Property auctions for beginners

This article first appeared in City & Country, The Edge Malaysia Weekly, on November 25, 2019 - December 01, 2019.

If a property has been put up for a series of auctions, the price by convention would drop by 10% each time.” — Loh

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Property Auction House Sdn Bhd executive director Danny Loh had the distinction of being the first person to give a talk on auctions in the history of The Edge Investment Forum on Real Estate. In his session, titled “Auction 101”, he touched on the basics of property auctions in Malaysia, including the process and procedures, the benefits and risks of buying such a property as well as the things one needs to know and do before bidding.

“Auctions are where hidden gems can be found,” he said.

Loh explained that a sale by auction is a public sale whereby potential buyers offer bids for the goods and try to outbid each other. “An auction sale is completed by 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, namely judicial and non-judicial auctions.

Judicial auctions are court auctions and are regulated by the National Land Code. “In this case, the title has been issued under the name of the borrower, where 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,” he said.

Non-judicial auctions, more commonly known as LACA or loan agreement cum assignment cases, are not regulated by any legislation and the property has not been issued a title. “Even if it has been issued a title, it would still be under the name of the developer. The loan would be secured by the loan agreement cum deed of assignment, 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.”

 

The advantages

Despite the risks, there are many advantages of buying properties at auctions, said Loh.

Good bargains can be found as banks are motivated to sell and their objective is to recover the loan in the shortest time possible, he explained. “The bank will set the reserve price. If a property has been put up for a series of auctions, the price by convention would drop by 10% each time. So, if a property has gone through three auctions within three months, it would be discounted by 30% — something you can’t get in the regular market.

“The lowest priced auction property in my record is a RM3,500 apartment in Bukit Beruntung about 13 years ago. There are still some cheap properties in today’s auction market. For example, a reasonably new shoplot in Perak is asking for more than RM200,000.”

At auctions, sellers are dealing with willing buyers. “Those who attend auctions are the most willing buyers as they have taken the trouble to prepare the bank draft. They would at least want to buy a property at its reserve price,” said Loh.

Auctions also give prospective buyers a fair chance. “We have online auctions now, so even people from Sabah and Sarawak can bid for properties in the Klang Valley.”

Buying a property at an auction also ensures that the price buyers are paying is only one bid higher than the previous bidder’s. “In other words, you are buying at market value.”

As auctions are fixed on a particular time and date, buyers will not be dealing with uncertain sellers. “There is no backing out of a deal as buyers are dealing with the courts or banks. The successful bidder will sign the sales contract on the spot and owners cannot change their mind or procrastinate. Auctions are clear-cut, unless an owner seeks a court order to stop the sale, which is a very rare occurrence,” assured Loh.

 

Steps and precautions against risks

First and foremost, prospective buyers of auction properties have to identify their investment objectives, said Loh. “You must be clear about your objectives — whether you are buying for your own occupation, for rental yield or for speculation. Buy something in a location that you are familiar with.”

He advised interested purchasers to start off by visiting auction websites such as auctions.com.my or auctiondata.com.my as well as obtain information from print media.

Auction properties are sold on an “as is where is” basis, so Loh recommends that buyers inspect the property to better understand its state, condition and surroundings as well as conduct a comparison of prices in the neighbourhood.

“As you can’t view the inside of the property, you need to visit the premises and talk to the neighbours before buying. You could knock on the door to see if it is tenanted or if the owner is there. If it is the tenant, it is usually easy — tell them you are interested in purchasing the property and they may allow you to go in. Otherwise, you could talk to the neighbours.

“If possible, bring along a professional to determine the value of the property and also the repair costs. Inspection and survey are very crucial,” he stressed.

Once the auction is set, the auctioneer will prepare the proclamation of sale (POS), which includes details of the auction and description of the property. “It is crucial to check the description and ensure that you are looking at the correct address,” Loh said, adding that one should also do a title search at the land office to find out whether there are any caveats on the property.

“Bidders must do their homework and understand their financial standing. For instance, if there are any caveats on the properties, they will take a longer time to be removed and banks may not be able to release financing. So, buyers must be prepared to pay in cash.”

One should also check with the relevant authorities and management office on any outstanding service charges, quit rent, assessment and other outgoing charges in the event the bank does not absorb them.

“Read the POS carefully. While some POS are quite fair in 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, many POS stipulate that arrears of utility bills would be borne by successful purchasers.

“Some banks do absorb these outstanding bills but on a reimbursement basis and sometimes these bills can be very hefty,” Loh warned.

As nearly all POS stipulate that the bank has no obligation to give vacant possession, one needs to find out whether the property is vacant or occupied. “It is your duty and at your own cost to evict whoever is occupying the premises. What you can do is go to the premises to find out. If it is tenanted, it is usually much better as you can talk to the tenant. Tell the tenant you want to buy the property and maybe even sign a new tenancy agreement,” he recommended.

“If it is the owner, use a soft approach. Some people lock up everything after buying the property, which will antagonise the owner and the owner will not be kind to you. Talk to the owner nicely. If that doesn’t work, then apply for a court order,” said Loh.

In addition, it is important to go through the details of the POS to check whether there are any limitations on the property. This includes “whether it is a bumi lot, meant for specific industry use, height restrictions and remaining tenure. For example, banks will not finance properties with only 20 years left on the lease”, he cautioned.

“There are also instances where, after buying the property, the buyer thinks it comes with a parking lot but in the POS, there is no accessory parcel. Rather, the lot provided must be rented from the developer,” Loh said, adding that if the buyer is a developer, it would be useful to check on the status and limitations such as the plot ratio.

In LACA auctions, a buyer would need to obtain the consent of the developer as the title has not been issued, he pointed out. “A developer’s consent is crucial. As some developers don’t grant a direct transfer, you’ll need to do a double transfer, which will delay the process and you may not be able to meet the settlement deadline. Developers also do not usually grant their consent unless all outstanding service charges have been settled.”

Before the auction, bidders must prepare a bank draft that is 10% of the value of the reserved price and be prepared to top up the difference between that amount and 10% of the final selling price immediately after the auction.

“The settlement period is crucial. Bidders risk losing their 10% deposit on the purchase price if they do not settle the balance within the stipulated time frame, usually between 90 and 120 days. Any extension granted may come with a penalty,” he said.

Loh advised bidders to talk to their bank beforehand to find out if the bank would be willing to finance the purchase. “Don’t do it after the auction as some banks don’t finance certain areas.” He said buyers should also call the auctioneer to obtain other information on the property and to find out the latest developments of the auction.

On auction day, bidders are advised to be early. “An auction may start at 9.30am but the courts may stop accepting your bank draft at 9am,” Loh warned. If one is bidding on behalf of another person, one should prepare an authorised letter.

“During the auction, don’t get emotional. Also, set your target price,” he advised, adding that bidders are required to raise their hand to signify their interest to bid.

After the auction, successful bidders will have to sign the sales contract, engage their lawyer to effect the transfer and apply for a loan.

“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 POS will require the purchaser to pay the fees of the bank’s solicitor for vetting or preparing the assignment,” said Loh.