Buying an investment property requires finding a ‘bargain’ to make the investment truly worthwhile and beneficial and for many, auctions present a fertile hunting ground for bargains. Auctions are generally associated with distressed sellers, especially in tough economic times. In recent times however, property auctions have become popular even with non-distressed sellers.
According to auctioneers, auctions have become more popular mainly because:
- purchasing a property on auction is a much simpler process than the traditional method of sale as purchasers know that once the highest bid is accepted there is no further back and negotiation required;
- sellers are selling their properties as quickly as possible for as high a price as possible; and
- purchasers know that they are dealing with motivated sellers who are serious about selling and are not simply testing the market.
Personally, I’m of the view that the opposite is true in the above instances. I think most sellers struggle to sell their properties in the open market for the price they desire and think the bidding in an auction will achieve a higher price. I also doubt strongly that non-distressed sellers are motivated as most reserved prices have a market related or higher opening bid. The process at auction is far more rigid and such auctions are not always quick or successful, as astute purchasers will not overpay for a property simply because it is on auction.
Having said that there are many opportunities to find bargain properties at auctions, especially distressed auctions but purchasers really need to understand the game works. I learnt this the hard way, but that’s a story for another day.
Auctions are a public sale of goods or property, which are sold to the highest bidder.
There are principally 3 types of auction sales in South Africa, (1) voluntary auctions, (2) bank auctions and (3) sales in execution by a sheriff. I will not get into sales in possession for purposes of this discussion.
This is pretty much self-explanatory. These are auctions where the seller voluntarily places their property on auction in order to achieve the highest purchase price possible for the property from an open bidding process. The reserve price is generally set by the seller and most sellers tend to set the reserve price at market or above when compared to bank or sheriff auctions. This type of auction heavily favours the seller.
Bank auctions are also ‘voluntary’, voluntary in the sense that the seller works with the bank to sell the property. I have previously dealt with bank assisted sales (See: https://propertylink.africa/restructuring-your-mortgage-repayment/). These types of sales occur typically when the seller is significantly in arrears with their bond payment and it is unlikely that they can be ‘rehabilitated’. The bank will work with the seller to sell the property in a speedy way and the sale is subject to the bank accepting the bidding price. The bank will set the reserve price.
Bank auctions tend to favour the buyer as the properties are usually sold at a discount. In some instances, although this is rare, the bank may write off the shortfall between the amount achieved at sale and the amount outstanding bond. More commonly though, the bank may provide the seller with an unsecured loan with soft terms for the shortfall or issue summons for the remaining amount if an arrangement cannot be reached.
These sales are referred to as sales in execution. These types of sales typically happen where a bank and a bondholder have failed to agree on a bank assisted sale. The bank will approach the court to enforce its mortgage bond over the property and by so doing attach the property. The court will issue an order for the property to be attached and sold in order to settle the amount owed by the owner to the bank. The sheriff through the court order, will carry out the sale in the prescribed manner and the property will be sold to the highest bidder. The price tends to be ‘reserved’ at the amount outstanding but the bank may choose to accept a lower amount and try to recoup the shortfall from the owner.
The property is sold voetstoots, which means ‘as is’ and the buyer takes the risk of settling all outstanding debts on the property including rates and taxes and even evicting any people residing on the property should this be necessary.
These types of sales are where purchasers find the most value but also carry the most risk – high risk, high reward.
In order to buy a property on auction, you will need to:
- register to attend the auction and receive the information pack (where available);
- pay a refundable deposit as set by the auctioneer;
- if your bid is successful, pay the auction fees;
- if not a cash purchase, arrange financing prayer to the auction; and
- research or view the property prior to the auction where possible.
Importantly, you will have little if any time to inspect the property and often no access to the property before the auction, so there is considerable risk that the property is not in a reasonable condition and you cannot place any reliance on any figures or information provided by the sheriff.
Once you have bought the property, note the following:
- make sure you can follow through with the purchase (it helps to sort this out in advance) as failure to complete the sale will lead to you forfeiting the deposit and still be liable for sheriff’s fees in a sale in execution;
- the property in a sale in execution, is sold as is and it is your responsibility to settle all outstanding rates, taxes, municipal services, body corporate levies and any evictions; and
- if the owner is sequestrated or the property is the subject of a deceased estate, the transfer can be held up for extended periods of time.
It is absolutely important to familiarize yourself with the auction process and the property in the quest of hunting down a bargain. Because even though it is very possible to find bargains on auction, there are many pitfalls. Even more importantly, do not simply buy a property because it is on auction and discounted, first apply The Property Investment Principles (See: https://propertylink.africa/the-property-investment-principles/) and only the property complies with these should you even consider attending the auction to hunt for a bargain.
*Disclaimer: The contents of this article should not be considered as legal, professional, financial or any other form of advice. These are merely views based on the writer’s personal experience. Readers should obtain independent advice on any matter prior to making any decision.