Jeonse

Jeonse (Korean: 전세; Hanja: 傳貰), also known as Chonsei, Key Money Deposit[1] or Key Money,[2] is a real estate term unique to South Korea that refers to the way apartments are leased. Instead of paying monthly rent, a renter will make a lump-sum deposit on a rental space, at anywhere from 50% to 80% of the market value.

Operation

Jeonse involves the tenant giving the landlord a large sum of "key money" when a lease is signed. The amount of money required depends on the economy and the location of the property. Usually, the amount required is 50% of the property's value but can be as high as 60-80%.

In 2014, it was reported that the average cost of a Jeonse in Seoul equals to almost $300,000 USD.[2]

The tenant is then allowed to stay in the property "rent-free", not requiring any additional monthly payments, until the end of the lease, which is usually 2 years.[3] Utilities and other costs (water, gas, electricity, cable, phone, internet, security) are applied for and paid by the tenant.

The landlord makes a return by taking the deposit money and investing it and keeping all interest earned on the deposit. The tenant's deposit is protected by having a lien issued against the property for the amount given. The entire deposit is then returned to the tenant at the end of the lease.

In rare cases where damage has been done to the property, the damage has to be fixed to the landlord's standard before a landlord will return the deposit.

This system is popular for two main reasons. First, there are very few mortgages in South Korea , so it is difficult for consumers to own a home. Also, real estate prices continue to increase so fast that some see the situation as a housing bubble.

During times of lower interest rates, wolse (월세), or monthly rent, is more often used. With a wolse lease, a renter signs a lease for 1 or 2 years and makes a deposit on the apartment equal to perhaps 10% of the market value. The renter then pays monthly rent.

Risks

As Jeonse tenants are not obligated to pay any monthly rent, it may lead them to believe that Jeonse is a great deal in all aspects. However, there is a certain level of risks of which the tenants shall be aware for leasing an apartment by Jeonse.

Rising housing market

Jeonse tenants are taking a short position in the housing market in some sense. When the apartment price goes down the amount of Jeonse deposit goes down proportionally, although this may not always be the case. In such circumstances, the tenants will get the difference back when they renew the lease, at least in theory. However, if their landlords fail to provide the difference either with their own money or by taking a loan, the tenants are left with a few difficult options such as a lawsuit. On the other hand, when the apartment price goes up the deposit may go up as well, and the tenants shall fill the gap when they renew the lease.

Variable interest rates

It is a common practice that Jeonse tenants have the deposit ready by taking a loan from a bank due to the sheer amount of the deposit. If they take a loan with a variable annual percentage rate (APR), which is fairly common, they are exposed to the risk of rising interest rates. However, banks are able to provide a very low APR (2-4%) as the deposit may be taken as collateral.

According to the latest report by the Bank of Korea, the bank's household loan balance as of the end of December last year was 98.8 trillion won. Compared to the end of December 2019, there is an increase of 10 trillion won, the largest since 2004.[4]

Dishonest landlords

Some landlords may have a large amount of overdue taxes. In such cases, the government may put the apartment up for auction in an attempt to collect the overdue taxes. When the apartment is sold, the government collects the overdue from the profits from the auction.[5] Since national tax (국세) and local tax (지방세) take a higher priority than the tenants, they may lose some or all of their deposit, depending on how much their landlords owes the government.

See also

References
  1. "1.Wolse/Jeonse". Seoul Metropolitan Government. Retrieved 19 October 2017.
  2. Phillips, Matt (10 March 2014). "It takes $290,000 in cash to rent an apartment in Seoul". Quartz. Retrieved 19 October 2017.
  3. Kim, Tae-gyu (29 July 2009). "Tenants Face Hard Times From Rising Jeonse Payments". The Korea Times. Retrieved 19 October 2017.
  4. "영끌·빚투에… 2020년 가계빚 100조 폭증". 세계일보 (in Korean). 2021-01-14. Retrieved 2021-01-14.
  5. 최 훈. "집주인이 안 낸 세금, 세입자가 낸다?" 시사매거진 2580, MBC News. 2 May, 2016.
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