For the keen buyer, real estate auctions offer an exciting opportunity. This month, we unpack the advantages and disadvantages of buying (and selling) a property on auction – and how to get the most bang for your buck.
Not all auctions created equal
Justin Clarke, co-founder of Private Property and now Executive Chairman of Wealth Migrate, breaks down the four types of auctions you could find yourself at. First up: Voluntary auctions. “In South Africa there is a growing trend to sell your house through an auctioneer in a voluntary auction,” says Clarke. These types of auctions are typically beneficial to sellers in active markets, since they have a reserve price and the sale is subject to the seller accepting. Clarke points out that, for these reasons, these types of auctions rarely work for the buyer. “The prime purpose is to get a better price for a property by playing buyer against buyer in a live environment,” he explains.
The second type of auction is the bank auction. These auctions are organised by the bank when the distressed seller, significantly in arrears on bond repayments, is given an ultimatum to sell at auction. The bid is subject to the bank’s approval. “In this case, most of the properties are sold at a discount and the bond holder agrees to write off the shortfall in the outstanding bond,” Clarke explains. Buying from a bank auction therefore offers buyers a good chance at picking a property up at a bargain price. In addition to this, the buyer is getting all the benefits in terms of warranties. The seller is also responsible for the payment of all rates and taxes upon selling.
“The ultimate source of great value property is of course the sheriff auctions,” Clarke explains. There are several reasons for this. These auctions are typically not widely advertised, leading to a poor turnout. “In most cases the only party at the auction is the bank,” says Clarke. These auctions often end up in a situation where the bank offers a massive discount – around 50% of the value – in order to get the deal done. Sheriff auctions take place when the bank has been unsuccessful in rehabilitating the bond holder and are unable to recover their funds.
The final type of auction is the property in possession (PIP). Clarke warns that these aren’t always great buys. “Understand when the bank buys the property in at a sale in execution they have to incur significant costs, transfer, evicting the errant occupants, making good the damage and securing the vacant property. On top of that there are many stalling tactics that can hold the process back and the bank gets locked up in litigation, preventing them from selling the property on. They add all the costs incurred and try to recover the total when they sell.”
The buyer’s checklist
- When you bid at property auctions, you must be confident that you will qualify for a home loan, because you can’t afford to default on the sale. If you can’t come up with the finance, you could face legal action from the seller. You will have to fulfil the contract or forfeit any money you have already paid, including the deposit. You can budget 10% of the purchase price for that. The payment of the deposit is usually required immediately, in cash, after the winning bid. The auctioneer also requires a commission payment worked out as a percentage of the auction price.
- Get your prequalification taken care of. Prequalification is a process conducted by bond originators, helping you to work out what you can afford on your monthly bond repayment, with or without a deposit, and find the best home loan options for you. They’ll also be able to highlight what else you can expect to pay when you purchase a property.
- You must register beforehand and pay a refundable deposit. And don’t be afraid to ask questions. Ask the auctioneer for the sale contract, read it carefully, and ask for clarity if you’re unsure of anything. Consult an attorney if necessary.
- Make sure you arrive early, before the auction starts, so that you can be present when the auctioneer reads out the terms and conditions of the sale.
- Property auctions feature an inventory of homes that are sold voetstoots, faults and all. That means that the seller is not legally responsible for fixing any faults after the sale. Successful bidders at home auctions will also be liable for any outstanding municipal rates, taxes and levies on the property. It’s therefore important to do your homework beforehand to find out what the market value is of the property you’re keen on, and factor in the potential for additional maintenance and repairs so that you don’t overbid in the heat of the moment.
- Part of your preparation should be attending a few property auctions as an observer to get a feel for how they work.
- When you’re ready to participate and you spot a property you’re keen on, ask the auctioneer for copies of the title deed, the site diagram, the property plans and the zoning certificate if relevant. Being able to inspect the property yourself before the real estate auction will prove invaluable in terms of assessing the condition of the property. Seeing the property beforehand might pave the way to making an offer to purchase, too.
- Take a closer look at the Conditions of Sale before you decide to participate in a real estate auction as these can be amended until the auction date. Another thing to look out for is the interest clause. The Conditions of Sale might state that the price of the winning bid carries interest until the transfer of ownership is registered.
- Also check the Conditions of Sale to see if there’s a lease agreement in place. If there is a tenant on the property, that agreement must be honoured.
Advantages for sellers
Voluntary auctions are becoming increasingly popular with property owners. The first clear advantage is the fact that the property is sold “voetstoots”. The auction process also eliminates the need for the seller to pay commision – instead, the buyer pays a market-related auctioneers commission (up to 10%). In terms of achieving a good price, auctions can work in a seller’s advantage. Having an open forum with motivated and financially qualified buyers will often lead to higher prices being reached. It’s important to be realistic with your price, however, since an uninformed seller can complicate matters.
Greg Tarrant, author of Sheriff Auctions: How to Purchase Property at Sheriff Auction & Tax Tips and Tricks for Residential Property Owners, explains his thinking when deciding how much to bid for a property: “How much you are prepared to bid depends on why you want to buy the property. My goal is to acquire buy-to-let investments, so I focus only on properties that will be cash-flow positive from day one and that have low outstanding levies and rates, because the buyer has to settle these in cash (they cannot be financed). I also focus only on sectional title properties that are not situated on the ground floor, because I do not want the hassle and expense of garden maintenance.”
Whether you’re a buyer or seller at an auction, knowing the value of a property is crucial. Getting a property valuation report (that includes information like comparative sales in recent months, amenities, municipal valuation, and the average price and size of properties in the area) is vital in preparing yourself for a property purchase – no matter how you end up buying.