Time and again, due to a general lack of knowledge of the real estate industry, Nigerians and foreigners alike, either get defrauded investing their income in the wrong markets or express hesitancy in investing, as a result of the legal regime and relative opaqueness in the industry, this doesn’t have to be the case.
There are steps you can take to invest successfully in real estate, that if followed judiciously, yields desirable results.
This article explores the types of real estate, the different ways in which potential investors can invest in real estate, stages involved in real estate investment.
TYPES OF REAL ESTATE
Real estate is categorized into the following:
- Raw land, and
- Special use.
INVESTING IN REAL ESTATE
By purchasing a home, rental property or other property, one can invest in real estate directly. A potential investor can also invest indirectly through a real estate investment trust (REIT) (CHEN, 2021).
The good thing about real estate is that prospective owners can “buy property using leverage, paying a portion of its total cost upfront, then paying off the balance over time” (ASHWORTH, 2021). This is a great advantage for people who have multiple interests, people who do not have bulk money but are passionate about investing what they have. This way, low income earners can still aspire to have an investment portfolio.
WHAT POTENTIAL REAL ESTATE INVESTORS MUST CONSIDER DURING THE ACQUISITION OF LAND
Investing in Real Estate in Nigeria is notorious for the difficulty associated with the entire process. From finding vendors, to verifying the legitimacy of said vendors, etc., prospective investors must ensure that they do due diligence, otherwise, investors risk losing their money to fraudulent individuals, ending up with a bad title to property or even lifelong litigation.
For an evergreen industry, it is not surprising that its traction continues to grow monumentally, especially in mega cities like Abuja, Lagos, port harcourt, etc. in the past few years, where there has been a bullish growth in the number of real estate investors, both domestic and foreign individual as well as corporate bodies, as population growth continues to heighten, among other economic factors.
According to the (Department of Strategic Communications , 2021) of the Nigerian Investment Promotion Commission (NIPC), the real estate, power, manufacturing and agriculture sectors received $8.35 billion worth of investment in the first quarter of 2021, as they made the top 4 investment destinations.
For potential investors, it is very important to put certain elements in mind before engaging in the business of real estate investment in Nigeria.
The foremost elements to consider are:
- THE LEGAL SYSTEM:
Potential Real Estate investors must acclimatize themselves with the legal regime governing property ownership and possession in Nigeria. This means understanding the constitutional provision regarding land ownership, the Federal statutes as well as the Land Use Laws, tenancy laws of various states of the Federation.
To begin with, the Constitution of the Federal Republic of Nigeria 1999 Cap C23, Laws of the Federation of Nigeria (“LFN”) 2004 (as amended) grants every Nigerian the right to own and acquire real property/estate in any part of the country.
The Land Use Act 1978, Cap L5, Laws of the Federation of Nigeria, 2004
This is the principal law enacted to regulate ownership of real estate in Nigeria. This law vests the power to control and administer all land situated within a geographical area of a state in the State Governor for the benefit of the citizens (Jegede, 2021).
It enhances the principle of leasehold by which land in each state is vested in the governor of a state, to be held in trust for the benefit of Nigerians within the state (Oladale Oladunjoye, 2020). By virtue of this law, “the Governor can grant a right of ownership for individuals and corporate bodies to hold and use the land for a limited-term and such grant is evidenced by the issuance of a Certificate of Occupancy or Governor’s Consent (Jegede, 2021).
As provided under Section 22 of the Act, the consent of the Governor of the state where the land is situated must be obtained to transfer any interest in land.
Land rights in Nigeria may be proprietary, possessory or may relate to lesser interests. The recognized rights over land in Nigeria broadly include:
- Right of Occupancy: A right of occupancy refers to the right granted to a holder to occupy land for a period of up to 99 years as evidenced by a Certificate of Occupancy.
- Assignment/Leasehold: Registered owners of land are at liberty to either assign the unexpired residue of their existing interest or grant a sub-lease for a limited number of years. Assignments and leases are usually contractual.
- Easements: An easement, also known as a right of way, is a property right which confers a non-possessory interest to use real property in the possession of another person for a stated purpose (Oladale Oladunjoye, 2020).
- POINT OF PURCHASE
Here, the potential investor must fulfill the following conditions:
- Ascertain the nature of the title of the vendor, interest to be alienated, the capacity of the vendor, the physical condition of the land
- Investigate whether there is pending litigation on the land
- Discover if the land is under government acquisition and if there are encumbrances on the land
- Employ the services of a legal practitioner to ensure that the above are duly carried out with the utmost diligence.
This is usually the next step after the land has been purchased. When the land interest to be transferred is above three years, transactions must be “be evidenced in writing and by a deed duly executed between transacting parties” (Jegede, 2021).
- PERFECTING THE TITLE OF INTEREST
This is the final stage. The purchaser/investor, at this stage, must fulfill all of the related financial obligations for the perfection of the title such as associated costs and taxes.
The perfection of the title involves certain stages such as:
- Governor’s consent– The Land Use Act provides that a statutory holder of occupancy must obtain the Governor’s consent of the State where the real estate is located for a valid transfer of an interest in real estate by way of assignment, mortgage, lease, sub-lease, or otherwise. The official fees payable for the grant is usually between 1% to 2% of the assessed value of the property.
- Stamping of the document- Under the Stamp Duties Act, the stamping of transfer of an interest in real estate documents must be done within 30 days of execution of the deed of transfer instrument. Stamping of the document is a condition to be satisfied for registration of transfer of an interest in the land document.
- Registration of document– Registration is a compulsory process for deed of transfer of interest which involves registering the holder of an interest in real estate as the owner to the exclusion of others.
Registration of transfer of an interest in land must be done within 60 days of execution of the deed of transfer. The transfer instrument submitted for registration must have Governor’s consent endorsed on it. An unregistered title document may lose priority against a subsequent instrument that is registered since registration governs priority. It is also important to state that an unregistered deed is not invalid; however, it is inadmissible in court as evidence of proof of title. The process of registration involves the submission of the required application to the Land Bureau of the state where the land is located (Jegede, 2021).
- (BUYING AND OWNING) RENTAL PROPERTIES: This entails building or buying an already built house for rental purposes. Tenants can be managed through one’s solicitors. It is a regular source of income, depending on how fast one is able to fill up vacancies. Again, it requires occasional renovation due to the wear and tear that would naturally occur. To avoid incurring unnecessary losses, it is advisable to include a refundable caution fee when tenants move in the first time. Nevertheless, the property would appreciate, if managed properly, and this can lead to a steady boost in the owner’s income.
- REAL ESTATE INVESTMENT GROUPS (REIGS):
The beauty of this is that owners do not have to bother with managing the properties. However, it is quite cost-intensive and “requires a capital cushion and access to financing” (BEATTIE, 2021)
For this sort of investment, the process usually involves a group of investors who pool resources together as stated above. (BEATTIE, 2021) notes that, “In a typical real estate investment group, a company buys or builds a set of apartment blocks or condos, then allows investors to purchase them through the company, thereby joining the group.”
The success of this venture naturally depends on the managing company whose duties encompass “managing the units, handling maintenance, advertising vacancies, and interviewing tenants”. (BEATTIE, 2021) The company, in turn, collects an agreed percentage of the rent in exchange for carrying out the above stated tasks.
This system also gives investors an opportunity to own one or multiple units of living space. The biggest risks associated with this are inefficient managers and very long term vacancies.
- HOUSE FLIPPING:
Also known as Fix and Flip, this strategy allows an investor “to buy a dilapidated or old property, usually a house or shopping complex, at a lower price, renovate same and then sell at a higher price.” (DRADROCK REAL ESTATE LIMITED, 2020)
This is an age-long practice in Nigeria and works best “for people with significant experience in real estate valuation, marketing, and renovation.” (BEATTIE, 2021). One of the most important aspect that investors keep in mind is only buying houses which have intrinsic value, this way they do not have to spend so much on renovations and are able to make profit after sales.
And although, it offers quick returns and does not tie up capital for too long, it requires deeper market knowledge and can lead to a massive loss if previously highly-rated properties suddenly plummet for some reason.
- JOINT VENTURES
Multiple parties occasionally come together to combine resources to execute a real estate project. This is known as a real estate joint venture.
This system gives room for real estate operators to work with individuals willing to supply the required capital for the project.
The real estate operators, also known as Operating Members, are highly experienced professionals in the real estate sector whereas the Capital Members finance most or even the entire project.
Joint ventures also occurs, where a party has a land and has no finance to develop it, in which case, he gets a financier to develop and profits shared at an agreed ratio.
The joint venture agreement is signed by the parties. The agreement contains the details of the conditions of the joint venture such as its objective, the contribution of the capital member, how profit will be split, delegation of management responsibilities, ownership rights of the project etc.
Beside the popular use of the term, ‘mortgage’, it can also refer to a loan used to purchase or maintain a home, land, or other types of real estate. It works just like the usual mortgage, in this case, the property serves as collateral to secure the loan.
A mortgage is a legal document or agreement between an individual and an organization that allows the individual borrow money (loan) for residential needs. This agreement conveys the ownership rights from the owner to the lender until the lender pays back; this is done as a security.
HOW TO ACCESS MORTGAGE FINANCE TO BUY A HOUSE IN NIGERIA
In Nigeria, there are a lot of misconceptions on mortgage finance. A lot of people have either never heard the term ‘Mortgage’ or are entirely against the idea. This is why a great number of people do not know when and how to access mortgages since they do not know what it is nor the operating institutions.
Several organizations in Nigeria offer mortgage loans such as the National Housing Fund (NHF) which is a government scheme set up to alleviate the increasing housing shortage, First Bank Nigeria Mortgages, Trustbond Mortgage Bank, Gateway Savings and Loans, Lagos Building and Investment Company and Global Trust Savings, to mention a few.
Two important points to be considered to help potential applicants access mortgage finance in Nigeria;
- Applicants must have some money (savings) deposited as mortgage institutions do not give applicants the entire money needed for the house; this can also be referred to as down payment.
- Applicants must make sure to have all the important documents that suggest that they would be able to repay the loan. This cannot be stressed as there is an increase in the uncertainty in lending money.
In Nigeria, mortgage institutions are divided into three;
- Federal Mortgage Programmes such as NHF which are provided by the Federal Government to help Nigerians acquire long term loans that are cheap. To access the NHF loan, you have to become an active contributor.
- Primary Mortgage Institutions (PMIs) which solely provide mortgage to people
- Commercial Mortgage Facilities; banks make up this type of mortgage facility.
There are also certain documents that will be required when applying for a mortgage loan. Each document requirement depends on the mortgage institution. Potential applicants would do well to find out the specific requirement needed by the institution they decide to obtain a mortgage loan from.
This occurs when a contractual relationship that arises when the original owner of land/property lets it out to a tenant who further sublets to a third party known as the subtenant or sublessee.
- Online Real Estate Platforms
This takes the form of crowdfunding, and is also known as, real estate crowdfunding. The investment is done via online real estate platforms.
This is novel, fast-growing industry in Nigeria. Even though it requires investing capital, the said capital is usually less than what is required to purchase properties outright.
This strategy also helps investors diversify their portfolio as there is the possibility of investing in various projects in different places without spending too much money; a fitting system for low-income earners. A disadvantage is that investors will be unable to access their funds due to the nature of the investment which has to remain illiquid.
The real estate industry remains one of the fastest-growing part of the Nigerian economy and, therefore, must be taken advantage of by individuals who aspire to own a real estate investment portfolio in an industry that appreciates in triple and sometimes, quadruple-fold. It is advised that apart from doing due diligence, prospective real estate investors must ensure that they employ the services of property law practitioners and estate surveyors and valuation expert. These professionals owe their client the duty to do due diligence on their behalf before the investment is finalized.
*This article is by no means exhaustive, consult a real estate attorney or a registered estate surveyor and valuation expert for Real Estate investment advice.
Sandra Onyia & Martha Braimoh
(Associates at Starlion Legal)
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