Property Investing: E-bidding platform to spur auction market


  • Ishak: With e-bidding, they won’t have anyone to turn to. At the end of the day, these so-called syndicates that we are trying to eliminate could be the ones taking control of the online auction process. In my opinion, the High Court should provide both live and online auctions concurrently so that those who are not IT savvy could have another option.

  • Poon: With a seamless integration of online bidding, property auctions may see a shift in popularity. With rising property prices and affordability issues plaguing the Gen Y market, the auctioned property market could be seen as a way to meet the housing needs of this generation as well as all Malaysians.

  • See: The transparency [it provides] will eliminate syndicates because they will no longer have the advantage of working with insiders to buy properties. Also, the number of bidders will deter them from manipulating the auction market.
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This article first appeared in The Edge Malaysia Weekly, on October 3 - 9, 2016.

 

Auctioned properties are an often overlooked segment when it comes to real estate investing in Malaysia. Some common criticisms are that the auction process is often viewed as non-transparent or blighted by syndicates that attempt to inflate prices.

To address such issues, the Chief Registrar’s Office of the Federal Court of Malaysia (CRO) will launch

eLelong in December. The online platform is designed to facilitate the virtual bidding of auctioned properties and aimed at transforming the auction process.

Metro Homes Sdn Bhd director See Kok Loong says the platform is a positive move. “The transparency [it provides] will eliminate syndicates because they will no longer have the advantage of working with insiders to buy properties. Also, the number of bidders will deter them from manipulating the auction market.  

“For example, if five bidders come to a traditional auction, the syndicates could negotiate with them or offer incentives to encourage them to forgo the bidding. But with eLelong, the number of bidders could rise to 100. Thus, it will be impossible for the syndicates to negotiate with all of them. Their old ways may not work anymore.”

The CRO hopes that the implementation of eLelong will increase the transparency of all public property auctions conducted by the High Court of Malaysia. “[As] all auctions conducted by the High Court of Malaysia will be more transparent, [it] will invite more prospective bidders, and not just in the state where the property is but also nationwide,” it says in an email response to Personal Wealth. Private auctions, as they are not under the purview of the court, will still be conducted using traditional channels.

By having an online bidding system, anyone can participate in the auctions. “eLelong will reflect positively on the auctioned property market and will promote greater public participation from any location in the world,” says the CRO.

“They will be able to view the auctioned properties and the reserve price online without time and logistical constraints. They can even bid on multiple properties at the same time.”

It adds that eLelong will use the same work process as traditional auctions but with some modifications. All the transactions will be conducted online.

The online bidding process starts with the filing of an application with the High Court. Once the property is on eLelong, bidders may register their interest on the system. When the bidding process is completed and the successful bidder has settled the payment in full, a certificate of sale will be signed by a court officer and sent with the title deed to the successful bidder.

The eLelong system is timely as “we need to move forward with the current technology to create a better system for the public”, says the CRO. “[Once the system is in place, it is hoped that] it can ameliorate the issue of touting as the identity of bidders will not be disclosed to anyone. Thus, there is no way for syndicates to get in touch with the registered bidders as the auction will be conducted virtually. The new system will not only improve the court delivery system but also enhance the integrity of the auction process.”

However, it acknowledges that there are limitations when it comes to dealing with these syndicates. “The issue of touting by syndicates is currently beyond the purview of the CRO as all transactions are done outside the court and not during the auctions. Nevertheless, the CRO has always collaborated with the Polis Diraja Malaysia and the Malaysian Anti-Corruption Council when there is a request for investigations into this issue.”

According to auctioneers and buyers, it will be tough to eliminate syndicates completely. Ishak Ismail, director of IM Global Property Consultant Sdn Bhd and president of Persatuan Perunding Hartanah Muslim Malaysia, points out that it is very difficult to tell syndicates from genuine buyers.

“If you want to bid in an auction, first, you have to come with a bank draft [for the 10% downpayment]. Then, after it has been deposited, you enter the courtroom and bid (assuming that the property has not gone beyond your capacity or limit). We cannot treat everyone who comes to the auction as part of a syndicate,” he says.

“But there is a group of people, perhaps brokers or agents, who treat the bidding of auctioned properties as a full-time career. They either buy on behalf of their paymaster or for themselves. But they are not breaking any laws of the country. And yes, there are instances when a few of them negotiate with other bidders not to bid. But as this is a third-party negotiation, the court cannot stop them. If they negotiate and agree, what can it do?”

Alan Poon, founder of Superior Wealth Mastery, a boutique wealth education provider that runs courses on investing in auctioned properties, says he welcomes any initiative that helps reduce or eliminate syndicates. “I think [the move] is necessary and I applaud it. But we can only gauge the effectiveness of this platform after it has been rolled out.

“There are, of course, concerns about whether there has been enough consultation with the industry’s stakeholders. So, although implementation is very important, there must be a proper study done, rather than just enforcement.

 

Impact of online auctions

Poon says a concern is that the platform may not be helpful to auctioneers as their role will be minimised. “If online bidding is fully implemented, the auctioneer’s relevance in the market will be a big question mark. Perhaps it should be implemented in a state first, maybe Selangor or Kuala Lumpur, before doing so nationwide. With this, there will be feedback or discussions before the nationwide implementation.”

Ishak says auctioneers play a very important part in ensuring that the property auctions run smoothly. “Based on my experience, most of the genuine buyers at these auctions have little or no knowledge of the auction process. As auctioneers, we normally have to spend time explaining to them things such as the Condition of Sale and impact of buying from the auction process. We have to educate them that buying an auctioned property is not the same as buying sub-sale or prime market properties.

“With e-bidding, they won’t have anyone to turn to. At the end of the day, these so-called syndicates that we are trying to eliminate could be the ones taking control of the online auction process. In my opinion, the High Court should provide both live and online auctions concurrently so that those who are not IT savvy could have another option.”

Ishak points out that the implementation of eLelong will not just affect the livelihood of auctioneers but the bidders as well. “[According to the 2014 Malaysian Communications and Multimedia Commission survey, 33.4% of Malaysians do not have internet access.] If e-bidding is introduced, what will happen to those who are not IT savvy or live in rural areas? Additionally, internet connectivity in Malaysia is not fantastic either.

“When a third of the population is unable to bid, it will not be considered a public auction anymore, but a closed auction. Section 256 to 259 of the National Land Code says the sale of an auctioned property must be made by public auction. So, for me, online bidding remains questionable.”

He adds that when eLelong was announced, the auctioneers were shocked as they had not been consulted. “About 1,600 auctioneers will be impacted, as well as their employees and families. The High Court should have had more dialogue sessions, conducted a survey or sought feedback from all the relevant parties.”

The CRO has proposed the setting up of business centres to provide the public with greater internet access. “The business centres will be set up by third-party administrators, subject to the CRO’s regulations, across the country. They will provide services such as assisting registered bidders to participate in auctions via the eLelong system, promoting the eLelong system to the general public, promoting auctioned properties and giving advice on to the work process of the

eLelong system,” it says, adding that these administrators will be allowed to charge a reasonable fee for the services rendered.

Meanwhile, Poon says online auctions will be a boon for investors. “eLelong is very much lauded for the convenience and time saving it will bring. The auctioned properties will also be assessed by a greater number of potential bidders, without the size constraints of the bidding hall. I believe that online auctions will gain traction as more people try out the platform.”

He adds that the auctioned property market is largely untapped and there is a huge potential for growth. The online bidding process could help spur the market.

“With a seamless integration of online bidding, property auctions may see a shift in popularity. With rising property prices and affordability issues plaguing the Gen Y market, the auctioned property market could be seen as a way to meet the housing needs of this generation as well as all Malaysians,” says Poon.

 

Market for auctioned properties

Ishak says the auctioned property market is quite slow. “The slowing property market has impacted the sale of high-end properties. Now, these properties are coming to the auction market. So, we have a number of high-end properties with reserve prices starting at RM1 million, especially in the Klang Valley and Johor,” he adds.

“But the problem is, even when there is demand and there are bidders, the bidders are afraid to come and bid because the banks have tightened their credit policy. If you buy a property through an auction, you are given 120 days to settle the balance payment of 90%. No extension is allowed and your 10% downpayment will be forfeited if you cannot settle. That is why the auction market, particularly for high-end properties, is quite challenging.

“There is great demand for mid-range landed properties. Last and this year, many buyers and investors have bid and bought auctioned properties priced at RM50,000 to RM500,000.

“For flats and other properties in this category, such as at Bukit Beruntung or Ukay Perdana, the take-up rate has been phenomenal. There is no problem selling properties within this price range.”

Poon says he has observed that most of the auctioned properties in the market are between RM200,000 and RM500,000. “The market is made up of all segments and property types, especially those in the ‘hot spots’ and those that range from RM200,000 to RM500,000. We are anticipating more high-end properties to flood the market, either due to the weak holding power of their previous owners or a softening market.”

See says the demand for high-end properties is weakening because of the general economic and political situation in Malaysia. But the demand for low-cost and affordable properties will always be there as they are a basic need. He expects the demand for these properties to grow this year. He adds that the auction market consists mainly of residential properties and most of them are strata-titled.

Ishak says the auction market has improved in the last 10 years. “Many of the bidders are young graduates and they are snapping up properties, especially mid-ranged ones.

“Previously, auctions were only done at the High Court or land office. But after a landmark case in 1997, the court decided that banks too have the right to auction non-strata properties.

“There are two kinds of properties in Malaysia — those with individual grants or strata titles and those without. For properties with titles, any legal or auction proceedings have to go through either the High Court or land office. But for properties that have yet to be issued titles such as flats, apartments or condominiums, it normally takes years.

“So now, instead of taking on six-month non-performing loans, the banks have shortened the tenure to two months and they are able to start auction proceedings right away. Back then, it was a long process as they needed to go through the land office or High Court. Once this was allowed, the auction market grew very quickly.”

 

Pros and cons of buying auctioned properties

Poon says there are many misconceptions when it comes to auctioned properties. “They are often perceived as rural or dilapidated. Often, this is not the case. In recent years, perhaps due to the price speculation from 2009 to 2012 before the cooling-off measures were implemented, many auctioned properties have been much newer and even more expensive, which are often let go due to [the owner’s] weak holding power.

“Compared with a new property, buying an auctioned property is way faster as the bidding process ends within minutes, and new properties are available every day. The risk is that you will need to conduct a thorough due diligence on the property. You may need to evict the occupant (if there is one) and you are not able to view the property before the sale.

“For new properties, buyers will have to wait for the development to be completed, and there is a risk of the project being abandoned. At times, the workmanship and location of the building may not meet the buyers’ expectations as well. However, new properties do come with perks such as waivers and discounts in terms of the sale and purchase agreement fees, legal fees and stamp duty fees.”

Ishak elaborates on the pros of buying auctioned properties. “With auctioned properties, first, they are sometimes undervalued properties. Second, you could get away with Restriction of Interest. Third, normally, you can take possession of your property immediately after the auction as the bank won’t restrict you. You can also find a tenant and rent the property out immediately. Also, if you buy the property through a High Court auction, you can settle the 10% deposit of the reserve price within 120 days.

“Those who buy low-cost auctioned properties, for example, under the law, the Restriction of Interest will not be taken into account. What this means is that if you buy through a sub-sale or prime market, the Restriction of Interest says you need to get consent from the state authorities for the transfer of charge and so on. If you are not within the range, you are not qualified. This Restriction of Interest is in the title.

“But in an auction, the Restriction of Interest does not apply because the said property is not a transfer under 14A, but under 16F of the National Land Code 1965, under court order. You don’t have to get state consent once you are a successful bidder.”

Ishak says one can make good money from buying auctioned properties. “I have been buying auctioned properties since 1994. And I think there is a lot of opportunity [in this area] because you immediately profit when you buy. This is because you know exactly what the market value versus the reserve price is.

“The reserve price approved by the court is normally based on the valuation report prepared a year ago. So upon purchase, you are already enjoying that appreciation. Furthermore, properties in general definitely appreciate over time.

“Normally, when we buy auctioned properties, we renovate them and then sell them for a profit. You could also rent out the property.

“When you purchase a property, if there is any infrastructure development, the price will definitely increase. In Rawang, 10 years ago, an auctioned house cost RM7,000 to RM8,000. Now, because of the infrastructure being built, the price [when sold on the sub-sale market] has gone up to RM30,000 to RM40,000.”

See, however, does not believe that the value of a property appreciates automatically upon purchase. “No, the value does not appreciate upon purchase, it appreciates because of demand and other factors [such as infrastructure development].

“Auctioned properties appreciate like other properties over five years. It was good from 2011 to 2015. But I see the appreciation slowing down this year.”

Poon says the appreciation value of the auctioned property depends on the winning bid price. “If there is no other bidder, one can obtain the auctioned property at the reserve price, which could be up to 40% below market value. Hence, with minimal expenses to touch up the property, it can be sold for a profit. There is no time frame in general as different properties in different locations have their own demand versus supply.

“In 2009, I bought a property in Shah Alam for RM90,000. At the end of last year, I sold it for RM240,000 — a gross capital gain of RM150,000 or more than 200% profit in over six years, not to mention the monthly rental gain during the period. Shah Alam does not have good rental yield, but it has good capital appreciation over the long term. So, my advice is study the market.”

Ishak says there are a number of risks to consider. “You may not be able to inspect the inside of the property, so you won’t know what its condition is. Second, you are buying it on an ‘as is’ basis, so you are subject to any issues of endorsement [an entry in the registered document of title to any land made by the land administrator] or encumbrances, such as caveats or squatters.

“For example, if there is a caveat on the property, you will have to settle it yourself and go to court to have it withdrawn or removed. If your property is tenanted, you will need to evict them and this will incur costs. Another issue is that after 120 days, if the buyer does not have extra cash and has to depend entirely on the bank, and the bank rejects his application, you will be stuck and risk having your 10% deposit forfeited by the court.

“So, make sure that you have enough savings, do your due diligence on the property and find out what the outstanding amount is, and whether that can be absorbed and paid by the bank or if you need to settle it yourself. Read the Condition of Sale carefully. If you do all these, I think auctioned properties can be a good investment.”

See says another risk is the period stated in the Proclamation of Sale. “If it states 90 days, it means that the entire payment must be settled within 90 days and no extension is provided. Your deposit will be forfeited if your bank cannot release the payment on time.

“In the secondary or sub-sale market, we usually provide an additional 30 days. In developer sales, if the payment cannot be settled within 120 days, the developer charges a late payment penalty of 10%. My advice is that if you purchase an auctioned property, it would be better to pay cash.”