#PropertyHacks – Should You Buy A House At Auction? Here’s A Guide On Everything You Need To Know About It
If you are considering purchasing an auctioned property, it is important for you to understand the basic auction terms and conditions. Here’s a complete step-by-step guide to buying a property at auction or lelong in Malaysia.
Buying a property at auction could be a good bargain if you’re looking for a cheap, below market value property. However, purchasing an auctioned property could also be a risky business if you are not well-informed about the procedure and the risks associated with it.
We’ll have to be frank – buying a house at auction is not the right choice for everyone. You must have the cash for the reserve price and the willingness to take on a high-interest loan to buy the property. That doesn’t include the fact that it can get pretty unnerving to be at an auction in the first place, given the bidding speed and the competition among potential buyers.
But scouting for an auctioned property could be fun for those who enjoy doing extensive research and who love the thrill (and have the patience and nerves) of hunting for hidden gems or good deals in the market!
All it takes is time, interest and dedication, and you could walk away with a really good deal. If you are interested to learn more about how to buy an auctioned property, read below!
What is an auctioned property?
When a homeowner fails to pay their mortgage for at least a few months, they could default on their loan, and end up in foreclosure. If the homeowner continues to delay the balance owed after a certain period, the bank has the right to repossess the house and auction it off, and also force the homeowner out for nonpayment.
What are the pros and cons of auctioned houses?
But before you go into a bidding war, hold your horses! The process of purchasing an auctioned house is not the same as purchasing a house from a private seller, and there are several pros and cons you should weigh before deciding on your next step.
1. Cheaper house prices
The first and most obvious reason to buy a house at auction is the cheaper price tag, usually way below the market rate. Not constricted to the size or the area, you could find a suitable house that is typically out of your price range. Paying less for the house also means you can be more flexible with your budget and allocate more money to other things like renovation and furnishing.
2. Lower commission fees for agent
According to the Malaysian Institute of Estate Agents (MIEA), the agents’ commission fees are set at a maximum of 3% of the property’s sale price for the sale and/or purchase of land or buildings within Malaysia – slightly hefty to say the least.
However, the joy of buying an auctioned property is that the commission fee, for either an agent or attorney whichever you choose, could be lower.
1. Not being able to check the property
One of the big disadvantages with an auctioned property is that, as a bidder, you won’t get a chance to view the interior of the property. Thus, bidders won’t know what the condition of the house is when they are making their bid, and this can turn into a pretty risky investment. Did you know that a man bought an auctioned condominium at Mont Kiara only to find a body that had been chopped into 11 pieces stuffed inside the unit’s fridge?
Do as much research as possible on the property; even if you don’t have access to the interior of the property there are other factors to look at such as the exterior parts of the house. For example, the picture of the auctioned property may look acceptable, but visit the location to get a better view of it – the last thing you want is for it to be located at a busy T-junction or next to a sewage plant.
Bonus: equip yourself with extensive knowledge of the general housing market. Find out the legal elements, inspection jargons, the type of lease the house is under, and find out more about the bank who owns the property.
2. More complications may arise out of it
The complications are higher than usual for an auctioned property. Common complications include understanding that there’s a caveat placed on the house by a third-party.
Derived from the Latin word which means “let him or her beware,” a caveat is a temporary measure to protect the rights of the land.
A private caveat aims to protect an individual’s rights under the sale and purchase agreement temporarily, in anticipation of legal proceedings lodged in the private caveat. A private caveat could cause a hindrance as it will prevent any dealings: from registering to change of ownership, while the private caveat is in force.
Read further below for our full explanation on caveat.
Before we go into the full steps, here’s a to-do checklist before bidding on an auctioned property
Auctioned properties have a risk of having a private caveat. If an auctioned property does have a private caveat, even if you win the bid and pay the full amount, you will still have to challenge the third party (who submitted the caveat) for the property. This is because a private caveat may only be removed:
- by the caveator (a person who files or enters a caveat)
- by the Registrar
- by an order of the court
Application for the removal by court order could be done by any person aggrieved by the existence of the private caveat. In this case, the person who won the bid on the auctioned house which had a private caveat.
An auctioned property with a private caveat will also mean you will not be able to get a home loan. This is because no bank will approve a loan if there is a private caveat on the property. Therefore, unless you can afford to pay in cash, it is advisable to not proceed to bid for a caveated auction property.
But do take note that, even if you win the bid and have the money to pay for it in cash, you will also have to go to court to challenge the third-party to remove the caveat, which can be a long procedure and incur additional costs as a result of the legal fees charged.
Before proceeding to bid for an auctioned property, it is advisable to get the proclamation of sale (POS), and also to do a title search of the property; you can request these things from the auction agent. This will give a bidder useful information such as the address, and if there are any restrictions such as a caveat on the property. Having the address means you can check out the surrounding location of the house, even if you can’t see the interior at least you will know what the location is like.
Do an extensive background check on the developer of the property – if the property’s title is still under the developer’s name, a bidder should first check if the developer is still an existing company.
Remember, the terms and conditions in an auction contract always protects the bank, not you. If the developer is bankrupt and the company has been liquidated, then transferring the title to you after you have won the bid will be a hassle.
3. Type of tenure: is it leasehold or freehold?
Finally, do some homework to find out the type of tenure for the auctioned property, whether it is leasehold or freehold. If it is leasehold, you will need to check with a bank to make sure you can get a loan. If the number of years remaining on the lease for the leasehold property is less than 50 years, some banks might not give you a loan. Or if a bank does approve a loan, instead of securing a 30-year loan, you might get a 25-year loan.
For example, a bank auctions Ahmad’s house for RM1.4mil. However, his default loan amount to the bank was only RM300,000. As such, after his house has been auctioned, Ahmad will get RM1.1mil, as the bank will only take the outstanding amount owed, which was RM300,000.
Buying a property, whether it is brand new, sub-sale or even an auctioned property will involve risks. Read our other articles on purchasing property so you can make a better-informed decision before taking that big financial leap.
How to buy a lelong or auctioned house? – Here are the 10 steps
- Identify the property – you can find properties that will be auctioned from platforms such as lelongtips and auctionlist. Otherwise, you can also have a look at the classifieds section of newspapers.
- Search for the property – get the proclamation of sale (POS), and also to do a title search of the property. This will provide you with the location and description of the property for auction.
- Inspect the property – don’t rely on the description only. Go to the location so you can see the surrounding area.
- Call the auctioneer or sales agent to obtain other information on the property not available in the description.
- Prepare a bank draft equivalent to 10% of the reserve price.
- Register on the auction day and get a copy of the terms and conditions of sale from the auctioneer. A bidder’s card with a number will also be issued to you for identification during the auction process.
- Read the conditions of sale, and seek clarification from the auctioneer on any queries before the auction starts.
- Bidding on the property will start when the auctioneer announces the commencement of the auction. Bidders raise their hands to bid for the property.
- The successful bidder will be the bidder with the highest offer during the bidding process. When the auctioneer’s hammer falls, the property is considered sold.
- Sign the sales contract, and the successful bidder will be advised to collect the stamped contract at a later time. Contact your bank to arrange for financing.
Buying a property is a major financial investment. Follow the tips and tricks in our #PropertyHacks series to make the most out of your investment. Stay tuned for more content!
This article was first published in November 2017 and has been updated for freshness, accuracy and comprehensiveness.