit (electricity and water)
- Repair or renovation costs
Buying a commercial property is much more than just the serving the mortgage itself but rather you have to take into consideration of the costs for valuation fees, real estate agent's fees, sale and purchase agreement fees, memorandum of transfer fees, loan agreement legal fees and some other miscellaneous costs like MRTA/ MLTA, loan instalment interest, and utility deposit.
Property Buying Criteria
The criteria for purchasing commercial and residential properties differ slightly, due to the property’s purpose. Below are some of the most important criteria that need to be looked into.
- Location: Selecting the location of a commercial property is crucial to its business’s success. While it may be good for a residential property to be located in a secluded area, depending on the nature of the commercial property, it is usually better for it to be situated in a busy area with high traffic and large catchments of residents.
- Accessibility: Whether a light industrial business or a strand of shops that require a large amount of traffic to sustain, accessibility is an important factor. For light industrial businesses, this may mean that easy access to highways are required, while the shops should be in the centre of a plethora of access roads.
- Safety: The safety of an area is important. Light industrial businesses in areas that are unsafe may stand to lose thousands of ringgit in form of stolen assets if there is a break-in, and standard businesses may lose clients if their patrons feel unsafe shopping in the area. Hence the importance of the safety in the area.
- Proximity to population catchment: This criteria is not as applicable to light industrial businesses as it is to shops. Standard businesses such as eateries and services shops that require a high amount of traffic to sustain will need to be close to large population catchments to grow their business.
- Size: The size of the property will depend highly on the nature of the business. For example, a logistics company with much stock will require much storage space, while a typical shop such as a clothes boutique will require less space.
Upon selecting a few suitable properties, the next thing the buyer should do is to set as many appointments as the can with the relevant agents.
A good place to search for new properties is via the PropertyGuru New Launches or Project Reviews page.
Otherwise, an easy way to get the agent to seek the property for you instead is to go to the PropertyGuru Agent’s Page, look for an agent and get them to find a suitable property for you instead.
When visiting a property, it is a good idea to bring a list of questions that you wish to ask the agent. Among some of the questions that should be asked are as below:
- Is the property freehold or leasehold?
- If the property is strata titled, how much are the maintenance fees?
- Does the unit come with parking lots? If yes, then how many?
- What is this area like? Your agent will likely know much more about the area than you do unless you grew up in the area.
- Are there any upcoming changes in the neighbourhood? This is especially important if there are empty plots of land nearby.
Below are some additional items for subsale property buyers to look out for:
- Are there are defects in the unit? Ensure you check for structural cracks, leaking roof, missing roof tiles and so forth. These repairs can cost up to tens of thousands of Ringgit, which should be offset from the selling price.
- Are there any items that need to be replaced or repaired soon?
- Why is the owner selling?
And for buyers looking at property for rental, they should ask the below questions.
- What kind of rental can the property fetch?
- Are there any business restrictions on the property, such as the types of businesses that can be carried out on the premises?
Learn more about how to pick the right commercial property with "Finding the best property for investment in Malaysia - New, Subsale or Commercial".
Mortgage Loan Documents
The commercial mortgage loan requirements and documents are slightly different as compared to the residential ones. the differences lie in the tiers and the rates.
The maximum loan for residential properties is 90%, while for commercial properties it is 80% if the property is purchased under personal name.
Loan To Value Ratio
The maximum time a residential property buyer can get a 90% mortgage loan for is 2 times, whereby thereafter the maximum loan for the third property onwards is only 70%.
Commercial properties are however not tied to the same restrictions.
A commercial property buyer is able to get an 80% mortgage loan for the purchase of their commercial properties without limit, as of 2017.
Commercial Property Loans
Commercial property loans are restricted to only certain types of commercial properties. The complete list is as below:
- Retail shop lot / Shop house
- SoVo / SoFo units
- Commercial land
- Agricultural land
- May include SoHo units and Serviced Apartments, depending on the bank’s internal policies
As SoHo units are the only developments that has Commercial status but enjoys HDA protection, there has been confusion as to whether this segment should be financed under the Commercial loan or Residential loan sector.
Commercial Loans From Banks
Selected banks only finance selected types of commercial properties. Below are some of the factors they take into account:
- Commercial property type
- Commercial land
- Agriculture land
- The type of unit if it is situated within a mixed development
- Total number of floors within the building
- The floor the property is located on
Sdn Bhd Company
Otherwise known as a private limited company, a Sdn Bhd is a company that comprises a minimum of 2 individuals. The forms that need to be provided by a Sdn Bhd when purchasing a property is different than that of an individual purchasing a property. Below are the documents required:
- Form 24 & 49
- Latest Profit & Loss statement
- Memorandum of Article
- Company Profile
- Form 9
- 12 Months Bank Statement
- Latest Audited Report
Sole Proprietorship companies will require additional documents as per below:
- Form A and Form D
- Name Card
For other requirements such as a foreigner buying commercial property in Malaysia or perhaps as a Malaysian working abroad and wishing to purchase a property in Malaysia, please visit the Loan Documents page (Link to Loan Documents page) for details.
Getting Familiar With The Property Terms
Upon deciding on their desired property, a commercial property buyer will need to familiarise themselves with a few property terms that they will encounter in their Letter of Offer.
1. Type Of Loan
The typical type of mortgage loan that is available for commercial properties are the standard loan which come with fixed interest rates, and the flexi loan that come with flexi interest rates.
2. Amount Of Loan
The amount of loan in the Letter of Offer dictates how much the bank will be willing to loan to you.
This is usually the most crucial section for a property purchaser to check the moment they receive their Letter of Offer.
3. Purpose Of Loan
The purpose of loan dictates what is the loan being made for. In this case, it would be for the purchase of a commercial property.
4. Description Of Property
A description of the property in question to be purchased will also be stated in the Letter of Offer, whether it is for a factory, shop lot, retail unit or so forth.
The duration will dictate how long the loanee has to repay the loan. Typically the longer the loan period, the lower the monthly repayment and vice versa.
6. Processing/Set Up Fee
Indicated in the Letter of Offer will be the processing fee, otherwise known as the set up fee, should the borrower wish to take up the bank’s offer.
As of May 2017, UOB’s processing fee for their Intelligent Retail Loan was RM212.
7. Monthly Service Charge
Should the borrower decide to take up the bank’s loan, they will also be charged monthly service charges. These charges will be stated within the Letter of Offer, and is usually quite minimal.
For example, CIMB only charged RM10.60 per month for their Vacant Land Flexi Smart loan as of May 2017.
8. Prevailing Interest And Repayment
The repayment schedule will be stated clearly in the Letter of Offer, along with the interest rates that will be charged and how much the borrower will be charged if there is a late payment.
"Upon your default in making payment for any monthly interest due pending the commencement of instalment or default in the payment of any monthly instalment due, the Bank shall be entitled to vary the interest rate for the facility to BLR + (the rate as in letter of offer) or to such rate as may be prescribed at the Bank’s absolute discretion upon giving you adequate prior notice”
Based on the loan tenure, total amount and interest rates, the Letter of Offer will indicate the monthly instalments that need to be borne by the borrower.
Calculated based on the loan amount, the instalments - which are the monthly repayments to the bank - will be stated within the Letter of Offer.
10. Security Documents
Security documents are for the safety of the bank, to ensure that the borrower is able to make their payments on schedule monthly. If needed, the Letter of Offer will state the necessary documents they require.
Prepayments occur when a borrower pays more than he was supposed to.
Depending on the type of loan that they took, their interest rates may either be lowered if it is a flexi loan; otherwise the extra payment will not have any effect should they have gotten the standard loan.
12. MRTA/Fire Insurance
While residential properties do not require fire insurance, this insurance is compulsory for commercial properties. Should the borrower wish to, the amount can be incorporated into their loan.
Our comprehensive guide of Understanding Commercial Property Loans and the Relevant Loan/ Property Terms with Commercial Property Loans will help you understand the process to getting yourself the commercial loan. Having a profound understanding of what are the loan documents will make the process even easier for you.
Signing The Documents
The next thing for the property buyer to do once they accept the Letter of Offer is to know what are the coming documents that they will need to sign.
1. Signing The Letter Of Offer
The first document that they will need to sign is naturally the Letter of Offer. When the borrower signs the Letter of Offer, they will need to pay a deposit of 2% to 3% of the purchase price.
This money is usually paid to a neutral party such as an agent of a stakeholder account. If the payment is made to an agent, the agent is referred to as an escrow agent.
The remaining 10% of the downpayment is paid after the Sales & Purchase Agreement is signed.
The important details provided in the Letter of Offer are as below:
- Legal names of vendor and buyer
- Price agreed upon
- Amount of deposit
- Any items included in the sale
- Date before which the SPA must be signed
2. Signing Of The Sales & Purchase Agreement
After signing the Letter of Offer, the borrower will have about 2 or 3 weeks to sign the Sales & Purchase (S&P) Agreement.
Should they exceed this period, they will need to ask the bank for an extension on the Letter of Offer.
During the 2 to 3 weeks period, the necessary title searches will be conducted, while buyer and seller agrees to various clauses.
Upon both parties coming into agreement, the S&P document will be signed in front of lawyers who will bear witness to the signing.
After signing the S&P, the remaining downpayment will need to be paid.
Should the borrower’s monies be located overseas or in other assets, they should prepare the money beforehand to avoid delays during this period.
The important details to check in the S&P document is as below:
- IC numbers
- Property premises
- Ensure that all additional details - such as parking lots - are stated in the S&P
- Ensure that all details promised by the sales agent such as additional air-conditioning units, renovations and furnishings are stated in the S&P
3. Signing The Loan Agreement
The final agreement that needs to be signed will be between the bank and the borrower - the Loan Agreement.
This document will dictate the terms of the loan, which the terms are usually skewed to protect the bank’s interests. The cost of creating this document will however need to be borne by the purchaser.
If the borrower is purchasing a property within a multi-unit or multi-storey building, they will also need to sign a Deed of Mutual Covenant.
This deed will dictate the buyer’s rights within the building such as:
- Usage of the building
- Types of activities that can be carried out
- Who specifies the management fees
- How to appoint a building manager
- Matters pertaining to the maintenance or renovation of the building
4. Memorandum Of Transfer
Should the development already be completed, the final document to be signed is the Memorandum of Transfer (MOT).
This document is to transfer the ownership of the property from the last owner to the current one - and in the case of new developments, from the developer to the buyer.
Commercial properties are a different game play all along and one must take extra precautions when dealing with the signage of Letter of Offer, sale and purchase agreement and memorandum of transfer.
Vacant Possession And Keys
After the borrower finishes signing all the necessary documents, they will need to be prepared to complete all outstanding payments on their purchase such as the:
- Balance of their legal fees
- Payment of their Stamp Duty and other charges
The buyer’s lawyer will then ensure that all outstanding bills on the property has been paid for - whether the utility bills, quit rent, assessment fees or various service charges.
Only after all these outstanding payments have been made - and the seller’s lawyer able to produce the Agreed Apportionments to indicate all the bills that have been paid for - will the balance of the payment be transferred to the seller’s lawyer.
Vacant Possession And Keys - Subsale Development
In the event that the property is a completed one, the seller will then be able to hand over the key via both parties’ lawyers.
Once the buyer gets his keys, he should double check that all the bills for the property has been paid for.
However if it is a new development, the buyer will need to await the completion of the property and the completion of all the building’s safety checks before they will be able to obtain their key.
Find our more about what to expect upon signing off the documents such as paying the remaining of legal fees, stamp duty with our comprehensive guide of The property buying process for subsale, commercial and new developments.
Looking to buy a residential property instead? You may be interested in the comprehensive guide to purchasing a subsale residential property and as well as the complete guide to purchasing a new property project.
It's also recommended for you as a potential property buyer/ investor to learn more about the types of land title such as the differences of freehold, leasehold and bumi lot and if you are keen to buying a new property project, knowing the payment schedule of new property project will help you better manage your personal and investment finances.