Seek and ye shall find – a foreclosed property. Homebuyers would want to take advantage of ‘hidden gems’ in the auction market.
Picture this scenario: A total of 100 properties are being offered at an auction event and there are over 25 personnel (auctioneers, lawyers and bankers) milling about. You would imagine that there would be potential buyers in the hundreds, eagerly waiting to bid for a piece of the property pie. At a time where many aspiring homebuyers’ biggest challenge is affordability, you would think that they would be snapping up auctioned homes. After all, it is a known fact that foreclosed homes are much cheaper than their original market value.
Well, you guessed wrong. A typical auction event in Malaysia, even those by prominent banks, would only see a handful of bidders attending and yes, we are talking about 5 to 7 people on average. The main key takeaway from this is that supply is so much higher than demand and there is no better time than the present for home seekers to look into purchasing a residential property in the auction market.
Here are 5 reasons why an auction property is a great bet:
#1 Even greater discounts abound
Should you do a quick search of auction property listings online and compare these properties’ price tags with actual transacted prices of similar properties on brickz.my (the only property portal in Malaysia which provides the latest sale value of sub-sale properties), you would see that the auction units are being sold at least 20% below the “market-value” properties, which is the typical discount rate. Currently, however, there are more properties being let go at 30 and even a 40% discount!
Due to the lacklustre property market, properties which go under the hammer are no longer sold in the first auction but may only be sold during the third or fourth round of auction. And the property prices reduce by a further 10% for every subsequent auction.
#2 Fewer competitors
If you were to ask around 10 years ago, many of your friends and family would have a bullish stance on buying a property. There would be a long queue of buyers at almost every new residential launch.
Fast-forward to today and the general sentiment adopted by most Malaysian buyers is “wait-and-see”. Zooming into auction properties, the competition for these auction properties drop further because historically, the number of buyers in the property auction circuit has always been far lower than the primary or secondary market. Imagine being the only bidder at an auction where the property price is already 40% below the market!
#3 Now is the best time to buy
When the demand for property slows because of negative sentiment, this automatically shifts the supply end, to an upside. Nevertheless, real estate is a big-ticket item and is not a common consumer product. Unlike shoes, handphones and such, homes cannot be produced within a couple of hours or within a few days.
There is a famous quote by investment guru, Warren Buffet, which perfectly captures this situation, “It is wise to be fearful when others are greedy and greedy when others are fearful.”
Thus, based on this understanding, an undervalued property which you purchase today might increase in value when consumer/market sentiments change and the supply of properties could not catch up in time to support this new demand.
When purchasing sentiment turns positive, property prices rise regardless of whether they are from the primary, secondary or the auction market.
#4 Higher supply of “new” auction properties
Since these homes are technically being bargained off, most Malaysians have the perception that auction properties are ‘inferior’ when compared to a newly-launched or secondary property. Many assume that either something horrible must have happened there (One particular murder case in Mont Kiara is always being mentioned in the auction circuit) or the home is probably riddled with structural defects.
Admittedly, there are bad apples out there but this is usually the exceptions rather than the norm. According to numbers from AuctionGuru.com.my, a total of 32,611 properties went under the hammer (auction) in 2018. Now, not all 30k plus units could be bad apples, could they?
Moreover, according to Gary Chia, AuctionGuru.com.my’s Executive Director, the number of newly completed properties put up for auction rose last year, due to an increase in owners who could not afford to pay or defaulted on their monthly instalments once their units were ready. This further proves that there are great auction deals waiting to be discovered.
Speaking of the increasing number of defaulters, aspiring home buyers must conduct their financial due diligence first before applying for a home loan to ensure they will be able to service their monthly intalments down the road. One great way is to calculate your debt-to-service ratio (DSR) to find out what is your maximum home loan eligibility. You can do this easily via LoanCare in just three steps.
#5 You have the luxury to check it out
If you are still hesitant over the whole auction thing, then why not learn more about the whole process first?
It is pretty simple – Attend a few property auction events and observe how they are carried out. Study some of the successful bids for properties which match your target area/budget/specification and compare those auction prices with the median transacted prices in brickz.my.
Even better, approach one or two of the (friendlier) successful bidders and learn from them what are the things to prepare for – common tips include checking for outstanding utility bills and doing a title clearance check.
Many auctioneers are friendly people too, ask them for some success and horror stories. It is now the perfect time to learn as much as possible and make your move before the property market improves and sentiments change. During good times, a solid property at an attractive price in an auction will be snapped up within the first round of auction itself.
Words of advice
However, you should always refrain from jumping the gun. Due diligence is still necessary even if the identified auction property is now 30-40% below the median transacted prices.
1) It is better to buy in areas we are familiar or have done enough study.
2) Buy properties where the online reviews for the development are mostly positive.
3) You could even drive by the property in the evenings to check if the light is on. If it is on, people may still be staying inside the home and evicting them might extend to longer than a few months.
Edited by Reena Kaur Bhatt