Is Buying A Property At Auction A Good Idea?
Buying property at auction can be cheaper than buying direct from developers and homeowners, but these benefits often come with huge risks too.
Typically, houses end up on the property auction block because of the owner failing to pay their mortgage, property tax, income tax or other obligations that come from owning a house. These properties could also have been seized by the government due to illegal activity or are simply just abandoned.
When the original owner of the auction property is already owing money to the bank or government, there could likely be other unpaid debts tied to the property when it finally finds its way to the auction block. So, it’s best to be prepared before you raise your hand to commit to buying one in auction.
Here are some risks and pitfalls that you should avoid at all cost.
1. Losing your deposit
There are two types of auction for foreclosed properties in Malaysia: Loan Agreement Cum Assignment (LACA) auction, which is done by banks for properties without an individual or strata title; and non-LACA auction, which is done through High Court for properties with an individual or strata title.
A LACA property requires a 5% deposit to the auctioneer, while a non-LACA property requires 10% of the reserved price.
The balance purchase price of a LACA property is normally settled within 90 days after a successful bid, while a non-LACA property allows you to settle the balance within 120 days.
Before you consider buying an auctioned property, ensure that you have enough cash allocated to pay the balance purchase price. This helps to prevent your deposit being forfeited due to late payment caused by any possible reason.
2. Making a bad investment
Obviously, property prices and rental yields vary due to various factors.
However, just because it is cheap doesn’t mean it will make a good investment. Like any property investment, you need to consider all the factors, depending on whether you are buying for your own occupation, as an investor, or as a speculator. If you make the mistake of buying a house at a shoddy location, the price may remain the same for a long time.
Before you invest your hard-earned savings, take the time to understand the condition of the auction property and check its surroundings as well as compare property prices in the neighbourhood.
After all, no one may want to buy the property from you until years and years later, so you need to be prepared to be in for the long run.
3. Trouble evicting previous occupants
Unfortunately, an auctioned property does not always come with vacant possession, so if there are people occupying the property, it is your job to get them out after you successfully bid for the property.
According to Malaysian law, to legally evict occupants out of a property, you must first be the owner of the property. Once you are officially the owner, you can apply to distress the occupants through a lawyer before you apply for a court order. This process can be lengthy, taking 4 weeks or more and will likely cost thousands of ringgit including the cost of taking legal action.
Of course, the best way to get the occupants to move is to first speak to them. This can be a difficult process – the occupants might not be in, be reluctant to meet you, and might even refuse to open the door. Some have even been known to damage the interior before leaving.
Before you purchase an auctioned property, always find out if it is occupied, and if it is, whether they are the previous owners or tenants. Tenants are usually agreeable to extending their tenancy if rental remains the same. However, you may run into trouble if the occupants are disgruntled previous owners.
4. Footing heavy outstanding bills
Some auctioned property buyers get a rude shock when they discover that they have to pay for various outstanding bills, including water, electric, maintenance, quit rent and even assessment taxes that have not been settled previously.
The cost may run into tens of thousands and throw you off your initial budget. Normally, you will need to pay all the outstanding bills after you have successfully bid for the property and submitted the necessary paperwork through your lawyer.
Before the auction date, go to the relevant utility offices, such as Tenaga Nasional Berhad, Syabas, property management office, with a copy of the Proclamation of Sale (POS) to check on the outstanding bills. This is so you can calculate the real cost involved and decide if it will be a worthwhile purchase.
If there are outstanding bills, add everything up and you have will have an idea of the maximum auction price you should be willing to go for.
5. Paying for costly repair works
Always take into consideration the condition of the property you are bidding for. A property that is badly-maintained and is riddled with damages can rake up significant repair costs.
This could result in a potentially vast difference in your overall expenditure, so you would do well to inspect the property first to get an accurate costing.
Before the auction date, pay a visit to the unit. Though you may not be able to view the interior, just looking from the outside can give you an idea of the condition of the property.
6. Buying a property with existing restrictions
Another risk that can cause you trouble when it comes to buying auctioned properties are the caveats that may be in place for the property, or the status of the title.
Certain properties are allocated as Bumiputera lots, and you may not be able to transfer the property to your name if you are not a Bumiputera. There are also some properties with caveats in place.
Caveat is legal notice to stop or suspend a property sale. For example, if the auctioned property is co-owned by two individuals, one of the owners may put a caveat on the property to stop the other owner from selling the property. Another scenario could be the previous owner may have dealings with money lender, and they agreed into a private caveat to use the property as collateral.
To avoid running into trouble after you have successfully bid for a property, cover all bases.
If you are keen in trying to acquire a bargain property at auction, paying attention to the aforementioned details will provide an accurate picture of the true costs and true value of the property until you’ve become the new owner.
Adequate investigation on the buyer’s part will reduce some of the risks associated with buying auctioned properties and ensure you are making a sound investment choice.
This article was first published in 2014 and has been updated for freshness, accuracy and comprehensiveness.