XII. Due Diligence and Investigation

A. Risk versus Benefit

Perhaps 100 years ago, much of the land on Lombok was remote, unpopulated jungle. Over time a family would clear the land and put it to productive use. It may have been terraced into rice fields, planted with coconut trees, used as grazing land, or a home for fishing. As Indonesia grew, the tax office came to survey the area, set some property corners and guess the approximate land area. Ownership documents were written on palm leaves in old Sanskrit language. Many of these "proof of ownership" documents still exist today and are held by the original fam ly. From the time that jungle land was opened and claimed as family land, many complexities may have been introduced. The grandfather, or great-grandfather, who originally opened the land, may have died without a will leaving the issue of which son owned the land open to question.

Often a parcel of land was abandoned or informally sold to another person with minimal documentation. Sometimes the patriarch of a parcel of land allowed family members and friends to build a house on the property. After several generations, small villages were formed on the land. If the patriarch died without forcing the squatters to move, the family heirs may find it difficult to prove who owns clear title of the land.

This so called dirty land, where true ownership of land is almost impossible to establish, may be offered for sale to naive tourists. After a deposit has been paid, the truth is discovered that a certificate can never be issued.

These are the risks are inherent in the process of buying land in Lombok. To name a few...identifying true land owners, obtaining permission from the head of village, settling ownership conflicts among neighbors and family, paying-off a variety of people associated with the land purchase, negotiating price, determining exact property boundaries, negotiating settlement terms... etc.

If a foreign buyer is aware of these problems and takes steps to avoid them, these risks can be minimized. The benefit of taking these risks is the prospect of a huge reward. Many people have quadrupled their money in the past five ears. Still, the price of land on Lombok is far, far below the price of equivalent land in Bali. Choice parcels with a panoramic view are still available in many areas of Lombok at a bargain price. Very few places in the world offer the chance to buy a large parcel and build a house for less than US$100,000. A Hilltop villa or deluxe ocean home and property can be built purchased for less than US$250,000.

B. Due Diligence

The term due diligence has only recently been introduced into the vernacular of purchasing Lombok real estate. In its simplest form, the term simply means: Research, analysis, or doing your homework. Cynics have suggested the term has caught on because it sounds so "professional" and the dubious agents use the term to give the impression that reall know the lingo. Who would only want analysis or research performed on their property when they can have "due diligence"?

Perhaps the most complete definition comes from Wikipedia: Due Diligence is a term used for exercising of a high standard of care prior to finalizing a purchase.

C. Checking Public Records

When purchasing property in Lombok, due diligence has two broad aspects. The first, and easiest part, is to examine public records to check that parcel of property has no glaring problems. The second part involves engaging the entire neighborhood to discover hidden problems that may be buried in the brain of a knowledgeable elder.

D. Checking Public Records

Regarding the check of public records, the parcel have a prior land certificate which show that some form of limitation or lien has been recorded on the property. Records must be check to insure the land is currently held as freehold (or fee simple) title. Also, the zoning of the land can be checked to be certain the property can be used for your intended use. Occasionally, land is located in a "forest" zone which allows very limited uses.

Buyers are often driven by the idea that buying land on Lombok must be similar to the process of buying land in their home country. The desire of a potential buyer to hire a lawyer to conduct due diligence almost reaches the point of obsession. In addition, they will trust large amounts of money to a lawyer before checking references. In Indonesia, regular lawyers primary function is to file and prosecute law suits. Unless you are going to court, you don't need a lawyer.

A Public Notary (or Notaris) is licensed to perform the duties that may be conducted by a lawyer and escrow officer in other countries. The Public Notary may check the authenticity of the title to make sure that no encumbrances, mortgages or other liens are attached to the property. However, conducting a complete search of public records is a simple and quick task that anyone familiar with the Land Office (BPN) can do in a few hours. Don't let anyone charge you an exorbitant rate; and don't let anybody convince you this is all that is required to complete due diligence. Notaries and lawyers have a way of overstating their importance and the need for you to retain them to perform other tasks in the purchasing process. I urge caution here. The dubious reputation of all lawyers and many notaries on Lombok is well earned based on past experience of prior clients.

E. Digging for the Unwritten Truth

The real skill of a good due diligence search is locating a problem or problems that are far from obvious. Digging to find when someone is hiding the truth and frightening a neighbor into telling the truth. That is the skill of a true investigator. Various web site 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 locale will also have regulations requiring local advice."

To perform this second phase of due diligence, you need to find someone who is highly familiar with, and respected by the residents of the location where you want to buy land. Usually, but not always, that person will have many family members and ancestors that were born in the area. Often that person has worked with the process of buying and selling land for many years, but often as an avocation and not as their primary occupation. It is not uncommon for these people to have a successful shop or restaurant.

Having numerous good connections and history of trustworthy involvement in the community is a key quality for someone to perform due diligence. He must be welcomed and trusted by the neighbors or that live nearby. He must be able to sit cross-legged in the gazebo style hut (called a berugah), and feel at ease talking about all aspects of the neighborhood and the property under consideration.

He must be able to coax-out the gossip, the rumors, the speculation, and the facts about why the owner is selling the land. Sometimes money is needed to send a son or daughter to a university or pay-off a government official to get a job as a policeman. There are numerous good reasons why an owner may be selling a portion of his property.

Other times, a landowner may be trying to sell his land for a second or third time - yet for some reason, the sale is never actually consummated. Perhaps the family is split over who actually owns the land. Perhaps a deceased father had sold the land to a tourist in the past, but the tourist took the certificate and never returned to use the land. In other cases, one man may claim ownership based on a 50-year-old document written on palm leaf in Sanskrit, the ancient language of India (now extinct). At the same time, another man may say his family has lived on and cultivated that same property for 3 generations. (In Indonesian law, putting the land to productive use is strong proof of ownership).

At the low end of the feeding chain is the man who sells his neighbor's land without permission. Perhaps his only goal is to get a deposit on the land from an unsuspecting tourist, knowing full well that the sale can never be completed.

How many land scams occur in comparison to the number of legitimate land sales will never be known. They certainly happen frequently enough to command the attention of the gossip mill quite often. Scams are hugely profitable and can be prevented thorough due diligence research. Not having a competent person conduct a thorough due diligence search is tantamount to inviting trouble. Conversely, having a highly respected member of the community on your team conducting the investigation may ward off a scam before it is even attempted.

I.Important Facts to Consider

A.Is ownership risky?

B.Lombok: A Different Culture

C.Living on Lombok

II.Summary Steps to Buying Land

A. Get familiar with Lombok

B. Choosing a Partner("Nominee")

C. Find a parcel of Land

D. When You Find a Parcel

E. Negotiate the Price

F. Comprehensive Due Diligence.

G. Initiate Title Transfer.

H. Issuance Land Certificate

III. Visit All Lombok First

A. From Tourist to Resident

B. Explore the Hidden Lombok

C. Starting a Checklist

IV. Legal Issues

A. The Issue of Ownership

B. Foreigners Solve the Problem

C. The Nominee Method

D. Foreign Direct Investment(PMA)

E. One Final Option

V. Choose Partner and Team

A. Start Looking Early

B. Wide Variety of Skills

C. Other Trustworthy People

D. Check if Trustworthy

VI. Places that Sell Land

A. General Warnings

B. Real Estate Companies and Websites

C. The Local Tour Guide

E. The Local Gossip Mill

F. Miscellaneous Sources

VII. When You Find a a Parcel

A. Initiate Early Discussions

B. The history of the land

C. Get to know the Players

D. Slowly Get to the Price

VIII. Through an Engineer's Eyes

A. Clear access

B. Public facilities

C. Everything Belongs to you?

D. Check the Drainage

E. Check the Stability

F. Double Check Everything

IX. Settle Price and Terms

A. Necessary Preparations

B. Establish Proper Atmosphere

C. Conduct the Negotiations

D. The Issue of Parcel Size

E. Money is Not the Only Issue

F. Giving a Deposit?

X. The Written Agreement

A. How do I Pay Money?

XI. Due Diligence and Research

A. Risk versus Benefit

B. Due Diligence

C. Checking Public Records

D. Digging for the Unwritten Truth

XII.The Notaris Office

A. Settling the Final Terms

B. Notaris - Initiate Title Transfer

C. Sign the Nominee Agreement

XIII. Finally a Certificate