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Can someone explain how this 'Jeonse' system works? The article is vague -- it states that a large deposit is required equal to around the price of the entire p

Can someone explain how this 'Jeonse' system works? The article is vague -- it states that a large deposit is required equal to around the price of the entire property, but why? Do they still have to pay rent? Why won't they get their deposit back if the state takes ownership? Shouldn't huge deposits be in escrow? None of this makes any sense to me.

frx 4y ago
I had the same question. Why can't they simply buy the property if the deposit is the same price as the property itself?
- quakeguy 4y ago
  https://anthonyleezhang.github.io/pdfs/jeonse.pdf https://anthonyleezhang.github.io/pdfs/jeonse.pdf
  - thaumasiotes 4y ago
    What answer are you suggesting? Is it that banks will finance a jeonse deposit, but they won't finance a purchase? > Chonsei deposits are often very large, at around 70% of house prices > Chonsei arrangements are popular partly due to the fact that the residential mortgage market in Korea is unusually underdeveloped: mortgages have very short terms, and loan-to-value ratios generally below 40%. > It is common for tenants to fund Chonsei deposits by borrowing from banks
- HDThoreaun 4y ago
  They don’t want to is the idea. They want to live their for two years and then get their money back so they can move somewhere else without risk of things breaking or housing market going down.
- IncRnd 4y ago
  The owner might not want to sell, or they might only want to rent. Also, the deposit is fully refunded at the end of the term in this type of rental. In a jeonse, the deposit is generally 50% to 80% of the value.
- lifthrasiir 4y ago
  As a tenant you are freed from the property maintenance; instead you are at mercy of landlords for that aspect, but I think they should and actually do the maintenance in practice. Many properties in SK are offered via a peculiar scheme, the Housing Subscription System 주택청약제도, which is a result of convoluted history. Basically you should have a dedicated saving account, and your eligibility will be scored by multiple factors including the deposit sum of that account and in particular the period of non-ownership. When you buy a house your non-ownership counter resets; Jeonse will keep it. So if you use Jeonse as long as possible, your chance of being eligible for this scheme will increase.
Scoundreller 4y ago
Recent explanation I read is here: https://mobile.twitter.com/AnthonyLeeZhang/status/1613977673067540480 https://mobile.twitter.com/AnthonyLeeZhang/status/1613977673...
- jandrese 4y ago
  So basically it is yet another scheme that only works well when the market moves monotonically upward, and when there is a downturn it's a crisis? Everybody is a genius is a bull market. The fact the landlord passing unexpectedly is also a crisis suggests this is not a well structured system. What is extra weird is that the renters are paying the landlord considerably more than they would need for a downpayment on a mortagage to buy into this scheme. Is it just impossible to actually buy property or get a traditional mortgage? This system seems like the worst of all words. It is hard to see how you come out ahead in this system vs. just regular renting and dumping that money into the market.
  - Scoundreller 4y ago
    > Is it just impossible to actually buy property or get a traditional mortgage? Ta latter comment says something like you could, until recently, only get max 30% LTV on a traditional mortgage, but through this system, you can effectively get 50-70% https://mobile.twitter.com/AnthonyLeeZhang/status/1614107630372364293 https://mobile.twitter.com/AnthonyLeeZhang/status/1614107630...
  - kijin 4y ago
    The trick is that you can get a loan to pay the jeonse deposit. The interest rate for jeonse loans is considerably lower than for a regular mortgage, and until recently even lower than paying rent, because these loans are effectively guaranteed by the landlord who is contractually obligated to return the money. So if you simply wanted to live in a certain area for a while and not get tied down by the legal burden of ownership, getting a jeonse loan would have been a steal compared to a regular mortgage or even renting. My first jeonse deposit was $90K, $60K of which I borrowed from a bank. Interest on that loan was less than $150/mo. Rent on a comparable apartment would have been upwards of $500/mo at the time. Of course you can't get this kind of deal nowadays, but the scheme made a lot of sense when it worked.
deleted 4y ago
[deleted]
hn_user2 4y ago
I can give a little context just from my experience renting an apartment there. The large Jeonse where it is the price of the property is not necessarily required. Usually it is still usually rather large, and the higher the jeonse the less the rent is. So you are correct that a jeonse the cost of the house itself would usually mean $0 rent, whereas a more "normal" 1 years worth of rent jeonse would yield you a "normal" rent. The huge deposits are not held in escrow (though they should be), but as I found out after having to sue to get my Jeonse back, there are ways to protect it if you act in advance: 1) You can register a lean on the property when you first move in in the amount of your jeonse. 2) Do NOT vacate the property until the Jeonse is returned. That being said, people are mostly just trusting and I don't know of anyone that actually follows those steps. As a foreigner you are especially vulnerable since they know you likely have a flight to catch on your move out week and won't hold the property hostage. That being said, the legal system for these kinds of debts was swift and we got paid quite quickly once a lawyer was involved. The whole state of Jeonse is quite extraordinary. It has a huge effect on people being able to move away from home, and I would guess a large effect on homelessness overall. It is wild that you have to pay $30,000 USD to just move into a 1 bedroom apartment. I had a small studio near a university and it was $12,000 USD just to move in. If I do it again I will definitely be prepared for filing a lien and for a fight at move out.
- deleted 4y ago
  [deleted]
- scaramanga 4y ago
  I think first para of this is not quite right. If there is a monthly payment, it's weolse not jeonse. And the large deposit is bojeunggeum (key money). The larger it is, the lower the rent, typically on a standard scale (eg. every $10k more is $100/month less iirc). But you won't get zero rent without switching over to jeonse. You're talking about upwards of quarter million dollars to start with that. I've never signed a jeonse contract so not sure if the terms are very different to a 2 year weolse contract or whether the numeric parameters are just different :)
eric-hu 4y ago
https://en.m.wikipedia.org/wiki/Jeonse https://en.m.wikipedia.org/wiki/Jeonse I don’t know the system at all, but it sounds like the money is intended for the landlord to invest. There is mention that a lien is created on the property.
jimscard 4y ago
The article states that they get 2 years of free rent. In exchange, the property owner gets the use of the deposit money. From what I can tell, the scheme depends on property values going up, so that when one tenant leaves, the owner can get another tenant to put down a larger deposit, part of which they use to pay back the first tenant etc.
- hsbauauvhabzb 4y ago
  Isn’t this normally called a Ponzi scheme?
  - mistrial9 4y ago
    https://ko.wikipedia.org/wiki/%ED%8F%B0%EC%A7%80_%EC%82%AC%EA%B8%B0 https://ko.wikipedia.org/wiki/%ED%8F%B0%EC%A7%80_%EC%82%AC%E...
  - deleted 4y ago
    [deleted]
  - IncRnd 4y ago
    No, this isn't close to a Ponzi scheme. A Ponzi scheme is fraud where profits are paid to earlier investors with funds from more recent investors.
    - deleted 4y ago
      [deleted]
    - fsckboy 4y ago
      you mean simulated or pretend profits
      - IncRnd 4y ago
        The word profit refers to the profit of the earlier investors.
troydavis 4y ago
This submission from earlier today explains Jeonse and why interest rates affect it: “Monetary Policy Transmission in the The Korean Jeonse System”: https://anthonyleezhang.substack.com/p/monetary-policy-transmission-in-the https://anthonyleezhang.substack.com/p/monetary-policy-trans... (via https://news.ycombinator.com/item?id=34379950 https://news.ycombinator.com/item?id=34379950)
skim1420 4y ago
In Seoul in the late 90s I paid some $50K equivalent jeonse for a ~1000 sqft apt, with no further monthly rent. From what I understood, the landlord can make back something equivalent to rent via common interest rates. I was young and frankly didn't understand the exposure or workings at play in this article. Historically, in Korean culture it was very common for the extended family to live together. When a child married they often continued to reside with the parents/in-laws until they had saved enough money to move out on their own. Jeonse is far less than the amount required to buy a place, and because they get the full amount back when they move out to a bigger/nicer place (more jeonse), they can build up their savings until they have enough to buy a place. Back then mortgages were rather rare and even monthly rents weren't that common. Things are far different now of course.
- hocuspocus 4y ago
  > Jeonse is far less than the amount required to buy a place That depends on interest rates. I lived in Korea between 2010 and 2015 and in the end jeonse really didn't make sense anymore. I had a German coworker who went straight from company paid housing to buying his own place after two years, which is not easy as a foreigner. I regret not doing the same. Of course if you look at the higher end of the market, the relative difference can still be fairly substantial. But I lived in an area where you could buy an apartment for say 200M KRW while the jeonse would be 190.
- em-bee 4y ago
  actually, the reason to live with the parents had nothing to do with money. traditionally, the oldest son would take over the household of his parents when he gets married. this is still very common in china and it is seen in many other cultures, so i expect korea to be similar.
bane 4y ago
The Jeonse system, sometimes called "key money" is one of the various systems in South Korea that people use to get access to incredibly expensive housing in lieu of purchasing it. In a basic sense it's a long-term loan to the property owner, usually in the amount of 70-80% of the total property value, that you get back at the end of your lease. In exchange the following things happen: - The property owner get lots of cash they can use for investments. - The tenant lives rent free or at a very low rent considering the value of the property -- allowing them to save significant income for future housing or investment opportunities. - The tenant gets all of their money back at the end of the lease. The system is obviously surprisingly fragile, especially in a market that is in a downturn (the IMF period was a big one for example), or if the property owner over leverages the Jeonse money and can't pay it up at the end of the lease. Jeonses are typically viewed as a stepping stone for young families as they accrue their own savings in preparation to buy their own property to live in. It works because unlike renting, you aren't simply burning your money in a fire every month, you get it back and can add any savings made during the lease to that value to either find another place to Jeonse, or buy a property if you have enough. Mortgages of course exist, but aren't as favorable as they are in the U.S. and there are all kinds of ownership schemes/systems in place that would make the average American's head spin, often financed by the property developer instead of a bank. There is also insurance for the tenant, but as you might guess the terms are strict and getting a payout can be difficult. "Insurance fraud investigator" is not an uncommon job title. Of course this system has caused problems for housing supply and is considered a large part of why apartments in Korea are so expensive. A landlord can simply leverage jeonse after jeonse to acquire massive numbers of properties. Some recent laws put high property taxes on investment or "second" properties, but people find ways around those laws by using family members and friends to "buy" the properties. The state doesn't want to get in the business of repaying tenants as it would incentivize risky investments on the part of landlords, and the state's strategic interest is in increasing the housing supply to lower prices. Deposits don't sit in escrow as it's intended that the landlord is able to use that money to make themselves money to offset what would have been monthly rent payments. It's important to remember that from ~1953 to ~1997 or so, if you could get in a business or own any kind of property you could make incredible amounts of money. The market only moved up and there was virtually zero risk to this kind of property scheme. There was a brief "blip" from 1997 to 2003-2004 where it wasn't true, and then the market has basically been back to upward moving until COVID-19 hit again. So for maybe 3 generations, this has become the institutional way that real estate works and has made lots of people lots of money. It's slowly changing as high-yield investment opportunities disappear and the government cracks down on predatory property speculators -- but it's still a very common system that's unlikely to go away any time soon.

frx 4y ago

I had the same question. Why can't they simply buy the property if the deposit is the same price as the property itself?

quakeguy 4y ago
https://anthonyleezhang.github.io/pdfs/jeonse.pdf https://anthonyleezhang.github.io/pdfs/jeonse.pdf
- thaumasiotes 4y ago
  What answer are you suggesting? Is it that banks will finance a jeonse deposit, but they won't finance a purchase? > Chonsei deposits are often very large, at around 70% of house prices > Chonsei arrangements are popular partly due to the fact that the residential mortgage market in Korea is unusually underdeveloped: mortgages have very short terms, and loan-to-value ratios generally below 40%. > It is common for tenants to fund Chonsei deposits by borrowing from banks
HDThoreaun 4y ago
They don’t want to is the idea. They want to live their for two years and then get their money back so they can move somewhere else without risk of things breaking or housing market going down.
IncRnd 4y ago
The owner might not want to sell, or they might only want to rent. Also, the deposit is fully refunded at the end of the term in this type of rental. In a jeonse, the deposit is generally 50% to 80% of the value.
lifthrasiir 4y ago
As a tenant you are freed from the property maintenance; instead you are at mercy of landlords for that aspect, but I think they should and actually do the maintenance in practice. Many properties in SK are offered via a peculiar scheme, the Housing Subscription System 주택청약제도, which is a result of convoluted history. Basically you should have a dedicated saving account, and your eligibility will be scored by multiple factors including the deposit sum of that account and in particular the period of non-ownership. When you buy a house your non-ownership counter resets; Jeonse will keep it. So if you use Jeonse as long as possible, your chance of being eligible for this scheme will increase.

Scoundreller 4y ago

Recent explanation I read is here: https://mobile.twitter.com/AnthonyLeeZhang/status/1613977673067540480 https://mobile.twitter.com/AnthonyLeeZhang/status/1613977673...

jandrese 4y ago
So basically it is yet another scheme that only works well when the market moves monotonically upward, and when there is a downturn it's a crisis? Everybody is a genius is a bull market. The fact the landlord passing unexpectedly is also a crisis suggests this is not a well structured system. What is extra weird is that the renters are paying the landlord considerably more than they would need for a downpayment on a mortagage to buy into this scheme. Is it just impossible to actually buy property or get a traditional mortgage? This system seems like the worst of all words. It is hard to see how you come out ahead in this system vs. just regular renting and dumping that money into the market.
- Scoundreller 4y ago
  > Is it just impossible to actually buy property or get a traditional mortgage? Ta latter comment says something like you could, until recently, only get max 30% LTV on a traditional mortgage, but through this system, you can effectively get 50-70% https://mobile.twitter.com/AnthonyLeeZhang/status/1614107630372364293 https://mobile.twitter.com/AnthonyLeeZhang/status/1614107630...
- kijin 4y ago
  The trick is that you can get a loan to pay the jeonse deposit. The interest rate for jeonse loans is considerably lower than for a regular mortgage, and until recently even lower than paying rent, because these loans are effectively guaranteed by the landlord who is contractually obligated to return the money. So if you simply wanted to live in a certain area for a while and not get tied down by the legal burden of ownership, getting a jeonse loan would have been a steal compared to a regular mortgage or even renting. My first jeonse deposit was $90K, $60K of which I borrowed from a bank. Interest on that loan was less than $150/mo. Rent on a comparable apartment would have been upwards of $500/mo at the time. Of course you can't get this kind of deal nowadays, but the scheme made a lot of sense when it worked.

deleted 4y ago

[deleted]

hn_user2 4y ago

I can give a little context just from my experience renting an apartment there. The large Jeonse where it is the price of the property is not necessarily required. Usually it is still usually rather large, and the higher the jeonse the less the rent is. So you are correct that a jeonse the cost of the house itself would usually mean $0 rent, whereas a more "normal" 1 years worth of rent jeonse would yield you a "normal" rent. The huge deposits are not held in escrow (though they should be), but as I found out after having to sue to get my Jeonse back, there are ways to protect it if you act in advance: 1) You can register a lean on the property when you first move in in the amount of your jeonse. 2) Do NOT vacate the property until the Jeonse is returned. That being said, people are mostly just trusting and I don't know of anyone that actually follows those steps. As a foreigner you are especially vulnerable since they know you likely have a flight to catch on your move out week and won't hold the property hostage. That being said, the legal system for these kinds of debts was swift and we got paid quite quickly once a lawyer was involved. The whole state of Jeonse is quite extraordinary. It has a huge effect on people being able to move away from home, and I would guess a large effect on homelessness overall. It is wild that you have to pay $30,000 USD to just move into a 1 bedroom apartment. I had a small studio near a university and it was $12,000 USD just to move in. If I do it again I will definitely be prepared for filing a lien and for a fight at move out.

deleted 4y ago
[deleted]
scaramanga 4y ago
I think first para of this is not quite right. If there is a monthly payment, it's weolse not jeonse. And the large deposit is bojeunggeum (key money). The larger it is, the lower the rent, typically on a standard scale (eg. every $10k more is $100/month less iirc). But you won't get zero rent without switching over to jeonse. You're talking about upwards of quarter million dollars to start with that. I've never signed a jeonse contract so not sure if the terms are very different to a 2 year weolse contract or whether the numeric parameters are just different :)

eric-hu 4y ago

https://en.m.wikipedia.org/wiki/Jeonse https://en.m.wikipedia.org/wiki/Jeonse I don’t know the system at all, but it sounds like the money is intended for the landlord to invest. There is mention that a lien is created on the property.

jimscard 4y ago

The article states that they get 2 years of free rent. In exchange, the property owner gets the use of the deposit money. From what I can tell, the scheme depends on property values going up, so that when one tenant leaves, the owner can get another tenant to put down a larger deposit, part of which they use to pay back the first tenant etc.

hsbauauvhabzb 4y ago
Isn’t this normally called a Ponzi scheme?
- mistrial9 4y ago
  https://ko.wikipedia.org/wiki/%ED%8F%B0%EC%A7%80_%EC%82%AC%EA%B8%B0 https://ko.wikipedia.org/wiki/%ED%8F%B0%EC%A7%80_%EC%82%AC%E...
- deleted 4y ago
  [deleted]
- IncRnd 4y ago
  No, this isn't close to a Ponzi scheme. A Ponzi scheme is fraud where profits are paid to earlier investors with funds from more recent investors.
  - deleted 4y ago
    [deleted]
  - fsckboy 4y ago
    you mean simulated or pretend profits
    - IncRnd 4y ago
      The word profit refers to the profit of the earlier investors.

troydavis 4y ago

This submission from earlier today explains Jeonse and why interest rates affect it: “Monetary Policy Transmission in the The Korean Jeonse System”: https://anthonyleezhang.substack.com/p/monetary-policy-transmission-in-the https://anthonyleezhang.substack.com/p/monetary-policy-trans... (via https://news.ycombinator.com/item?id=34379950 https://news.ycombinator.com/item?id=34379950)

skim1420 4y ago

In Seoul in the late 90s I paid some $50K equivalent jeonse for a ~1000 sqft apt, with no further monthly rent. From what I understood, the landlord can make back something equivalent to rent via common interest rates. I was young and frankly didn't understand the exposure or workings at play in this article. Historically, in Korean culture it was very common for the extended family to live together. When a child married they often continued to reside with the parents/in-laws until they had saved enough money to move out on their own. Jeonse is far less than the amount required to buy a place, and because they get the full amount back when they move out to a bigger/nicer place (more jeonse), they can build up their savings until they have enough to buy a place. Back then mortgages were rather rare and even monthly rents weren't that common. Things are far different now of course.

hocuspocus 4y ago
> Jeonse is far less than the amount required to buy a place That depends on interest rates. I lived in Korea between 2010 and 2015 and in the end jeonse really didn't make sense anymore. I had a German coworker who went straight from company paid housing to buying his own place after two years, which is not easy as a foreigner. I regret not doing the same. Of course if you look at the higher end of the market, the relative difference can still be fairly substantial. But I lived in an area where you could buy an apartment for say 200M KRW while the jeonse would be 190.
em-bee 4y ago
actually, the reason to live with the parents had nothing to do with money. traditionally, the oldest son would take over the household of his parents when he gets married. this is still very common in china and it is seen in many other cultures, so i expect korea to be similar.

bane 4y ago

The Jeonse system, sometimes called "key money" is one of the various systems in South Korea that people use to get access to incredibly expensive housing in lieu of purchasing it. In a basic sense it's a long-term loan to the property owner, usually in the amount of 70-80% of the total property value, that you get back at the end of your lease. In exchange the following things happen: - The property owner get lots of cash they can use for investments. - The tenant lives rent free or at a very low rent considering the value of the property -- allowing them to save significant income for future housing or investment opportunities. - The tenant gets all of their money back at the end of the lease. The system is obviously surprisingly fragile, especially in a market that is in a downturn (the IMF period was a big one for example), or if the property owner over leverages the Jeonse money and can't pay it up at the end of the lease. Jeonses are typically viewed as a stepping stone for young families as they accrue their own savings in preparation to buy their own property to live in. It works because unlike renting, you aren't simply burning your money in a fire every month, you get it back and can add any savings made during the lease to that value to either find another place to Jeonse, or buy a property if you have enough. Mortgages of course exist, but aren't as favorable as they are in the U.S. and there are all kinds of ownership schemes/systems in place that would make the average American's head spin, often financed by the property developer instead of a bank. There is also insurance for the tenant, but as you might guess the terms are strict and getting a payout can be difficult. "Insurance fraud investigator" is not an uncommon job title. Of course this system has caused problems for housing supply and is considered a large part of why apartments in Korea are so expensive. A landlord can simply leverage jeonse after jeonse to acquire massive numbers of properties. Some recent laws put high property taxes on investment or "second" properties, but people find ways around those laws by using family members and friends to "buy" the properties. The state doesn't want to get in the business of repaying tenants as it would incentivize risky investments on the part of landlords, and the state's strategic interest is in increasing the housing supply to lower prices. Deposits don't sit in escrow as it's intended that the landlord is able to use that money to make themselves money to offset what would have been monthly rent payments. It's important to remember that from ~1953 to ~1997 or so, if you could get in a business or own any kind of property you could make incredible amounts of money. The market only moved up and there was virtually zero risk to this kind of property scheme. There was a brief "blip" from 1997 to 2003-2004 where it wasn't true, and then the market has basically been back to upward moving until COVID-19 hit again. So for maybe 3 generations, this has become the institutional way that real estate works and has made lots of people lots of money. It's slowly changing as high-yield investment opportunities disappear and the government cracks down on predatory property speculators -- but it's still a very common system that's unlikely to go away any time soon.