Monday, February 05, 2018

Potential Risks of Buying an Auctioned Property

When I was looking for a place to call my own, I noticed a lot of auctioned properties that I could buy for a cheaper price, but before I decided, I wanted to research a little more into what it was buying an auctioned property entails.

Foreclosure auctions are one of the ways of buying property at a fairly cheaper price. Many buyers thus chase foreclosed properties sold in bank auctions as a means to get more bang for their buck, rather than paying more money by buying from developers or through sub-sales. However, buyers should tread carefully into the auction lane. Although the potential payoffs may be huge, so are the risks involved. In fact, buying properties through auction can be a high-risk investment strategy.
These type of properties are usually a result of failure to pay mortgage, property tax, income tax or other obligations owed on the property. Apart from that, auctioned properties could also be government seizures or abandoned homes. There has been an increasing trend of foreclosed properties and subsequent auctions, especially kl property or property in Selangor.

So what happens when we see a property being put up for auction? Before an auction, banks will set a reserve price on the foreclosed property. Usually, this amount is based on the price at which the property was bought, as well as taking into account the loan dues. The reserve price is also typically 10-15 per cent lower than prevailing market prices in the same area. How else would it be enticing for potential owners to make a commitment to purchase the property?

The bigger question here, is an auctioned property really worth the cost savings? To guide you on this, here are some tips to help you analyse the potential pitfalls and repercussions when buying an auctioned property.

1. Keep cash in your pockets or risk losing your deposit
In order for you to participate in any property auction, you are required to make an earnest deposit. Typically, this amount is 5% (for LACA[Loan Agreement Cum Assignment] properties) or 10% (for non-LACA properties) of the reserve price. If you have won the auction, you are required to settle the balance purchase price within a period of 90 days (for LACA properties) or 120 days (for non-LACA properties). If you win the property at auction but fail to pay, your deposit will be forfeited.

Thus, make sure you have enough cash on hand as backup to ensure a smooth transaction. The joy that winning the auction brought you could turn into horror when you realise your bank loan has been rejected and you have no cash and hence no way of paying the remaining balance. Another method is to look for a pre-approved loan from a bank. However, remember to check if the bank allows lending for a foreclosed property.

LACA: Loan Agreement Cum Assignment auction through banks for properties without individual or Strata title
Non-LACA: Non- Loan Agreement Cum Assignment auction through the High court for properties with individual or Strata title

2. Do your checks and research or risk bad investments
Don’t be blindsided by cheap prices. If it’s too good to be true, it usually is. It doesn’t matter what your intended purpose is – whether it is for occupation, investment or speculation – always have a clear objective for the purchase in mind.

You should take into consideration all factors before putting down your deposit. You might find that the description in the auction catalogue is just a fanciful marketing tactic. If it is possible, inspect the property beforehand yourself. Do some research on the location and the environment of the property to see if it is a property and area worth investing in. Furthermore, check on the structural soundness and condition of the property you are bidding for. Although you won’t be able to see the interior of the property, the exterior can give you a rough idea of its condition.

If a property is foreclosed, chances are the previous owners have been struggling financially for a period of time before the foreclosure. This means that the house has not received needed repairs or general maintenance for quite a while – you need to consider how much you will be willing to spend, and whether the damages to the property will be extensive and thus expensive to repair. Take potential repair and renovation costs into account as this might make a vast difference in your overall expenditure.

Once you have a clear objective and adequate knowledge and details gathered, you can decide on a comfortable amount you will be willing to pay for the auction.

3. Banks don’t provide details, so check for outstanding dues
Banks typically don’t provide details on the foreclosed property and are usually unaware of the pending bills and taxes due on the property. Do not assume that a property is not problematic just because a bank is selling it. If your bid was the winning bid and you submitted the necessary paperwork, you are liable to pay for all outstanding dues owed on the auctioned property. Depending on the circumstances, you might be in for an unpleasant surprise when you find out the amount owed in dues.

Banks will always de-risk themselves with paperwork that protects the bank and states that they will not be held liable for any dues or frauds. The banks will not indemnify you from the issues with the property. Thus, it is advisable to check on all of these aspects before you bid. Approach the relevant property management offices and utility offices with a copy of the Proclamation of Sale (POS) to check for any pending property tax or outstanding bills. Also involve a lawyer to check if there are any pending and unsettled disputes regarding the property.

If you have a rough idea of the amount of all dues owed on the property, you will get a good grasp of whether the auction is worth the money. With this information in hand, you can work out the maximum amount that you’re prepared to pay for the property and stick to it.

4. Previous occupants, illegal or not, are your responsibility
Sometimes, there may still be occupants in the property although it has been foreclosed. Be aware of whether the property being auctioned is vacant or not. If it is not, it is the successful bidder’s responsibility to remove the occupants. Whoever the occupants are, you will have to bear the pain and headaches of evicting them. You might be facing difficult issues – especially if they are the previous owners – as they might be emotionally distraught or disgruntled, or you might face retaliation by the tenants who are being sued for eviction.

The process of eviction is a time-consuming process. In order for you to legally evict occupants out of a property, you must be the legal owner of the property itself. You will then need involve a lawyer to apply to distress the occupants. Only after that can you apply for a court order for eviction. The process applying for a distress order may take up to four weeks, and will cost you between RM1,500 to RM 2,000.

5. Understand limitations and caveats of the property or risk buying something you can’t own
Before you get attracted by the potential cost savings, look at the status of the title or any caveats that may be in place. A caveat is a temporary measure to protect the rights of the land, while a private caveat’s purpose is to protect an individual’s (usually an owner) rights under the sale and purchase agreement temporarily. A caveat is usually lodged in anticipation of legal proceedings. For example, a co-owner may put a caveat in place on the property, and this will stop and suspend a property sale. Furthermore, caveats will cause a hindrance in registering or change of ownership of the property while the caveat is in force. A private caveat may only be removed by the person who files or enters the caveat, by the Registrar, or by an order of the court. Thus, even if you won an auction on a property with a private caveat, you will have to lodge an application for removal of the caveat by court order. This process can be a long procedure and incur addition costs in the form of legal fees. You will also not be able to apply for any loans as no banks will approve a loan for a property with a private caveat in place. There may also be limitations in the title of the property. This is especially so in Malaysia, where there are certain properties that are titled as Bumiputera lots.

Thus, with the proclamation of sale (POS) in hand, do a title search of the property to see if there are any restrictions or limitations. Make sure you can legally own the property before bidding on it.

Last words
It is vital to cover all bases before you enter a bid for a property. Although you might be potentially acquiring a bargain, remember to pay attention to the details we listed to get a clearer idea of the true cost and true value of the property on auction.

Yes, it’s a bit tedious, but buying an auctioned property is not as straightforward as buying a new development. So, always cover all bases and go in with your eyes wide open, and don’t be blindsided by just the low price of the property.

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