Death of Korea's 'apartment king' leaves 100s in property purgatory

Apartments seen from Yongsan in central Seoul on Thursday [NEWS1]

An audacious gamble using a real estate trick possibly unique to Korea failed to pay off for one man, leaving hundreds of tenants in legal limbo and unable to get their hands on massive deposits they put down for the privilege of living rent free for two years.

The collapse of the scheme exposes a fundamental but largely ignored flaw in the country's jeonse system — where apartments are leased for a fixed term in exchange for a sizable but refundable deposit — and has systemic implications, as individuals, banks, insurance companies and the entire property market are exposed.

In the "apartment king" case — as it has become known in Korea — a man in his 40s purchased more than 1,000 units in low-rise buildings in and around Seoul. He employed the often used maneuver of taking the joense deposits to fund the purchase.

For cheaper apartments in Korea, the jeonse amount is often close to the market price of the property itself, so the deposit can almost pay for the property. Real estate empires can be amassed with little capital and no need to go to the bank.

It all works if real estate prices keep rising, if the owner can get one tenant to replace another without any vacancy, if the rules of the game remain the same and if the mastermind can manage the accounting nightmare of dealing in and keeping track of so much unsecured debt. It fails if any one of the many participants fails to play their part, or if any of the conditions change.

The apartment king's grand plan went awry when property prices started to fall, taxes increased and the king himself died in October. The higher taxes meant he did not have the money to roll over the flats. His death means the tenants will have difficulty getting their money back.

Tenants often borrow the money they use to make the deposit, so if they don't get their money back, they could be in default. A daisy chain of delays and defaults could be set in motion.

In a press conference on Monday, Won Hee-ryong, minister of land, infrastructure and transport, said it will take time before the tenants are made whole.

When a joense deal fails, recourse is limited and remedies are complicated.

Many of the contracts are insured, and in the case of the apartment king, some tenants had policies from state-owned Korea Housing & Urban Guarantee Corporation on Monday (HUG).

The problem is the insurance only kicks in if the owner of the apartment cancels the contract, and the apartment king being deceased is in no position to do that.

His heirs could if they are willing to inherit the property, which might not happen. The apartments have been seized by the National Tax Service and HUG, and 6.2 billion won ($4.8 million) of comprehensive real estate tax is owed. The properties are also falling in value due to rising interest rates and a weak property market.

The parents of the apartment king told HUG that they will consider the inheritance. They also told the company not to contact them, according to Koo Ja-hak, deputy head of the public relations department at HUG.

If the family decides not to inherit the apartments, the court designates an administrator. This process could take as long as two years, and tenants cannot vacate the premises until the administrator cancels the contract.

“A lot of the tenants are those in their 20s and 30s. Some of them have asked for a return of the deposit in advance, while others have requested an extension of bank loans taken out for the deposit,” Koo added. HUG is negotiated with the financial institutions for loan extensions.

"The victims will be able to live in their apartment for months until the inheritance procedure continues, and the guarantee on jeonse deposit can also be extended so they don't have to be worried too much for the time being," Won added.

About 200 contracts related to the apartment king have expired or will expire from his death to the end of the year, and HUG provided about 20 billion won in compensation before the death of the property kingpin.

“I spent 237 million won on a jeonse deposit” for an apartment in Gangseo District, western Seoul, one of the tenants said Tuesday in a radio interview. He asked for the contract to be canceled — when the owner was still alive — but the owner “had the audacity to tell me to either find a new tenant myself or to buy the house.”

He added that the victims have “created a community, and there are only around 450 members. So it seems a lot of people aren't even aware that they have suffered damages.”

“The family isn't likely to inherit the properties because of the debt,” Jeong Min-kyung, an attorney at MyongDo, said. “If the properties aren't inherited, the ownership will be transferred to the country, and the apartments will be auctioned."

Jeong added that the owner “took advantage of the jeonse system,” which he did based on the belief that the value of the units and their rent will continue to rise following the real estate rally in 2020.

“Jeonse is one of the many types of rent in Korea that has developed over the years,” Pong In-shik, a researcher at the Gyeonggi Research Institute, said. “It is agreed based on a mutual trust, which then becomes legally binding through a contract. Diversity in rent measures cannot be blamed” for a single incident.

President Yoon Suk-yeol said Thursday that the land and justice ministries will create a task force to provide legal services for the tenants.

BY JIN MIN-JI [jin.minji@joongang.co.kr]