Editorial
A condo that would normally sell for 10 to 12 million yen was listed at 8 million yen, with a tenant paying half the market rent. Little would be left each month and tenant rights are strong, so we passed.
Contents
It was an ordinary listing on Japanese property portals. A condo that would normally sell for somewhere above 10 million yen, around 12 million, was on sale for 8 million yen.
I wondered why it was so cheap, so I checked. It was an “owner change” sale, meaning it came with a sitting tenant, and I could not see the inside. The building met the newer seismic standards. I thought the seller might simply want to sell fast. A common reason for a low price is that the seller needs cash quickly, for example to divide an inheritance, and properties do often go on sale well below market for that reason.
Asking more questions: the rent was half the market level
When I asked further, I learned that a tenant already lived there, paying only 50,000 yen a month. A unit like this would normally rent for about 100,000 yen. That is half the market rent.
The reason was that the previous owner, who had died, had rented it to an acquaintance. I do not know the details, but I suspect the tenant was someone with whom the owner had a particularly close relationship. That person had been paying 50,000 yen.
On top of that, the building’s repair reserve fund and management fee came to about 35,000 yen a month. A buyer would be left with only about 15,000 yen a month, and after paying property tax the investment would plainly run at a loss.
Why we could not simply ask the tenant to leave
Could the tenant simply be asked to move out? Under current Japanese law tenants are strongly protected, so removing a sitting tenant is extremely difficult in practice. Raising the rent is also not possible without a compelling justification. Because a buyer would be knowingly purchasing the unit with this rent already in place, it would likely be hard to win a rent increase even in court.
Paying a large sum for the tenant to leave is another idea, but the cost would be far above ordinary levels.
There is a further difficulty. Even if the tenant were to pass away, the right to occupy the unit (the leasehold) is inherited. That means the unit could remain occupied, for a very long time, at a rent far below market.
Why we passed
Because of these problems, I concluded that this was a risky property to buy, and I passed on it. It taught me not to act on a low sticker price alone, but to look carefully at what lies behind it.
What this case shows
- When a price is far below market, first find out why.
- For owner-change sales, check the current rent and how the tenancy began.
- Judge by what is left after management fees, the repair reserve and property tax are subtracted from rent.
- A tenant’s contractual rights, such as the difficulty of ending a tenancy or the inheritance of the leasehold, are hard to change after you buy.
This is a record of an individual’s own decision and is not a recommendation of any property or investment. Legal points are described in the context of Japan; please consult a lawyer or a licensed real estate professional before making an actual decision.