It is a known fact that auction properties are much cheaper than its market value but why is this so? And how cheap is cheap anyway?
Generally, auction properties in Malaysia can be obtained at 20% below its market value. In certain circumstances, the price can be much lower. Sr Vicky How, Principal of Propedia Consultancy shares the nitty gritty on auction properties and throws in a few tips for aspiring purchasers.
How is a property auctioned off?
When the beneficial owner fails to service his/her loan instalment for 3 months straight, it amounts to an event of default and the bank will instruct the lawyer to sell the property by way of an auction. The lawyer will then proceed to instruct the valuer to prepare the valuation report for the particular property and appoint a private auctioneer (if the final title for the property has not been issued).
Otherwise, the lawyer will apply to the court for an order for sale and the lawyer will then have to appoint a valuer to prepare the valuation report and get an order from court to appoint a court auctioneer. From the valuer’s hand to the private auctioneer/court auctioneer, this process will take a few months depending on the efficiency of each department.
The auctioneer/court auctioneer will then advertise the proclamation of sale or condition of sales giving at least one to two month’s notice. This gives the public ample time to make preparations and inspections of the property. If the beneficial owner would like to pay and claim his property back, he may do so before the auction’s date. By the time the property is up for auction, the value of the property will have increased slightly.
How are auction properties valued anyway?
For auction properties, the valuer will value the property and provide both the market value and forced sale value of the property.
When the valuer values the auction property, he/she will normally conduct an external inspection because they are seldom given access to the property and the bank rarely holds the keys to the property. Hence, they will not able to inspect the interior of the said property just like the potential purchaser.
As such, the valuer will not take account any renovation being done by the beneficial owner. Vice versa, the valuer will not take account any defects in the property and no reduction will be made to the value of the property.
The value given by the valuer will be based on a basic unit of the property recorded in the Valuation and Property Services Department (JPPH) just like any other properties and there will be a reduction of 20%.
Why is it much cheaper?
REASON 1: Forced sale value
Since it is an auction case, the valuer has to give two types of values in his report, the market value and forced sale value. The forced sale value does not usually appear in the valuation report unless it is requested by the client. Forced sale value is the amount which may reasonably be received from the sale of a property under forced sale conditions which do not meet all the criteria of a normal market transaction.
A forced sale is defined as a sale when the property is disposed under extraordinary circumstances, usually reflecting an inadequate marketing period without reasonable publicity, an inappropriate mode of sale and sometimes reflecting an unwilling seller situation, and/or disposal under compulsion or duress. As such, by a rule of thumb, the forced sale value is usually lower than its market value by 20%.
REASON 2: No bid
If there are no bidders for the property on the auction date, the lawyer will fix another date for an auction normally after 30 days. But this time, the reserve price will be lower by 10% compared to the previous reserve price as there are no bidders for the first round. If for the second time, there are no bidders for the property, the property price will be reduced by another 10% and a third auction date will be fixed (normally after 30 days).
Due diligence tips
Buying auction properties require you to bear the risks because you will not get to inspect the interior of the property. One man’s meat is another man’s poison. Many people have profited from auction properties, but the other half has experienced losses instead.
Therefore, it is important for you to carry out these due diligence steps before deciding whether or not to buy the bank draft.
- The buyer must first inspect the Proclamation of Sale advertised by the Auctioneer and contact the Auctioneer for more details of the property.
- Asides from looking at the basic criteria of the property such as location, potential rental yield and capital appreciation, it is vital to carry out the due diligence before committing to buy an auction property, especially title search at the Land Office. A title search will determine the particulars of the property, such as the name of the parties, title particulars and also whether there are any caveats lodged on the property. A caveat serves as a notice of possible lawsuits by third parties and/or the previous owner. The caveat also prevents the transfer of the title and the interests of the property until the caveat is removed.
- Interested purchasers should also contact the management of the property to determine the outstanding service charge amounts currently owed by the property beneficial owner. Also, do a quick search on outstanding quit rent and assessment charges to ensure that the outstanding expenses are within the budget of the buyer.
- Arrange to visit or appoint agents to visit the property first before deciding whether to buy the property. Some of the auctioned properties may not be well maintained and have structural defects. By looking at the exterior you may be able to roughly gauge on the repair cost of the exterior of the property. Parties should be pretty clear and aware of the location and type of property they are buying. At least, a buyer can make sure that the property is not facing T-junction or close to a sewerage treatment plant.
Although many people may think that auction properties are defect properties which require loads of attention and money, some investors may unearth a really good bargain. People say you require some luck in buying properties. I say that you make sure you create your own luck by conducting due diligence before committing to buy auction properties.
You may even be lucky enough to buy a well maintained and renovated property through auction. As such, it is sometimes worthwhile to buy a landed property even if it requires some repair and renovation works because the land itself might be worth more than the repair cost. Smart investors know that by doing some renovation works, an auction property may look brand new again just like how make-up and a new dress can transform one’s look!
*Article was written by Vicky How & edited by Reena Kaur Bhatt.