Bali Real Estate: Why The Nominee System Is A Risky Bet

  • Bali Villa Realty by Bali Villa Realty
  • 3 months ago
  • Blog
  • 2

Are you dreaming of having a retirement home in Bali?

Yet, you are wary…

You’re not ready to navigate the complex laws for buying property in Bali…

You’re unsure how to buy property legally in Bali as a foreigner. 

Then, you’ve heard an easy way out to invest…

A simple, cheap, and straightforward system, called the “nominee” system.

That’s exactly why foreigners fall into the trap of a nominee system—and lose all of their money and their dream property.

We don’t want you to experience the same…

Losing your hard-earned money to an illegal investment.

This article will explain why you should not use the nominee system when buying a property in Bali…

And give you two legal ways to choose safer options instead.

What is the Nominee System?

In Bali, there’s a popular but risky method called the ‘nominee system’ that some foreigners use to buy property. 

It works like this: a local Indonesian, the ‘nominee,’ officially owns the property, but they do it on behalf of the foreign buyer. 

It was a workaround for the strict rules in Indonesia that prevent foreigners from owning land directly. 

This system depends more on trust than legal protection, which can be a big gamble.

But until fairly recently, the Indonesian government has changed the law and made investment easy for foreign investors. 

In a recent interview with Jakarta Globe, Indonesian President Joko Widodo directed his administration to reduce administrative barriers for potential investors.

It’s shown through the report from Foreign Affairs Minister Retno Marsudi that the amount of foreign investment Indonesia brought in the first nine months of 2023 was roughly $37.8 billion, an increase of more than 32%…

Compared to only $28.5 billion in foreign investment in 2014. 

With this ease, there’s no reason for foreign investors to engage in the risky nominee system.

Why a Nominee System is Risky?

Legal and Financial Risks of the Nominee System

While the nominee system might appear as a simple solution to bypass property ownership restrictions in Bali, it’s fraught with significant legal and financial risks. 

This system involves a local Indonesian (the ‘nominee’) holding the property title on behalf of the foreign investor. 

However, this arrangement is not legally recognized and lacks solid legal grounds. 

It gives foreigners a false promise of ownership rights without completing the legal process.

The Illusion of Ownership

The primary danger lies in the illusory nature of this arrangement. 

The foreign investor has no recognized legal rights over the property…

And if disputes arise, they might find themselves without legal means to enforce their supposed ownership. 

There have been numerous instances where the nominee claims full ownership, leaving the foreigner with no legal recourse.

Why Do Expats Use It?

  • Limited Initial Capital

The financial requirements for establishing a PT PMA, including the significant minimum capital investment, can be a barrier for some. 

Those with limited initial capital might see the nominee system as a more financially accessible option despite its lack of security and legal backing.

  • Attraction to Freehold Ownership

One of the main reasons expats are drawn to the nominee system is the allure of freehold ownership. Unlike leaseholds, freehold offers a sense of permanence and complete control over the property. This particularly appeals to those who want to settle long-term or view their Bali property as a legacy investment.

  • Misinformation and Lack of Awareness

A significant factor driving foreigners toward the nominee system is misinformation. Many are unaware of this informal method’s legal alternatives or risks. Misunderstandings about property laws and ownership rights in Indonesia often lead investors to mistakenly believe that the nominee system is a safe and legitimate option.

Three Better Ways to Buy Property:

Safer Alternatives to the Nominee System for Buying Property in Bali:

  • Setting Up a PT PMA for Property Investment in Bali

Establishing a PT PMA (Perseroan Terbatas Penanaman Modal Asing) is a viable legal option for foreign investors interested in Bali’s real estate. 

According to Indonesia Investments, foreign investors must set a minimum of IDR 10 billion (around USD 640,287) to buy a freehold investment…

Usually, a quarter of the total minimum invested (IDR 2.5 billion) is known as ‘paid-up capital.’ 

This amount can be higher in industries that need a lot of capital to start. 

What’s interesting is that often, when setting up a PT PMA, you don’t need to transfer this money to an Indonesian bank immediately.

Instead, the company’s owners can sign a letter promising this money is available. 

But, in specific industries, like financial services, this money needs to be transferred for real.

But, if you want a more affordable investment for your dream investment in Bali, consider a leasehold agreement. 

  • Leasehold Agreements

Leasehold is a popular and legally recognized method for foreigners to invest in Bali property. Here’s how they work:

  • Duration and Renewal: 

These agreements typically last 25 to 30 years. As the investor, you can use and profit from the property during this period. You can often negotiate an extension on the lease before it expires, ensuring longer use of the property.

  • Rights and Control: 

You can use the property under a leasehold agreement. You can live in it, rent it out, or even make renovations. However, you don’t own the land or the property outright – you’re renting it for a long time.

  • Lower Initial Investment

Unlike buying freehold property or setting up a PT PMA, entering a leasehold agreement requires a lower initial investment. This makes leaseholds more accessible for many foreign investors.

  • Security and Stability: 

Leasehold agreements are legally binding and offer a high degree of security. You’ll have a clear legal document outlining your rights and obligations and those of the landowner.

  • Popularity among Expats: 

This type of agreement is favored by expats looking for a holiday home, retirement residence, or property investment that doesn’t require the more significant financial commitment of buying a freehold or setting up a PT PMA.

  • Exit Strategy: 

Most leasehold agreements include terms for selling or transferring the lease to another party. This can be advantageous if you decide to move on or cash in on your investment before the lease ends.

  • Partnering with a Reputable Local Developer or Agency

Engaging with a credible local property developer or real estate agency can provide valuable insights and assistance navigating the Bali property market. These professionals can help find suitable leasehold or freehold properties and ensure compliance with all legal requirements.

Conclusion 

If you’re dreaming of investing in Bali…

It’s essential to choose the right, legal way to buy property. 

Avoid the risky nominee system, where a local holds the property for you – it’s full of legal and financial dangers. 

Instead, consider a simpler leasehold agreement that needs less money upfront. 

Always seek advice from real estate experts to ensure your Bali investment is secure and on the right side of the law.

Consulting Legal and Real Estate Experts

Before making any property investment in Bali, it’s crucial to consult with legal and real estate experts. At Bali Villa Realty, we guide you in making informed decisions—ensuring you avoid legal pitfalls and secure your investment.

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