Purchasing a property in Bali or Indonesia is a magical experience that can turn into a scam or a nightmare if nothing is done by following some steps of due diligence. Social media are full of happy stories showing happy endings with high return rates on investment.
However, some stories can end with some drama. Whoever you are, a buyer looking for a retirement place, a buyer of a villa or a developer, it is crucial to follow some steps and make sure your contracts cover all points and perform due diligence on the property you want to buy.
Property Contracts in Bali and the Rest of Indonesia
Memorandum of Understanding or Letter of Intent
Once the property you found is the one you want to lease or purchase, the first step is to send a formal offer before signing a lease or purchase agreement. The formal offer is a Memorandum of Understanding or Letter of Intent. This document is crucial as it will define the next steps of your purchase. This document has to cover a few points.
- Name of the party
- Price and terms of the lease
- Who will be in charge of the due diligence process
- Where will the money be transferred and how will the money be released to the seller
- You are going to purchase the property under a company that you are going to set up, and the final agreement will be made once it is established if you plan to have a business.
- Who will be the notary appointed in case of purchase (notary is not mandatory for lease agreement)
To protect your interests, ensure you formally sign your contract. We recommend avoiding direct payment of the deposit to the seller to prevent future disputes. The process of taking back your deposit can be long and frustrating.
Lease Agreement and Purchase Agreement
Once the legal team completes the due diligence in Indonesia, the second step is to draft the lease agreement or the sales and purchase agreement.
Those agreements are the proof of the transaction. The regulation doesn’t really define the terms and conditions of a lease agreement as it is a private contract between two parties. However, some minimum recommendations have to be followed. Bali has historically involved notarized agreements. Our experience shows that going to court doesn’t change much in dispute resolution, especially with biased appointed notary. Some notaries historically minimized agreements, causing tax issues. We advise against this practice due to difficulty in recovering full payments during disputes.
At the difference with the Sales and Purchase (Akta Jual Beli), the lease agreement (Hak Sewa) has to be strong. It defines the obligations of each party and how the lessee can use the property and how the lessee can extend the lease.
On a separate note, the seller cannot be forced to renew the lease. The last few years a few agreements mentioned conditions to renew the lease, letting some foreigners think they will be able to renew the lease with a prime right. Having a priority doesn’t mean the seller has to accept the renewal. The first extension will happen in a few years and we will see how the market will react.
On the other hand, the sales and purchase agreement (AJB) is a standard contract. The buyer becomes the owner and the owner loses its right on the contract. It is important to indeed check the details of the party and the property.
Read also: Complete Guide To Buying Property in Bali as a Foreigner [2024]
What to Check Before Buying a Property in Indonesia
Property Due Diligence in Indonesia
Ownership
One of the most important steps is property due diligence when you buy a property in Bali, Lombok and the rest of Indonesia.
Checking the ownership and the right of the person to lease the land to the buyer is important, especially when conducting property due diligence in Indonesia.
In Bali, it is not rare to see lands belonging to several owners or transferred to a person for a certain period of time without authorization to lease or sell the property. It is indeed rare to see an issue for a sales and purchase agreement but it happened a few times to see the owner or lessor not authorised to sublease the property. The due diligence also has to identify if, for example, the property has some mortgage. The mortgage can have consequences: a bank taking the property and pushing the lessee out of the land by buying back the lease. This could not be an issue if the value of the lease has been clearly declared and the value of the villa is part of the lease.
Zoning
The other aspect after the ownership is to check the ITR (zoning of the land). The zoning classifies what it is possible to do with the land. For example some residential zones authorise or do not authorise daily rental and to apply for a VIlla License or Hotel License.
Areas like Uluwatu are dry areas with a lower access to Water like in South Lombok. Lombok had a lot of land to sell for the last few years without having access to a general system of electricity or water. We recommend including those points in your due diligence and in your contract to cover those points.
Some lands, like in Tabanan, have been declassified as a green zone to allow more construction. However, those soils have been used for agriculture for centuries. Those kinds of soil may not be suitable for all types of construction and having a test can help to check what can be built in a durable way.
Road Access
Furthermore, some stories also demonstrate the importance of checking road access. Unfortunately, some properties may be located and encircled by other properties belonging to the same or different owners. Securing an agreement is crucial to not having to pay extra fees or even having access to your property denied.
Read also: Bali Property Market trends 2023 to 2024
Business Aspects of Due Diligence and Property Contracts in Bali, Indonesia
Real estate agents and developers often promote attractive occupancy rates, which can be difficult to double-check in real estate transactions. We however recommend having a third party to control the numbers. The recent developments of Bali or Lombok have no control over statistics. They can be easily manipulated, like a recent hotel explaining 30 million visitors in the area.
Bali attracted a bit more than 500,000 visitors in April 2024, which is an average of max 6 million max per year. Bali, Lombok, and other places continue to attract visitors, as well as developers. The occupancy rate is mathematically stable as long as both variables are increasing at the same rate.
Sometimes, investors make property investments for business purposes, and the occupancy rate can vary significantly from one location to another, even within a few hundred kilometers. We do see clients with a 92% occupancy rate and others with only 55% occupancy.
In addition, the revenue has to also increase more than the cost of maintenance. The occupancy rate is one factor, with the average revenue spent. All calculations can also be requested in the contract and added to a business due diligence to make sure your investment is secured and financially doable.
Contact us if you need assistance with your due diligence, to review or draft the contract and also include the business aspects.
FAQ: Property Contracts and Due Diligence in Bali and Indonesia
1. Why is it important to follow specific steps when purchasing property in Bali or Indonesia?
Purchasing property in these areas can be enchanting but also risky. Without proper steps, it may lead to scams or nightmares.
2. What should be included in the Memorandum of Understanding or Letter of Intent?
The document should cover the names of involved parties, price and lease terms, due diligence responsibilities, payment procedures, and notary appointment details.
3. Why is it advisable not to pay the deposit directly to the seller?
Direct payments may lead to disputes. Recovering deposits in disputes can be lengthy and frustrating.
4. What are the key elements of a lease agreement and a sales and purchase agreement?
Lease agreements define property usage and extension terms, while sales agreements transfer ownership. Both should be meticulously drafted and reviewed.
