Many of you have probably heard the terms "defective properties" or "properties with a reason" in the real estate market. These properties, which are often sold at a lower price than ordinary properties, sometimes attract attention among investors and homebuyers. However, their actual condition, legal status, and transaction precautions are often not fully understood.
Defective properties are generally defined as "real estate that lacks the quality or performance that it should normally have. There are four types of defects: psychological defects, physical defects, environmental defects, and legal defects, each with different characteristics, notification obligations, and price implications. Especially in recent years, accurate information disclosure regarding these defects is strongly required from the viewpoint of improving transparency of real estate transactions and consumer protection.
This article provides an easy-to-understand explanation from a professional perspective, from the definition of a defective property to specific examples of each type, the scope of the obligation to notify, price quotations, advantages and disadvantages at the time of purchase and sale, and investigation methods. We hope you will gain knowledge to avoid unexpected troubles and make appropriate judgments in real estate transactions.
A defective property is legally defined as "real estate that lacks the quality or performance that it should normally have. The word "defect" means "flaw" or "deficiency" and is also commonly referred to as "property with a reason.
Defective properties are classified into four major categories depending on the nature of the defect. Each type of defect has a different impact on the value of the property and the terms of the transaction, so it is important to understand the differences when involved in a real estate transaction.
| Types of Defects | Definition | Examples |
|---|---|---|
| Psychological Defects | Factors that cause psychological anxiety or aversion, such as incidents or accidents that occurred in or around the property | Suicide, other murders, lone death, accidental death, etc. |
| Physical Defects | Physical defects or defects of the building or land | Leaks, termite damage, structural defects, ground subsidence, etc. |
| Environmental Defects | Problems arising from the surrounding environment | Noise, odor, lack of sunlight, radio wave interference, proximity to objectionable facilities, etc. |
| Legal defects | Problems related to laws and regulations | Violation of the Building Standard Law, violation of road access obligations, ownership issues, unclear boundary lines, etc. |
Defective properties tend to have a lower market value compared to ordinary properties. This is because the presence of defects affects the property's attractiveness and future asset value. However, many people see the price difference as an opportunity to invest or acquire a home.
In real estate transactions, sellers and lenders have a "duty of notification" to inform buyers and tenants of defects. Failure to comply with this duty to notify may lead to legal trouble later on, so it is very important to ensure the transparency of the transaction.
Psychological defects are defects that may cause psychological anxiety or a sense of dislike due to events that occurred in the past, although there is no problem with the quality or performance of the property itself. Many so-called "accidental properties" fall under this category.
Typical examples of psychological defects include suicides, homicides, and solitary deaths in the property. According to the Ministry of Land, Infrastructure, Transport and Tourism's "Guidelines for Notification of Deaths by Real Estate Agents," in principle, natural deaths and deaths resulting from unforeseen accidents in daily life are not subject to notification, but suicides, homicides, and deaths that require special cleaning must be notified.
The period of notification obligation for psychological defects is generally three years from the discovery of the incident in the case of rental transactions, but there is no clear period in the case of sales transactions. Generally, it is considered that a longer period of notice is imposed in the case of sales transactions.
Since psychological defects are invisible, there is an aspect where one has to rely on notification from the real estate company or the seller/lessor. Therefore, it is important to confirm whether or not there is a "notice" before the transaction, and to ask for an explanation of the detailed contents.
Physical defects are physical defects or defects in the building or land. This is a relatively easy-to-understand defect that can often be detected by visual inspection or investigation by a specialist.
Examples of physical defects include
While some physical defects can be resolved through repairs or renovations, fundamental defects such as structural problems may require a large amount of money. Therefore, it is recommended to request a professional building inspection (home inspection) before purchasing a property.
There is no time limit on the obligation to notify the buyer of physical defects, and the seller must notify the buyer of all physical defects of which he/she is aware. However, normal wear and tear due to age-related deterioration and defects that can be easily detected with ordinary care may not necessarily be subject to the obligation to notify.
Environmental defects refer to problems arising not from the property itself but from the surrounding environment. It is a factor that affects the comfort and quality of life in the living environment, and is often overlooked when selecting a property.
Examples of environmental defects include
Environmental defects are often difficult to notice in a single visit, so it is important to visit the property multiple times at different times of the day and on different days of the week. In addition, checking the surrounding facilities and interviewing local residents are also effective methods of investigation.
Regarding the obligation to notify environmental defects, the real estate agent and seller must be notified to the extent that they are aware of the defects, but since it is difficult to ascertain all environmental factors, it is also important for the buyer to conduct his or her own investigation.
Legal defects refer to problems related to laws and regulations such as the Building Standard Law and the Urban Planning Law. These defects may result in restrictions on future rebuilding or expansion of the property, or in the worst case, they may be subject to administrative guidance or correction orders.
Examples of legal defects include
Legal defects are difficult to detect without specialized knowledge and can lead to major problems in the future, so special attention should be paid during real estate transactions. Checking the certified copy of the registry at the Legal Affairs Bureau or checking the history of building confirmation applications at the Building Guidance Section of the local government are effective methods of investigation.
Legal defects must also be notified, and any legal issues that the seller or real estate agent is aware of must be explained to the buyer. Particularly important matters are subject to "explanation of important matters" based on the Building Lots and Buildings Transaction Business Law.
| Types of defects | Obligatory notice period (lease) | Obligation to notify period (sales) | Method of Detection |
|---|---|---|---|
| Psychological defects | Generally 3 years | No clear time limit (to be determined on an individual basis) | Confirmation of the matters to be notified, interviews with neighboring residents |
| Physical defects | No time limit | No time limit | Visual check, building inspection by a specialist |
| Environmental defects | Notified to the extent known | Notification to the extent recognized | Multiple site visits, survey of surrounding environment |
| Legal defects | No time limit | No time limit | Confirmation of the registration certificate, investigation by the local government |
The price of a defective property tends to be lower than that of a general property, depending on the type and degree of the defect. While this price difference is an attraction for investors and home buyers, it can also be a challenge when selling in the future.
The price of a defective property is generally 50-80% of the market price, but it varies greatly depending on the type and degree of defect. Especially in the case of psychologically defective properties, the degree of influence on the price varies depending on the severity of the case.
| Type of Defect | Price Influence (compared to the general market price) | Remarks |
|---|---|---|
| Psychological defect (suicide, murder) | 30-50% of the market price | Varies depending on the newness and severity of the case. |
| Psychological defect (lonely death, natural death) | 10~20% (depending on the time until the discovery of the defect and the clean-up condition) | Variable depending on the period of time until the discovery and the cleaning conditions. |
| Physical defects | -20～40% (depending on the possibility of repair and the cost) | Varies depending on the possibility of repair and the cost |
| Environmental defects | -10~30% depending on the severity of the problem and the possibility of remediation | Depends on the severity of the problem and the possibility of improvement |
| Legal defects | 20-50% (varies depending on the size of the legal risk) | Varies depending on the magnitude of legal risk. |
Among psychological defects, the price of a property where a gruesome incident such as suicide or murder has occurred may fall by 30-50% compared to the general market price. On the other hand, in the case of solitary death or natural death, the price often drops only 10-20%.
In the case of physical defects, the estimated repair cost is an important factor in pricing. For example, if the problem is repairable, such as a leak or termite damage, the cost of repair plus an additional discount is usually the price reduction.
Environmental defects will affect the price depending on the severity of the problem and the possibility of remediation. For example, a temporary noise problem will have a small impact on the price, but a constant bad odor or lack of sunlight will be a major factor for the price decline.
For legal defects, the price will be affected by the magnitude of future risks. In particular, properties that cannot be reconstructed and properties that violate road access obligations have a significant impact on future property values, which can lead to significant price declines.
The price of defective properties varies depending on the region. In urban areas, demand for properties is generally high, so the rate of price decline tends to be relatively small even if the property has defects. On the other hand, in rural areas, demand is limited, so the rate of price decline for defective properties can be large.
In addition, the perception of psychological defects differs depending on local culture and customs, which may be reflected in the price. For example, the rate of price decline for properties with psychological defects tends to be higher in areas where spiritual elements are more important.
In recent years, the real estate market has become more rigorous in terms of notification regarding defects in order to improve transparency of information disclosure and to protect consumers. In particular, in 2021, the Ministry of Land, Infrastructure, Transport and Tourism formulated the "Guidelines for Notification of Death of a Person by a Building Lots and Buildings Transaction Business Operator," which clarified the standards for notification of psychological defects.
Meanwhile, the market for defective properties is also changing due to the increase in the number of vacant houses caused by the declining birthrate and aging population. The problem of vacant houses is becoming more serious, especially in rural areas, and property prices are declining regardless of whether the property has defects or not.
In the investment market, "value-up investment," in which defective properties are actively purchased and their value is increased through renovation or change of use, is also attracting attention. In particular, since physical defects can be resolved through appropriate repairs, they are increasingly being considered as investment targets.
Defective property transactions have unique advantages and disadvantages that differ from ordinary real estate transactions. By understanding them correctly, you will be able to make a decision that suits your needs and situation.
Price Advantage
The biggest advantage of a defective property is that the price is lower than that of a regular property in a comparable location and size. In particular, a significant discount can be expected for psychologically defective properties, even though there is no problem with the quality or performance of the property itself. By taking advantage of this price difference, it is possible to obtain a property in a better location or with a larger floor plan within your budget.
Potential as an Investment
From an investment point of view, properties with defects can be a target with high yield potential. In particular, physically defective properties can increase in value through appropriate renovations. In addition, since psychological defects tend to lose their influence in the market over time, asset value can be expected to recover through long-term ownership.
Less Competition
Defective properties tend to be shunned by prospective buyers in general, so there is also the advantage of less competition. Even in popular areas where bidding often becomes competitive for ordinary properties, transactions may proceed relatively smoothly for properties with defects.
Psychological burden
Especially in the case of psychologically defective properties, the psychological burden of actually living in the property cannot be ignored. In properties where suicides or other murders have occurred, there is a possibility that you may feel anxiety or fear when actually living in the property, even if you understand the situation as knowledge. In addition, the explanations given to visitors and the eyes of the surrounding community are also factors to be concerned about.
Issues at the time of future sale
Defective properties may require notification of the defects at the time of future sales, which may affect the sale price and the duration of the sale. Especially in the case of psychological defects, the property value may be affected for a long period of time because the period of notification obligation is not clearly defined for sales.
Financing Restrictions
Defective properties, especially those with legal defects, may make it difficult to obtain a mortgage loan. Financial institutions place importance on collateral value and tend to restrict financing for properties with uncertain future asset values.
Obligation to Notify and Legal Liability
When selling a defective property, you are obligated to accurately notify the buyer of the defects. If this duty of notification is neglected, a claim for damages or cancellation of contract may be demanded by the buyer after the contract is concluded. In particular, there is a risk of being accused of fraud if you intentionally conceal a serious defect.
How to Set a Fair Price
It is not easy to set a fair price for a defective property. Instead of simply subtracting a certain percentage from the market price, it is necessary to comprehensively consider the type and degree of defects, the period of time elapsed, and the location of the property. It is important to consult with a professional real estate company to set an appropriate price.
Lengthening of the sale period
Compared to ordinary properties, properties with defects tend to be sold over a longer period of time. In particular, since buyers are limited for properties with psychological defects, it is necessary to assume that it will take a long time to sell the property. If you need to sell the property in a hurry, using a real estate buyer is an option.
| Checkpoints | At the time of purchase | At the time of sale |
|---|---|---|
| Types and degrees of defects | Check the specific details of the defects and the extent of their effects. | Include accurate information in the notice |
| Scope of obligation to notify | Confirm the contents of the notice from the seller/real estate company | Notify all known defects |
| Fairness of the price | Confirm that the discount is commensurate with the degree of defects | Set a fair price considering the defects |
| Possibility of repair/improvement | Consideration of how to eliminate or reduce defects | Implement possible repairs to increase the value of the property. |
| Possibility of financing | Consult with financial institutions in advance | Support buyer's financial planning |
| Future asset value | Predicts long-term value fluctuations | Explanation of possible future value recovery |
| Neighborhood environment and reputation | Confirms the perceptions of nearby residents and the reputation of the community | Promote the good qualities of the community as well |
In order to properly determine a defective property, it is essential to collect accurate information. Below we explain the methods and checkpoints for investigating a defective property.
In real estate transactions, real estate agents are obligated to explain defects of properties in the "Important Matters Explanation. However, in order to obtain more detailed information, it is important to proactively check the following points.
Especially for psychological defects, the real estate company will only inform you of the extent that they are aware of, so it is important to ask specific questions such as "Have there been any fatal accidents at this property? It is important to ask a specific question such as "Have there been any deaths in this property?
Research using the Internet is also effective. Use the following methods to gather information.
However, information on the Internet is not always accurate, so it is important to check multiple sources of information.
It is also important to actually visit the property to confirm the property. Keep the following points in mind when conducting a survey.
It is especially important to take time to carefully check physical and environmental defects, as these can often be discovered through on-site inspections.
In order to detect defects more reliably, you should consider receiving support from a specialist.
Especially when purchasing an expensive property or an old building, requesting an investigation by a specialist can prevent future problems.
| Survey Items | Check method | Degree of importance |
|---|---|---|
| Existence of psychological defects | Check the notice, ask questions to the real estate company, search the Internet | ★★★★★ |
| Physical defects | On-site inspection, home inspection, check repair history | ★★★★★ |
| Existence of legal defects | Confirmation of the copy of the registry, confirmation of the building confirmation application history, confirmation of legal compliance | ★★★★★ |
| Environmental Defects | On-site inspection (multiple times), check surrounding facilities, check hazard map | ★★★★ |
| Past repair history | Confirmation of management association minutes, request for disclosure of repair history | ★★★★ |
| Reputation of neighboring residents | Interview nearby residents, check local bulletin boards and SNS | ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ |
| Future development plans | Check with local government's urban planning department and confirm public notice information | ★★★★ |
| Disaster risk | Check hazard maps, check past disaster history | ★★★★ |
Defective properties (properties with a reason) are classified into four types: psychological defects, physical defects, environmental defects, and legal defects, each with different characteristics and effects. These properties tend to be traded at a lower price than the general market price, but there are various risks and issues behind this.
The following are important points to keep in mind when dealing with defective properties:
1. accurate information gathering and understanding of defects: It is important to confirm the details of the notice from the real estate company and request a professional investigation if necessary. 2.
(2) Understanding the duty to notify: The seller/lessor has a duty to notify the buyer/lessee of any defects, and failure to do so may lead to legal trouble. In particular, the period of notification obligation for psychological defects is generally 3 years in the case of lease, while there is no clear time limit in the case of sale and purchase, and it is determined on an individual basis. 3.
(3) Appropriate evaluation of price: The price of a defective property is generally 50-80% of the market price, but it varies greatly depending on the type and degree of defects. Appropriate pricing and valuation are important.
4. comparative study of advantages and disadvantages: While there are price advantages and investment potential, there are also psychological burdens and challenges when selling in the future. It is necessary to make a decision according to one's own needs and circumstances.
5. use of research methods: It is important to make a comprehensive decision by combining multiple methods, such as checking with a real estate agent, internet research, on-site research, and consulting with a specialist.
Defective properties are not generally "something to be avoided," and it is important to understand their characteristics before making an appropriate decision. Although it can be viewed as an opportunity to acquire a home with a price advantage or as an investment opportunity, future risks and psychological effects must also be considered.
A real estate transaction is one of life's biggest decisions. When considering a property, especially one with defects, we recommend that you gather sufficient information and seek professional advice to make a prudent decision. We at INA & Associates, Inc. provide consultation services on real estate transactions, including defective properties, so please do not hesitate to contact us.
Legally, sellers and real estate companies are obligated to notify buyers of defects. However , in practice, not all defects are always notified due to the seller's own lack of awareness of the defects or differences in interpretation of the scope of the duty to notify.
Especially for psychological defects, the Ministry of Land, Infrastructure, Transport and Tourism established the "Guidelines for Notification of Death of a Person by a Building Lots and Buildings Trader" in 2021 to clarify the notification standards, but there are cases in which no notification was made before that time.
When considering purchasing a property, ask clearly, "Are there any notices?" and confirm the contents of the notice in detail. It is also recommended that you conduct your own investigation to the extent possible.
If a defect that was not notified before the contract is made is discovered after the purchase, it is possible to take action based on the "liability for nonconformity to contract" under the Civil Code. Specifically , the following options are available
However, there is a time limit for these claims, and they must be exercised within one year from the date of knowledge of the defect. In addition, there are cases in which the seller is not held liable for defects that the seller did not know about or that the buyer could have discovered with ordinary care.
If a defect is discovered, it is recommended to first collect evidence and consult a specialist (such as a lawyer).
The period of obligation to notify of psychological defects differs between leasing and sales.
In the case of leasing, according to the guidelines of the Ministry of Land, Infrastructure, Transport and Tourism, the period is "approximately three years from the discovery of the incident.
On the other hand, in the case of sales and purchases, there is no clear time limit, and each case is judged on an individual basis, taking into consideration the seriousness of the case, the period of time elapsed, changes in the surrounding environment, and other factors. In general, it is believed that a longer period of notice is imposed in the case of sale than in the case of lease. In some court cases, the obligation to give notice has been imposed even when more than 10 years have passed.
However, these are only guidelines, and judgments may differ depending on the content of the case and its social impact.
Although it is possible to obtain a mortgage loan for a defective property, the screening process may be more severe or the loan amount may be limited depending on the type and degree of defect.
In particular, properties with legal defects (e.g., violations of the Building Standard Law or properties that cannot be rebuilt) may be considered to have future collateral value problems, making it more difficult to obtain a mortgage loan.
In the case of psychologically defective properties, if there is no problem with the quality or performance of the property itself, there is no significant impact on the mortgage loan approval in many cases, but the response differs depending on the financial institution.
In the case of physical defects, if the property is repairable, you may be able to obtain a loan by submitting a repair plan.
When considering the purchase of a defective property, it is recommended to consult with several financial institutions in advance to confirm the possibility of financing.
When purchasing a defective property, special attention should be paid to the following points
Purchasing a defective property requires more careful judgment and specialized knowledge than normal real estate transactions. If you have any questions, we recommend that you consult with a specialist and make a decision after gathering and reviewing sufficient information.
A real estate transaction is one of the biggest decisions you will make in your life. Especially when considering a defective property, we recommend that you make a careful decision after gathering sufficient information and receiving expert advice. We at INA&Associates, Inc. provide consultation on real estate transactions including defective properties, so please do not hesitate to contact us. From property selection to contracting and follow-up, we will assist you in protecting your valuable assets.