It has been common practice lately for property developers in Malaysia to offer DIBS as part of their sales package in order to incentify prospective buyers to purchase new developments still under construction. What is DIBS, though? I couldn't really find any decent sources of information on this, so I decided to write my own understanding in hopes that it might benefit others considering to purchase new property.
DISCLAIMER: Before I continue, please note and understand that I am NOT an expert on property or bank loans or anything related. I am just a simple family guy who did a lot of research and asked a lot of questions to those who know what they're talking about (hopefully).
What is DIBS?
DIBS stands for "Developer Interest Bearing Scheme". It is a sales tool for making the purchasing of a new development still under construction more attractive to prospective buyers. It is a loan scheme that is especially attractive to "flippers", or short-term investors, who want to make a quick profit by selling off property they purchase while the development is still under construction immediately after construction is complete.
How does DIBS work?
When you purchase property, you often have to make an immediate down payment of at least 10% of the overall selling price. After that, you get a loan from a bank for the remaining 90% (or however much you didn't pay). Usually, the installments for the loan will start immediately after your loan has been approved, even though the construction of the development hasn't been completed. This seems a bit unfair, since you're paying a loan for a property that you can't sell, rent, or live in yet. Plus, this is Malaysia. Who knows when the damn thing will be finished?
In comes the DIBS scheme. DIBS is essentially an agreement between the buyer, developer, and bank providing the loan that until the construction of the development is complete (and, in most cases, the keys are handed over), the bank won't charge you anything, and instead, charge the developer interest.
Now, this sounds pretty wonderful, but once you understand the details, things aren't so pretty anymore.
When you pay your installments for a loan, you are paying a portion of your principal plus the interest calculated based on the interest rate at which the loan was granted to you. If during the DIBS period, the bank was charging the developer the actual interest of your installments, it would be a steal for you. Everyone would love DIBS and even wish that the construction would last forever. The truth is, though, the interest that the bank charges the developer is based on the down payment that was made.
Here's where it gets worse. Not only is the developer not actually paying off the interest on your actual loan, they're not paying off any of your principal. Since interest is calculated based on how much principal you have remaining with the bank, you still end up paying all of the interest for your loan, which means you're not benefiting from DIBS in any way. In fact, because the DIBS delays when you start paying back on the principal and shortens your loan tenure, you end up paying MORE in interest.
So why do people like/want DIBS?
As I stated in the beginning, DIBS is good for those who want to "flip" the property for a quick profit. If I purchase a property with DIBS, all I pay during the construction period is the 10% down payment. If I sold my property as soon as construction is completed, as long as I sell it for more than what the original price was I bought it for, I make a profit, since I can just take the money I sold it for and settle my bank loan entirely without paying any interest at all, since my installments haven't started yet thanks to DIBS.
If the developer gave rebates or discounts on the property, I profit even more! If say the developer provided a 10% rebate, that means I didn't have to pay anything for down payment since the rebate offsets it, and I don't pay anything on the loan because of DIBS. So this means it's actually possible for me to own and sell property without spending a single cent, given that my timing is right.
What are the risks of DIBS?
Plenty. First, in order for DIBS to work, you must first secure a bank loan. If you do not qualify for the loan or the bank rejects your loan application for whatever reasons, DIBS doesn't work. Since you must commit to a loan in order for DIBS to work, you are responsible for the loan regardless of what happens to the property you purchase. If you are unable to sell it, you will have to pay the installments yourself (with higher interest, remember).
There is also quite a bit of speculation that in order for developers to be able to provide the DIBS scheme, they price the property at a higher price than the market rate. This means you're committing to a loan for an amount that you assume can be covered through appreciation (or inflation or both) during the time of construction. You also assume that there are willing buyers for the property at a price for you to make profit at the perfect timing so that you can settle the loan before the first installment. If the property doesn't appreciate, you lose. If you don't find willing buyers at the right timing, you lose.
Then there's always project abandonment. If the development is abandoned before completion due to a lack of funding or whatever other reasons, you are still stuck with the loan. In many cases, since loans are given out in disbursements, you won't be stuck with the entire loan amount, but for the disbursements already given out to the developer, you are still responsible for payment, regardless of whether the property was delivered to you as promised or not!! Remember that there are 3 parties involved here, and paying money back to the bank is between you and the bank while whether you get what you bought is between you and the developer. You can take legal actions against the developer to get reimbursed, but what you committed to the bank and what the bank has already given out is still your responsibility, NOT the developer's.
Let's recap with an example.
Say that a developer, Dodgy Properties Berhad, has started a new development project, and the first phase of sales has already begun. You decide to buy a 1,000 square foot condo for RM500k and think you can flip it for a 20% profit.
You pay 10% (RM50k) as down payment (perhaps rebated by the developer later), and you borrow RM450k from the bank at 4.5% interest using DIBS. The project is not expected to be complete for another 2 years, which means you don't have to pay anything on your loan for the next 24 months.
The developer pays the bank the interest on the down payment you paid for the next 24 months, but you haven't actually paid back a single cent to the bank on your loan because no payment is being made on the principal, and you still owe the bank RM450k (plus the interest calculated based on it).
You start to look for prospective buyers for this property you bought, hoping to find someone willing to pay RM600k for it as well as accept a handover time of 2 years from now. This way, you make an easy (if you consider this as easy) RM100k in profit.
A few things can happen from here.
The Ideal Scenario
You find a buyer who is fine with your terms, you sell the property for RM600k before your loan installments begin, and you settle your loan of RM450k without paying any interest. If the 10% was rebated by the developer, you made RM150k!
The Better Than Nothing Scenario
You're only able to find a buyer who is willing to pay RM500k for the property, you settle your loan before installments begin, and you make RM50k if the initial 10% was rebated. If it wasn't, you gain and lose nothing for the price of going through some hassle.
Or, you're only able to find a buyer who is willing to buy the property for RM600k a year after your loan installments have started. You immediately settle the loan, but you've already paid a year of principal and interest, taking about RM30k off the profit you make (on top of the pain it caused you to have to pay RM3k every month until you found a buyer).
The Fail Scenario
Property value plummets during the DIBS period and no one wants to buy your property. Even if you sold it, you'd actually lose money, so you're forced to either give up and take your losses while they're small, or move in yourself and pay the remainder of the loan (25 or 30 years or whatever) with higher interest.
The Completely Screwed Scenario
Dodgy Properties Berhad goes bankrupt and cannot finish the construction even though they've been funded by the sales of all the units. RM100k has already been disbursed to the developer by the bank, so you end up having to pay the bank back RM100k plus the interest for it, and have nothing to show for it. It's like you just threw money into the trash.
I hope this gives you a better idea of what DIBS is all about and that it provides you with some insight for when you're property hunting.
And again, please remember I am NOT an expert on the subject matter and it is entirely possible that not everything I wrote is accurate.
HAPPY INVESTING!!
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