Know Your Stuff: How to buy an auction property

This article first appeared in City & Country, The Edge Malaysia Weekly, on March 8, 2021 - March 14, 2021.
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More Malaysians are starting to look at buying properties at auction, as the prices can be cheaper than those in the primary and secondary markets. Auctions can seem daunting, however, as it means one is buying a property without inspection. The relatively attractive prices also come with the risk of not knowing the exact condition of the property.

Also, many people do not understand the process of buying an auction property and what they need to know and do before bidding. 

An auction is a public sale in which potential buyers try to outbid each other for the goods. An auction sale is completed at the fall of the hammer and the goods are ultimately sold to the highest bidder. In Malaysia, there are two types of auctions with respect to foreclosed properties: judicial and non-judicial.

Property Auction House Sdn Bhd executive director Danny Loh notes that judicial auctions are court auctions, regulated by the National Land Code. Properties under judicial auctions are those whose title has been issued under the name of the borrower and the charge is created and perfected. If the person defaults on the loan, the bank will apply to the high court (land registry title) or the land administrator (land office title) for an order to sell the property.

Meanwhile, non-judicial auctions, more commonly known as loan agreement-cum-assignment (LACA) cases, are not regulated by any legislation and the title to the properties has not been issued. 

“Even if the title has been issued, it would still be under the name of the developer. The loan would be secured by the LACA; so, if the person defaults on his loan, the bank would not need to apply for an order for sale and the bank would have the right to sell the property,” he explains.

Know the why

Loh reckons that, like any property purchase, it is important for bidders to know the objectives of buying an auction property — whether they are buying for their own occupation, rental yield or speculation. 

“Bidders must do their homework and understand their financial standing. In some cases, there may be some caveats on the properties that will take a longer time to be removed. So, banks may not be able to release financing and bidders must be prepared to pay in cash,” he warns.

“Also, find out the legal costs that will be involved. When the balance of the purchase price is paid, the bank will sign a deed of assignment in favour of the purchaser. Most auction deals will require the purchaser to pay the fees of the bank’s solicitor for vetting or preparing the assignment.”

What should potential buyers do if they are interested in auction properties? 

Loh says, for a start, these bidders should obtain more information about the properties. As auction properties are sold on an “as is where is” basis, he advises bidders to inspect the property to better understand the condition and gauge the repair and renovation cost.

“Go and knock on the door to see whether there is anyone there. Chances are, if it is tenanted, the tenants may allow you to go in if you tell them that you are interested in purchasing the property. Also, talk to the neighbours.” 

He reckons that bidders should also conduct a comparison of prices in the neighbourhood and, if possible, engage a professional to determine the value of the property. It is advisable for bidders to buy something in a location that they are familiar with.

Auctioneers will prepare the Proclamation of Sale (POS). Loh says it is important for bidders to read it carefully and do a search with the relevant authorities and management office to find out whether there are caveats or outstanding payments on the property.

It is also important to check on any limitations on the property through the POS, such as whether it is a bumiputera lot, its intended property usage, height restrictions and remaining tenure. 

He notes that while a POS generally states that any arrears of service charges, quit rent and assessment up to the date of the sale would be paid out of the purchase money, successful bidders will have to pay the arrears of utility bills.

Next, bidders need to prepare a bank draft that is 10% of the value of the reserved price. 

On auction day, bidders need to arrive early, as the courts may stop accepting bank drafts half an hour before the auction starts. Loh says it is important to check the description stated in the POS and ensure that they look at the correct property.

Immediately after the auction, successful bidders will have to top up the difference between the initial 10% deposit and the 10% of the final selling price. They can then engage their lawyer to facilitate the transfer and apply for a loan.

“They are required to sign the sale and purchase agreement on the spot and cannot change their mind. They need to pay the remaining sum within the stipulated time frame, which is usually between 90 and 120 days. Therefore, it is important for bidders to talk to the banks beforehand and check whether they are eligible for financing,” he says.

“Lately, owing to the pandemic, many auctioneers have opted for online auctions, where those interested can bid from anywhere. Bidders need to understand the terms and conditions of the online auction, especially the mode of bidding and the digital payment of deposit.”

Nevertheless, bidders need to beware that, in the event of LACA auctions, they would need to obtain the consent of the developer, as the title has not been issued. Loh cautions that some developers do not allow a direct transfer. They usually also do not give their consent unless all outstanding service charges have been settled. 

In the event of no direct transfer, successful bidders will need to do a double transfer, which translates into a delay in the process and may result in successful bidders failing to meet the settlement deadline.

“Also, if the bid is successful, it is the bidders’ duty and at their own cost to evict whoever is occupying the premises. What they can do is go to the premises to find out. If there are tenants, you can inform them that you have purchased the property and suggest signing a new tenancy agreement. If it is occupied by the previous owner, talk to them nicely. If that doesn’t work, then apply for a court order.”