11 Due Diligence and Research

11.1 Risk versus Benefit

Much of the land on Lombok was remote, unpopulated jungle about 100 years ago. Little by little, families would clear some land and make it productive. Some land was converted into rice terrace fields, while some was planted with coconut or other fruit trees. Some areas simply was used as grazing land for animals or a home for fishing. When Indonesia grew and needed more tax income, the tax office came to survey populated areas, set property corners and guesstimate the land area to have a basis for property tax. In early time, ownership documents were written on palm leaves in old Sanskrit language. Land that has never been sold outside the first family that settled in an area still may have the proof of ownership written on palm leaves. From the old times that jungle land was opened and claimed as family land, complexities often was introduced when generations shifted. The great-grandfather, who originally opened the land sometimes died without a will. Which heir owned the land was left open to question and could still potentially be an issue, making it very difficult to issue a certificate for the land.

Other events known of making the ownership unclear is when parcels were abandoned or informally sold to another person without proper documentation. It was also common that major landowners allowed family members and friends to build a house on his property. Generations went by and small villages were formed on the land. Sometimes the major landowner died without forcing the family members and friends to move. Who would actually force family and friends to move from land where they have lived for a long time? This very understandable situation makes it very difficult for the major landowner’s heirs to prove who owns clear title of the land. This could potentially cause a lot of issues if the land was offered to be sold to a foreigner for a major amount of money. Before anyone understood what the land was worth, it was probably not an issue, but money has a way of changing people as you know.

The examples above makes the land so called dirty land and true ownership of the land is almost impossible to establish. It is common that dirty land is offered to be sold to naive tourists who eagerly put down a deposit on the land to not miss the opportunity. Soon after the truth is discovered that a certificate can never be issued and the land cannot change ownership. By then, your deposit is long gone.

Other activities that you might have to deal with during the process of buying land on Lombok are:

  • Identifying true land owners
  • Obtaining permission from the head of village (Kepala Desa)
  • Settling ownership conflicts among neighbours and family
  • Paying-off a variety of people associated with the land pruchase
  • Negotiating price
  • Determining exact property boundaries
  • Negotiating settlement terms

Foreign investors must be aware of these risks and make sure to minimise them. The reason for purchasing land on Lombok in spite of these risks is the prospect of a huge reward. Many people have quadrupled their money in the past five years. The price of land on Lombok is about 50-100 times lower than for equivalent land on Bali. Take for example the area around Kuta Bali where land not even close to the ocean or with any view is selling for 3.000.000.000 IDR per are. Beach front land probably is sold for 10.000.000.000 IDR per are if you can find any. Lombok still have parcels of land with panoramic ocean views available at a bargain price.

11.2 Due Diligence

The term due diligence was fairly recently adopted by the real estate business on Lombok. It simply means: Research, analysis or doing your homework. Cynics claim that the term due diligence was adopted because it sounds so professional and that it is used by questionable agents to give an impression of knowing the lingo. Some agents use the term to sell you a package of research and analysis for a higher price. Typical marketing technique to put existing products in a neat box and sell it for a higher price. The most important take away is that you or the one conducting due diligence actually exercise a high standard of care prior to finalising a purchase, which is also fairly similar to the wikipedia definition.

The first and easiest part of due diligence is to examine public records to check that the land has no obvious problems. The second and more time difficult part is to involve and engage the entire neighbourhood to discover hidden problems that may be buried in the brain of a knowledgeable elder.

11.3 Checking Public Records

If the land has an existing certificate it may show that some form of limitation or mortgage has been attached to the land. You must check that the land is currently held with a Right of Ownership (Hak Milik) title. The zoning of the land will mention if the property can be used for your intended use. If the property is located in a forest zone it allows very limited uses. It is very common that the certificate is located in an agricultural zone and this is typically not a problem, this is normal.

Many foreign investors often believe that the process of buying land in their home country is similar to the process of buying land on Lombok. This misunderstanding makes some buyers obsessed with the idea of hiring a lawyer to conduct due diligence and they also trust large amounts of money with a lawyer before checking references. You should know that Indonesian lawyers mainly work with filing and prosecuting law suits in court. Unless you are going to court, you don’t need a lawyer.

Many tasks that a lawyer in your home country would normally perform is done by a notaris in Indonesia. The notaris or Public Notary is licensed to perform the duties commonly needed when purchasing or selling land in Indonesia. The notaris typically offers the following due diligence services:

  • Check authenticity of the title to make sure that no encumbrances, mortgages or other liens are attached to the property
  • Conduct a search of public records at BPN, but this can also be conducted by anyone familiar with the Land Office (BPN) in a few hours

Make sure to not let anyone charge you an unreasonable rate or convince you that this is all that is required to complete the due diligence. It is common that Lombok notaries and lawyers are overstating their importance in the Lombok land purchase process. Many lawyers and notaris on Lombok have a questionable reputation, well earned based on past experiences with prior clients.

11.4 Digging for the Unwritten Truth

A skilled and true due diligence investigator is able to locate problems that are far from obvious. It can be necessary to frightening a neighbour into telling the truth when someone is hiding the truth. Various web sites have stated the problem in these terms:

“Language barriers, cultural differences, travel requirements, time constraints, local knowledge, local property processes, lack of professional advisers locally…etc. All make sourcing, negotiating and processing a good parcel of land in Lombok extremely difficult. Buying land in Lombok is as different from Bali, as Indonesia is from Australia with accurate facts and good professional help a rarity.”

“There happen to be false certificates of ownership around. And it also happens the same property is sold to more than one person at the same time. It’s easy to loose your money.”

“Each local will also have regulations requiring local advice.”

To ensure a thorough due diligence also for the second part, you must find someone who is highly familiar with and respected by the residents of the location where you want to buy land. More often than not, that person will have relatives and ancestors that were born in the area. The person has often worked with the process of buying and selling land for several years, but typically not as their primary occupation. Our due diligence investigator, partner and agent was an English teacher at the time of our first purchase. It is not uncommon that these people also have a successful business like a shop or restaurant.

Good connections and a history of trustworthy involvement in the community are key qualities to become a true due diligence investigator. It is important that he or she is trusted by the neighbours and is able to spend hours on the berugak. There should be nothing that limits him or her of talking about all aspects of the neighbourhood and the Lombok property for sale.

An ability to draw out the gossip, rumours, speculations and facts about why the owner is selling the land also helps to understand the motive of the seller. Many times money is needed to pay for university tuition fees or to pay-off a government official to get a job as a policeman. Pay for a marriage ceremony is another common reason. Other times, the landowner may be trying to sell his land for a second or third time, since for some reason the sale was never completed previously. Perhaps the family does not agree on who actually owns the land or perhaps a deceased father has sold the land to a tourist in the past, but the tourist took the certificate and never returned to use the land.

Another example of dirty land is if one man may claim ownership based on a 50-year-old document written on palm leaf, while at the same time another man may say that his family has lived on and cultivated the same land for three generations. Putting land to productive use is a strong proof of ownership in Indonesia. This can take years to settle, be expensive to settle or simply be impossible. Stay away.

It is also common that people try to sell their neighbour’s land without permission. Typically the only goal is to get a deposit from a naive tourist.

It is not known how many scams occur per legitimate land sale, but it happens frequently enough to demand your attention. Successful scams are very profitable and some type of people will always be tempted to try, but the good thing here is that a scam certainly can be prevented by conducting a thorough due diligence research. Putting the wrong person in charge over the due diligence process is like inviting trouble, while a competent person will scare away the scammers before they even attempt a scam.

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