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Death of Korea's 'apartment king' leaves 100s in property purgatory

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Re: Death of Korea's 'apartment king' leaves 100s in property purgatory

#31

Post by hocuspocus »

skim1420 wrote: post #18
Eisenstein wrote: post #2

Can someone explain how this 'Jeonse' system works? The article is vague -- it states that a large deposit is required equal to around the price of the entire property, but why? Do they still have to pay rent? Why won't they get their deposit back if the state takes ownership? Shouldn't huge deposits be in escrow? None of this makes any sense to me.

In Seoul in the late 90s I paid some $50K equivalent jeonse for a ~1000 sqft apt, with no further monthly rent. From what I understood, the landlord can make back something equivalent to rent via common interest rates. I was young and frankly didn't understand the exposure or workings at play in this article. Historically, in Korean culture it was very common for the extended family to live together. When a child mar…

> Jeonse is far less than the amount required to buy a place

That depends on interest rates. I lived in Korea between 2010 and 2015 and in the end jeonse really didn't make sense anymore. I had a German coworker who went straight from company paid housing to buying his own place after two years, which is not easy as a foreigner. I regret not doing the same. Of course if you look at the higher end of the market, the relative difference can still be fairly substantial. But I lived in an area where you could buy an apartment for say 200M KRW while the jeonse would be 190.

Re: Death of Korea's 'apartment king' leaves 100s in property purgatory

#32

Post by Keyframe »

bane wrote: post #20
Eisenstein wrote: post #2

Can someone explain how this 'Jeonse' system works? The article is vague -- it states that a large deposit is required equal to around the price of the entire property, but why? Do they still have to pay rent? Why won't they get their deposit back if the state takes ownership? Shouldn't huge deposits be in escrow? None of this makes any sense to me.

The Jeonse system, sometimes called "key money" is one of the various systems in South Korea that people use to get access to incredibly expensive housing in lieu of purchasing it. In a basic sense it's a long-term loan to the property owner, usually in the amount of 70-80% of the total property value, that you get back at the end of your lease. In exchange the following things happen: - The property owner get lots o…

The tenant gets all of their money back at the end of the lease.

Wild inflation rate appears.

Re: Death of Korea's 'apartment king' leaves 100s in property purgatory

#33

Post by [deleted] »

JCharante wrote: post #22
xyzzyz wrote: post #16

Earlier quoted context omitted.

It does not. The landlord can just invest the deposit, and then return the principal to the tenant when he leaves, keeping the interest.

At that point how is it better than the tenant investing the jeonse money and using the returns from the investment to pay rent?

[deleted]

Re: Death of Korea's 'apartment king' leaves 100s in property purgatory

#34

Post by hocuspocus »

cypherpunks01 wrote: post #14

Not sure I understand - don't these tenants have first position liens on the properties they live in? So failure to repay their deposits will result in them owning the property outright?

Second position. Tenants will likely lose the difference between the market value and the outstanding balance plus jeonse.

I was in a similar position and was advised against waiting for the property to be auctioned off and try to buy it myself.

Note: outside of a few neighborhoods, most apartments in Korea don't really appreciate in value. People want to buy new.

Re: Death of Korea's 'apartment king' leaves 100s in property purgatory

#35

Post by victorology »

Here's an example to explain jeonse. An apartment might have a purchase price of $500k and a jeonse "rental" price of $300k. If you rent under jeonse, you pay this $300k deposit to move into the apartment and you get it back fully when the lease expires. You could also pay monthly rent for $2k a month if you choose to rent on a monthly basis with low deposit.

Tenants like to rent under jeonse because it feels like free rent. The reality is that many tenants need to take out loans to make the jeonse deposit amount. Landlords make more with monthly rent because $2k of monthly rent is a higher return than you can make than receiving a $300k lump some to invest over the two year contract.

The reason why landlords rent under jeonse usually becomes they are really betting on property price appreciation. For the landlord to buy a $500k apartment, they only need to come up with $200k. They can use the $300k jeonse for the rest. When real estate prices increase, things go well. The apartment price appreciates to $800k and 2 years later, they can increase the jeonse price from $300k to $500k. Now you have $200k in extra cash to invest in your next property.

The opposite happens when real estate prices go down as they have been for the past 6-12 months. A landlord rented their property for $300k jeonse but now that prices have depreciated, they can only receive $200k on the market. When the current tenant's lease expires, they are supposed to get the $300k back but the landlord doesn't have this amount available in cash. They need to find a new renter and get money from them first.

With low interest rates, people could afford high jeonse amounts. These high jeonse amounts would lead to properties appreciating even more which would lead to even higher jeonse amounts. Now, interest rates are rising and you see cases like these.

Re: Death of Korea's 'apartment king' leaves 100s in property purgatory

#36

Post by kijin »

jandrese wrote: post #9
Scoundreller wrote: post #4

Earlier quoted context omitted.

Recent explanation I read is here: https://mobile.twitter.com/AnthonyLeeZhang/status/1613977673...

So basically it is yet another scheme that only works well when the market moves monotonically upward, and when there is a downturn it's a crisis? Everybody is a genius is a bull market. The fact the landlord passing unexpectedly is also a crisis suggests this is not a well structured system. What is extra weird is that the renters are paying the landlord considerably more than they would need for a downpayment on a…

The trick is that you can get a loan to pay the jeonse deposit. The interest rate for jeonse loans is considerably lower than for a regular mortgage, and until recently even lower than paying rent, because these loans are effectively guaranteed by the landlord who is contractually obligated to return the money.

So if you simply wanted to live in a certain area for a while and not get tied down by the legal burden of ownership, getting a jeonse loan would have been a steal compared to a regular mortgage or even renting.

My first jeonse deposit was $90K, $60K of which I borrowed from a bank. Interest on that loan was less than $150/mo. Rent on a comparable apartment would have been upwards of $500/mo at the time. Of course you can't get this kind of deal nowadays, but the scheme made a lot of sense when it worked.

Re: Death of Korea's 'apartment king' leaves 100s in property purgatory

#37

Post by kijin »

Eisenstein wrote: post #30
bane wrote: post #20

Earlier quoted context omitted.

The Jeonse system, sometimes called "key money" is one of the various systems in South Korea that people use to get access to incredibly expensive housing in lieu of purchasing it. In a basic sense it's a long-term loan to the property owner, usually in the amount of 70-80% of the total property value, that you get back at the end of your lease. In exchange the following things happen: - The property owner get lots o…

I don't understand how a mortgage is out of the question but they can come up with a lump sum of 80% of the property value. Where does this money come from? If they can come up with that and the market is great why not stay at YMCA and invest it for two years and get the entire sum to pay for the property? Your reasoning doesn't mesh with my way of thinking, which is obviously very different since I didn't grow up un…

Jeonse money is usually borrowed, too. At a much lower interest rate than you would get for a typical mortgage, because the landlord effectively guarantees that loan. Until recently, it's been much cheaper to pay interest on a jeonse loan than to pay rent.

Typical jeonse tenants start with savings equal to 10-20% of the value of the property. (To buy an apartment, on the other hand, they would need a down payment of at least 30-40% due to LTV restrictions.) They borrow the rest of the deposit from a bank. The landlord takes that money and adds their own loan to buy more houses, invest in coins, or whatever. So everything is leveraged at least twice. Of course this scheme all crumbles down when interest rates go up and property values drop.

Re: Death of Korea's 'apartment king' leaves 100s in property purgatory

#38

Post by wruza »

bane wrote: post #20
Eisenstein wrote: post #2

Can someone explain how this 'Jeonse' system works? The article is vague -- it states that a large deposit is required equal to around the price of the entire property, but why? Do they still have to pay rent? Why won't they get their deposit back if the state takes ownership? Shouldn't huge deposits be in escrow? None of this makes any sense to me.

The Jeonse system, sometimes called "key money" is one of the various systems in South Korea that people use to get access to incredibly expensive housing in lieu of purchasing it. In a basic sense it's a long-term loan to the property owner, usually in the amount of 70-80% of the total property value, that you get back at the end of your lease. In exchange the following things happen: - The property owner get lots o…

It works because unlike renting, you aren't simply burning your money in a fire every month, you get it back and can add any savings made during the lease to that value to either find another place to Jeonse, or buy a property if you have enough.

I don’t get the economics here. It doesn’t matter who manages the money (apart from the fact that your savings go to someone who is barely able to assess risks), the landlord only keeps the average interest. Why can’t a tenant invest the money themselves and pay the interest to the landlord as usual? Why transfer a principal part as a loan? It doesn’t make a better interest rate.

Jeonse scheme sounds crazy to me: you basically provide a loan to an individual - one of the worst risks in my book, which has indeed bitten hundreds of asses according to $title. Individuals die, disappear, go bankrupt, go to jail, become motivated to screw you. Personally I wouldn’t give more than $1k to a random individual without a proper collateral, no matter how good the legal system works. Trusting them all your savings? That’s insane.

Re: Death of Korea's 'apartment king' leaves 100s in property purgatory

#39

Post by jmoak3 »

victorology wrote: post #35

Here's an example to explain jeonse. An apartment might have a purchase price of $500k and a jeonse "rental" price of $300k. If you rent under jeonse, you pay this $300k deposit to move into the apartment and you get it back fully when the lease expires. You could also pay monthly rent for $2k a month if you choose to rent on a monthly basis with low deposit. Tenants like to rent under jeonse because it feels like fr…

Thank you for the explanation and examples

Re: Death of Korea's 'apartment king' leaves 100s in property purgatory

#40

Post by narrator »

victorology wrote: post #35

Here's an example to explain jeonse. An apartment might have a purchase price of $500k and a jeonse "rental" price of $300k. If you rent under jeonse, you pay this $300k deposit to move into the apartment and you get it back fully when the lease expires. You could also pay monthly rent for $2k a month if you choose to rent on a monthly basis with low deposit. Tenants like to rent under jeonse because it feels like fr…

The only reason property prices go up so much is because they are collateral for loans. When the government is growing the money supply and rates are falling the amount of credit and loans in the economy is increasing so things that can be bought with loans increase in price. The reverse happens when they raise rates.
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