"If You Don't Sign a Down Contract, You Can't Trade"…The 'Blind Spot' of Apartment Sale Rights in Provincial Areas

Premium of 80 to 100 million won but only 30 million won reported
Without under-the-table contracts, sales rights transactions are practically impossible
Illegal acts but no crackdown by Ministry of Land... Blind spot

The above photo is not related to the article below. (Photo by Yonhap News)

[Asia Economy Reporter Moon Jiwon] Mr. A recently gave up on buying a pre-sale right for an apartment in Pyeongtaek-si, Gyeonggi-do. This was because he heard that he would have to pay at least 80 million KRW more than the actual transaction price registered in the Ministry of Land, Infrastructure and Transport's real transaction price system for this apartment. After hearing similar stories at four real estate agencies that day, Mr. A ultimately gave up and returned home. He said, "I didn't know that down contracts for pre-sale rights still existed these days," adding, "It's strange that such acts are openly done without being cracked down on."

Although the Ministry of Land, Infrastructure and Transport has stepped up its crackdown on illegal activities in the real estate market, it appears that some local apartment pre-sale right transactions remain in a blind spot. Market-disturbing acts such as down contracts are still widespread, but proper enforcement is not taking place.

According to the industry on the 28th, it is known that pre-sale rights for Apartment A located in Pyeongtaek are virtually impossible to trade without a down contract. The resale restriction on this complex was lifted this month, and the pre-sale rights are reported in the real transaction price disclosure system as being traded with a premium of about 30 to 50 million KRW. However, in reality, the premium ranges from 80 million to 120 million KRW, more than twice the reported amount.

For this apartment with a sale price of 430 million KRW and an exclusive area of 84㎡, the actual transaction price is formed between 430 million and 480 million KRW according to the transaction status. Based on the reported data alone, there appears to be no premium or only about 50 million KRW. However, nearby real estate agents explain that it is impossible to buy the pre-sale right at this price.

Mr. B, a representative of a local real estate agency, said, "You cannot make a deal just by looking at the actual transaction price," adding, "Considering the premium (which is not reported) and the capital gains tax burden borne by the buyer, you have to think about an additional 100 million KRW or more." Down contracts are widespread to reduce the capital gains tax burden.

Mr. C, another agency representative, said, "Sellers all want to sell through down contracts, and if that agreement is not reached, the deal cannot proceed," adding, "I cannot guarantee that there is no crackdown, but the atmosphere is not one of great concern."

From the seller's perspective, lowering the declared transfer price reduces the capital gains, thereby lowering the capital gains tax. Some agencies tacitly allow such acts because lower prices lead to more active transactions. Some even encourage such behavior by saying, "There are many cases where the buyer bears the capital gains tax burden," and "As long as bank account management is done well, there is no problem."

Down contracts, which report prices lower than the actual transaction price, are clearly illegal. If caught, not only will the exempted or reduced capital gains tax be reclaimed, but a fine of up to 5% of the transfer price must be paid. Additionally, penalties for inaccurate reporting and late payment will be imposed. Buyers also face fines of up to three times the acquisition tax for violating the real transaction reporting obligation.

A Ministry of Land, Infrastructure and Transport official explained, "Down contracts are investigated when there are omissions or inaccuracies in the reported real transaction price," adding, "In the case of down contracts for pre-sale rights, if cases are reported to the Real Estate Transaction Disorder Act Reporting Center established at the Korea Appraisal Board, investigations will be conducted."

This content was produced with the assistance of AI translation services.