Finding The Properties In The Auction Market

Auction properties include every type of property namely can be from residential commercial and land. Auction property evolves from secondary market property. Secondary market property being auction or force sells by assignee / bank due to a delinquent owner. One should be familiar with the fundamentals of a property before going for auction. Auction properties depend a lot on the fundamentals such as the market price, physical and legal condition of a property.

Auction properties are for those who have free time, credit facilities or ready cash and can make fast decisions. Buying auction property involves time and effort to do the title search, property inspection, outstanding quit rent and assessment fees search and the electricity and water bills search. After short-listing potential money-making auction properties, call the auctioneer to fax you the Proclamation of sales (POS) and Condition of sales (COS). You may also get the POS and COS from some other auctioneers’ website.

Important information you can get from the Proclamation of Sale is:

  1. Location of the property

One of the most important factors to consider in property investment is the address. The location should preferably be near a town or the direction of growth of a town. This is where the rate of potential capital gain is faster and higher. At least half of auction properties are unsuitable for bidding because of their location. They may be too far away from your home or office; causing possible difficulties in tenant management and maintenance later. Other considerations include certain locations being black-listed or properties attached with a caveat, making them ineligible for a loan.

  1. Description of property

Consider the type, zoning or usage of a property. Generally, the property can be residential, commercial or land. For high-rise residential properties, choose the higher floors with a good view but avoid the top floor due to possible problems related to roof leakage and hot weather. Most of the auction properties are not accessible; they are either locked up or the owners/tenants are still occupying them. In order to visualize the houses/ shops’ built-up size and dimension, you may get the property’s plan from auctioneer. In the description of property, you can get the information of type of property and how to go to the property.

  1. Reserve price

The reserve price is the minimum bidding price. The more frequent the property comes under auction; the lower is the reserve price. Generally, the reserve price also factors in the legal and physical conditions such the restriction in interest and encumbrances. Is the reserve price within your budget? Remember; always have an OD facility on stand-by or ready cash in case the property cannot be financed in time. If you have cash in hand of about RM50,000, it is suggested that you use one of your properties to create an OD facility of about RM500,000. With that, your target auction property should be within RM500,000 range.

After paying a 10% deposit with your cash in hand, the remaining 90% can be financed by a bank loan. If you are unable to get the required loan to settle the balance of the purchase price within the stipulated time, the 10% deposit will be forfeited. Thereafter you are responsible for the losses/gains for the future auctions of this property until it is sold. Therefore, in order to prevent the loss of your deposit money, you can use your OD facility to pay the 90% balance of payment first. Evaluate the physical condition of the property and factor in the cost of repair required. For auction properties, the reserve price should preferably be at least 30% below the market price.

       4 .Tenure of property

Select freehold property which provides perpetual ownership compared to having a leasehold property whereby your ownership expires by a certain date.

      5. Property status: Bumiputra or Non-Bumiputra

You will need to find out whether the property is a Bumiputra lot. A Bumiputra lot can only be purchased by a Bumiputra, thus narrowing the number of potential customers when one selling.

The Conditions of Sale is a very important document; it is similar to the Sale and Purchase Agreement.

The useful information you can get from this document would be:-

  1. Any outgoings such as arrears of quit rent, taxes, rates, duties, imposition, levy, assessment, fees, bills, charges, maintenance or service charges in respect of the property to be
  2. Paid using purchase money or
  3. Apportioned by assignee/bank and purchaser
  4. Paid by the purchaser.

The conditions above should be considered and factored into the valuation and reserve price of the property.

  1. The time for the full payment of the balance of the purchase money is typically
  2. 90 days for freehold properties
  3. 120 days for leasehold properties.

Physical inspection of the short-listed properties

The purpose of a physical inspection is to identify potential problems and additional expenses as part of calculating the value of the property, and for determining your bidding limit. During the physical inspection, the main consideration is whether the property is accessible or not, and whether it is vacant or occupied by tenants or owners.

  1. Vacant and accessible. The premise is vacant, and you can go inside to inspect. Always go with a friend or partner in order to avoid any unnecessary problems.
  2. Occupied and accessible. Either the owner or tenant stays there and allows you to inspect the premises. Always factor in an additional eviction cost, if you decide to bid for such premises.
  3. Vacant and inaccessible. The property is vacant but locked. For landed residential properties, you may not be able to determine accurately the costs of possible repair and renewal. For high-rise residential and shop office, the repair costs may be estimated by inspecting a similar unit in the same area.
  4. Occupied and inaccessible. If the tenant stays there and does not allow you to inspect the premises, ask the tenant how much is he renting it for and whether he intends to continue stay there. If the rental is reasonably good and tenant intends to continue staying there, you may consider buying.

If the owner is still staying there, run! Do not waste your time and effort in evicting the owner. It is costly and may be very unpleasant.

Generally, survey and inspect the surroundings and neighborhood. For residential properties, always check the availability of markets, school, recreational facilities in the vicinity of the property and the neighborhood condition.

For high-rise residential properties such as apartments and condominiums, avoid the top floor, due to possible roof leakage. Survey the facilities available in the high- rise residential building. Also remember to check for any overdue service and maintenance charges from the management office. Finally, fine tune with the Feng Shui factors.

For landed residential properties, such as terrace houses, semi-detached houses and bungalows check the land area and built-up area first. Then, look at the physical condition of the house. Are there major defects which are beyond repair, or only minor cosmetic repairs required to enhance its value? It is preferable to be able to park two cars and have a wide road in front of the house. Finally, fine tune with the Feng Shui factors.

For shop offices, shop-apartments or hybrids always ensure there are sufficient parking lots available. The higher the shop such as four-storey or five storey-shops, the more parking spaces would be needed for employees and customers. Other factors include visibility of the shop, preferably frontage with the convenience of roads leading to the shop.

Also, check whether neighborhood shops comprise of synergistic businesses or businesses with ‘negative associations’. Examples of synergistic businesses are supermarkets, restaurants and even private colleges. Examples of businesses to avoid would be bereavement shops, printing presses due to noise, and auto repair shops. For investment purposes, the occupancy rate in the neighborhood should be more than 80%.

Factories or warehouses should be located near the seaport or airport, with readily available infrastructure like highways and roads. The factories should also be located near supply of cheap labor and raw materials. The most important factor for land is that it should be located near the direction of growth of a town and accessible to it.

Title Search

An official title search at the Land Office can be obtained by going to the respective Land Office yourself or employing a runner from a nearby lawyer’s office to gather the information. The main purpose of the title search is to check whether the title is attached with any caveat. If it is with caveat, you may have financing and transfer-related problems. The other reason is to find out whether the property has any restriction in interest. Any property with restriction in interest requires the consent from the Land Office; which normally takes at least three months. The time factor may affect the loan being released in time for the full payment as stipulated in the Conditions of Sale.

Other information that you can get from a title search would be:-

  1. Tenure
  2. Zoning
  3. Land usage
  4. Ownership

Valuation

The most difficult part of buying an auction property is determining the value of the property. Firstly, call and check the prices of similar properties that carry the “For Sale” sign in the same area. You may call an experienced property agent or banker in that area to provide an estimate of the market price for more expensive properties; it is advisable to get a professional valuer to help you determine the market value. You may also ask the owners of similar properties in the same area for local news on recent transacted prices in the neighborhood.

Fine tune the proposed market price of accessible properties you are going to bid for with the costs of repair and renewal. For inaccessible properties, use your experience and previous estimations to fine-tune. For owner- occupied properties, add in additional eviction costs.

Decision

Information about the auction properties will be available less than two weeks before the auction date. The information will be published in mainstream newspapers. The ability to make a quick decision is a very important factor in successfully purchasing auction properties. For auction property investors, one needs to allocate a lot time to do the basic title search, property inspection and attend the auction.

Once the decision is made, get ready for the auction. First prepare and bring along a bank draft of 10% of the reserve price. Determine the maximum bid price you are willing to go for. For example, from your valuation, the property market price is about RM600,000. The reserve price is RM450,000. The maximum price you are willing to bid is RM500,000. That means you have to stop bidding and not be carried away if the price goes beyond RM500,000. The 10% additional bid of RM50,000 needs to be paid in cash, which is RM5,000. In this case, you will need to bring along a bank draft of RM45,000 (10% of RM450,000) and cash RM5,000 (10% of the additional bid of RM50,000).

When You are the Successful Bidder

You are the successful bidder once your bid is accepted. You will receive a few sets of the auction contract documents. These documents are equivalent to the Sale and Purchase Agreement.

The next thing you should do is to get at least five more copies of the contract documents for transfer of billing name and address for water and electricity changes, and for transferring the property. As specified in the Condition of Sale in the contract document, there is a time limit for full payment, either 90 days or 120 days. If the purchaser of the auction property is unable to pay the balance of the purchase price within the time limit, the 10 percent deposit paid during the auction will be forfeited. Therefore, always prepare beforehand a credit line on standby, in case you cannot get the loan on time.

One of the important characteristic of an auction property is that it is sold on a “as is where is basis” meaning, after paying the 10 percent deposit and you are the successful bidder, you are fully responsible for the property.

What you need to consider before buying an auction property is that, firstly, you must know the fundamentals of the property. If it is residential property, refer to residential inspection checklist (Appendix I). If it is a commercial property refer to commercial checklist (Appendix II). For both the residential and commercial property, compare the auction reserve price to the market price. If it is more than 20% below market price, you may need to consider viewing the property and have a physical and title check before your final purchase decision.

For example, if the property’s market price is RM700,000 and the auction property reserve price is RM550,000, estimated other costs such as repair and settling of all the outstanding quit rent, assessment fees and bills of about RM50,000. YOU may set your maximum bid limit to RM600,000 before going for the bid. You may use auction property inspection checklist (Appendix III) before making your decision to purchase the auction property.

You can get the information about an auction property from signboards on the property or on trees and lamp posts near the property, newspapers and the Internet. Some the websites for auction properties are:-

  1. www.ngchanmau.com
  2. www.leongauctioneer.com
  3. www.auctions.com.my
  4. www.tancorp.com.my
  5. www.rajanauctioneers.com
  6. www.auctioneers-sejahtera.com
  7. www.lelongtips.com
  8. www.theoneproperty.com

You can also find auction property from auction property agents. Auction property agents act on behalf of the bank as a seller. The bank will pay the auction property agent the fee for the service provided upon the successful sale of a property. Normally, it is about 2% of the selling price. In the auction market, all types of properties such as residential, commercial, industrial and land are sold. Residential properties include apartments, condominiums, terrace, semi-detached houses and bungalows. Commercial properties include shoplots, shop offices and retail units in shopping complex. The industrial properties are raw land, agricultural land, residential land, commercial land and industrial land.

Generally it easier to sell properties through auctions because purchasers usually believe that auction properties must be cheap.

The reality is that not all auction properties are cheap. There are two type of auctions, one is private auction and the other is public auction. Private auctions are personal auctions. Normally, news about auction properties will be made known one or two weeks before the auction date in the newspaper, auctioneer’s office, land offices, the banks or on the Internet.

Nowadays, it seems that the Internet has made it easier and faster to disseminate auction property information. Due to the short period of time given to the prospective bidders before the auction date, a sense of urgency was created for prospective bidders to take immediate action such as viewing the property, checking the outstanding bills and estimate the repair costs.

The competitive bidding process can be fun and emotional. Due to the desire to win and the fear of losing clouding the judgement of bidders, sometimes the price of the properties at good locations get pushed up even beyond their market price. For example, market price of a shop office is RM500,000, was once sold in the auction market for RM900,000. That is RM400,000 more than the market price! Always set your ceiling price before going for an auction and remember to control your emotion and hand. Do not simply raise your hand, you may get the property at a higher price.

Generally, the difference between, auction properties in the auction market and other properties on sale such as those from developers in the primary market and property owners in the secondary market are:-

  1. The price of auction properties can be as low as 20% to 50% from the market price and
  2. Auction properties are sold “as where is basis”, which means that the property could be a non vacant- possession one and with encumbrances. You may have to factor these problems into the property. If the auction property is vacant for several years, you may have to factor in the eviction cost if the owner or tenant is still staying in the property. If the auction property is vacant for several years, you may have to factor in the repairs costs and all the outstanding bills such as electricity, water and sewerage charges.

The advantage of buying auction properties are:-

1. Bargain prices.

An auction property is usually valued by licensed property valuers to determine its market price. The assignee/bank will compare the total loan outstanding with the market price to determine the reserve price and this reserve price will be gradually reduced 10% each time during subsequent auctions until the property is sold off.

  1. Safe and fast transaction.

After the fall of the hammer and you are the successful bidder, you are required to pay 10% of the deposit and sign a bidding contract. You will also be given up to 90 days or 120 days to pay up the remaining 90% of the purchase price. Auction property is safe because unlike the secondary market property, the seller can still pull out the deal as long as the transaction is not completed. All the legal work is usually completed prior to the auction date and is stated in the Proclamation of Sale and Conditions of Sale. This will shorten the time taken for the transaction.

The transaction of auction takes either 90 days or 120 days, and is faster compared to the secondary market properties which takes about four months to ten months. Primary market property may take up to two to three years.

After the physical inspection, the following conditions of property should be avoided:-

  1. Hyper-market – traffic jam during weekends.
  2. School – traffic jam in the morning and in the afternoon.
  3. Mosque – traffic jam during Friday prayers and the loud speaker would be noisy for non-Muslims.
  4. Church – traffic jam during Sunday prayer.
  5. Temple – traffic jam and smog.
  6. Oxidation pond – bad smell, depends on wind direction.
  7. Pasar borong – bad smell, depends on wind direction.
  8. T-junction – distraction and invisible threats from vehicles.

Procedures in bidding for auction property

  1. Identity the subject property

Potential bidders should identify the property that suits their requirement such as the price, the location and the type of the property they are interested in.

  1. Get complete details of the subject property

Outstanding Bills

–              Electricity

–              Water

–              Quit Rent

–              Assessment

–              Maintenance chargers

–              Indah Water

Legal Encumbrances

–              Caveat/Loan

  1. Survey the Property

–              Location

–              Neighborhood

–              Physical conditions

4- Financial eligibility – check with the bank.

  1. Register as a bidder – 3 days before.
  2. Prepare a bank draft.

Auction begins

  1. Successful bidders are required to pay the 5% or 10% of the reserve price immediately to the auctioneer.
  2. Successful bidders will also be attended to by a solicitor to execute the Proclamation of Sale (POS) to formalize the purchase of the property.
  3. The balance of the purchase price should be settled by the bidder or his financial institution within 90 days to 120 days as stipulated in the Conditions of Sales (COS)
  4. It is advisable that the successful bidder should immediately apply for the loan amount required to settle the purchase.

Documents to bring during the auction day:-

  • Go earlier by one hour before the auction starts.
  • Register as an individual bidder.
  1. A photocopy of bidder’s identification card (both sides).
  2. Bank draft of 10% of the reserve price.
  3. Extra cash (to make up the balance of the first 10% of the final bidding price).

Corporate bidders

A certified true copy of company’s memorandum and articles of association.

Bank draft of 10% of the reserve price and extra cash.

Form 44, 24, & 49.

Board of directors’ resolutions.

Agent/representative

Letter of authority from intending bidder.

A photocopy of bidder’s identification card (both side).

Bank draft of 10% of the reserve price and extra cash.

Registered bidders will be given a card and allocated number which will identify him as abider. If it is held in high courts or land offices, the officers or auctioneer will call out their names before the auction starts.