AUCTION PROPERTIES YOUR WAY TO WEALTH

Winning under the Hammer

          Auction property is a term most property investors would have heard of, but not many are aware of what is actually going on when it comes to buying an auction property.

          Property that are being auctioned off by financial institutions are typically transacted at lower than market prices as the transparent open bidding process ensures that the property prices is determined predominately by market forces by cutting out all the intermediary factors.

          However, there are many negative perceptions and myths surrounding auction properties, and it is not uncommon to find people mistakenly believe that auction properties poses a much higher risk than buying from other channels.

          In contrast, auction is a very popular option in Europe, America and Australia. In fact, 7 out of 10 owners in Australia choose open bidding through auction houses to sell their properties. The transparency, simplicity and wider pool of buyer are just some of the appeals. Furthermore, it is not uncommon for houses to be transacted at higher than market price in auction houses in these countries.

The Reality of Auction Properties

          One of the most myths is that properties put on auction are typically dodgy unit that have inherent problems such as bad fengshui, crime scene, problematic tenants, etc. The truth is that almost 95% of the auction properties on the market are put up by financial institutions or the High Court when the owners are in default of the payment. This fact means that while the number of properties put up for auction is a good barometer to the health of the economy rather than the viability of auction properties as an investment proposition.

          It is not difficult to understand why some quarters with vested interest would want to perpetuate these unsavoury myths as the more people are turned off by auction properties, the less competition there will be for these properties.

Auction and the Economy

          With property sales having significantly slowed down in the housing market and economy recovery figures little to shout home about, there are predictions that this year will see a huge rise in the number of auction properties as speculators in the heyday of the property market could not afford the mortgage.

          Already there is a notable increase in the number of new properties unit put up for auction in recent months. In the past, a large proportion of properties auctioned by banks are low-cost or affordable housing, but as of now, there are more cases where some properties are being put under the hammer even before the CF has been issued.

          The thought of an increase in the number of auction property is an attractive point of view for prospective buyers as one’s person losses becomes another’s gain. However, the real-world figures seem to paint a very different picture so far with the number of properties put up for auction in 2015 (28,750 units) was lower compared to 2014 (35,577 units).

          It is still too early to predict the trend in the auction market as there are numerous contrasting factors in play and one might need to wait for Q3 figures for the trend movement to become clearer.  

Before Raising Your Hand

          There are three general phases of auction bidding that prospective bidders have to be aware of, fortunately, the phases are similar to those under the more familiar buying channels. The first phase involves the collection of information, due diligence and fund preparation prior to the bidding day.

           Interested bidders must obtain the Proclamation of Sales (POS) and the Condition of Sales (COS) document before proceeding. The two document s will include basic information on the property, the reserve prices, the terms of payment and other important details. Bidders must read carefully all the terms and conditions stipulated as there can be fees owing (such as management fees, land tax, etc.) that the new owner might need to inherit.

           Properties auctioned by financial institutions do not include vacant possession, it is best for prospective bidders to visit the property to better understand the situation. However, note that bidders are generally not allowed into the said property and would have to make the assessment based solely on the outlook. Alternatively, one might speak to the neighbours to learn a little more about the property in question and base the decision to bid from the information.

          It might be possible to gain access to occupied property, but this is solely dependent on how cooperative the occupied are. For uncooperative tenants, one can always apply for eviction notice from the courts upon winning the bid.

Loading Your Gun

          In terms of financing, do note that the successful bidder must pay off the balance between 90 or 120 days after winning the bid (depending on the stipulated terms), failing which the 10% deposit will be forfeited. There are cases where the banks might freeze a loan to a particular unit for a myriad of reasons which means that banks will not extend loans to these properties and prospective bidders need to be aware of this fact. The above reasons are why carrying out financial due diligence is just as important as assessing the property to be bid on.

          Since the POS and COS documents are generally posted two weeks prior to the auction, interested bidders only have a two-week window to carry out all the necessary preparation and due diligence.

Going in for the Kill

          On the day of the auction, interested bidder will receive a bidding placard after paying 10% deposit of the reserve price, the placard will be used for bidding and all one needs to do is follow the instruction.

          It is imperative that one does not get carried away with the bidding and keep strictly to a predetermined ceiling price you have set based on your ability to afford and the fair value you have decided for the property. It is all too easy to get carried away in a highly charged bidding environment but winning a bid on impulse is one of the worst decisions.

          In addition, avoid strangers whom might solicit you to partake in certain strangers or plan to game the system. Auction houses are places were money can be made and it goes without saying that there will be parties around with various shady proposals to offer. Even if the strangers are not actively trying to get you on board a scam, it is all too easy to reveal too much about your own strategy, including the fair value in your heart which might work against you.

          If you stick to your strategies and won the bid, hopefully at a price lower than your ceiling value, then what remains is to set in motion the payment procedure and the property will be yours.  

End.

Source from 大馬房地產REM （MAY 2016/ vol. 50, page 34-35）