The housing market these days is looking inflated yet great deals abound and some are almost too tempting to refuse. One such prospect is through the purchase of auction or ‘lelong’ properties. These foreclosed properties are auctioned to the highest bidder usually below market value and is a seemingly amazing investment opportunity. The perceived value of the home can be enormous as the cost to purchase can go as low as 50% below market value.
As good as it sounds; many potential buyers have been trapped into purchases that see them absorbing ALL the liabilities that come with the home. So if you are thinking about property auctions, be sure to ask these questions before you make that all important purchase.
What is the condition of the home?
Think about this, you would not buy a car without taking a look inside and going on a test drive; in fact, some people still won’t shop online for shoes and clothes, because they aren’t first able to try it on. So what happens when you are about to buy a house, a decision pegged as one of life’s major purchases – and you can’t even take a look inside to see what’s what?
This is by far the biggest gripe with auction properties, why? Because potential buyers are usually not allowed inside, instead they can only survey and inspect the property externally. Very few auctions provide the opportunity to preview the property before the auctions starts, and thus potential bidders often miss key indicators of damage, such as watermarks on walls, termite infestation and wiring issues.
Tip #1: Those planning to bid should survey similar homes in the vicinity of the desired property to find out its true value. This way a bidder can estimate, inclusive of repairs, just how much the house is truly worth and the level of additional expenses needed beyond the purchase price. In addition, you could also try your luck and ask neighbours in the area about the common repair problems faced in the home and if they would be willing to let you look inside (for layout and Feng Shui purposes, a long shot but worth a try nonetheless).
Is anyone staying there now?
When purchasing a lelong house, you are basically buying everything attached to it, even squatters. So if you buy a home with renters still living there, you’ll have to honour their tenancy contract, which is not a major issue if there is not much time left in the contract. But the real problem arises if they do not want to leave after term expiry.
Here you have a major issue on your hands; it’s a serious hassle to get people out of your house in addition to bearing all costs to evict including court and legal fees. It’s not an easy task to simply kick people out – ask yourself if the property is worth this much trouble.
Tip #2: Try to find out beforehand if there are people still living in the home, either legal renters or illegal squatters. It’s best to avoid the property if it is currently being inhabited; it should be fairly easy to spot, look for clothes drying in the garden or shoes on the rack. Check up on the property a couple of times and you’ll get the picture if people are indeed living there.
What else do I have to pay for?
In short, everything; you basically assume all liabilities of the property unpaid by the previous owner. So if you thought the responsibilities of owning a regular home are overwhelming, an auction property might be even more so due to the fact you are now accountable for all debt associated with the property.
What does this ‘debt’ specifically include? Well, depending on the auction type, you could be faced with paying off quit rent, assessment taxes, maintenance or service charges and utility bills that typically cover electricity, water and sewerage. If you’re purchasing a gated/ guarded or condo-type home that requires property management companies to oversee maintenance, then you’ll need to foot the bill for sinking fund fees as well.
Hold on, we’re not done yet; compounds on the property, warrants, developer consent fees, late payment interests and other penalties are also the responsibility of the purchaser, but based on auction type, could be deducted out from the balance purchase price payable.
Tip #3: Conduct a search at the state land offices, local municipal councils and utility companies to check up on any outstanding bills incurred that would fall on your head should you successfully win the auction. Tabulate the total costs and cautiously reason out if it is still worthwhile to take on the responsibility of this property.
Are there any financial concerns associated with the type of property auction?
Yes, Loan Agreement Cum Assignment (LACA) auctions which are conducted by banks for properties without strata or individual titles could place limits on; 1) how much the purchaser can claim back for outstanding bills related to the property and; 2) which bills may be claimed. This means that you really could end up paying more to cover debt beyond the balance of the purchase price.
Typically, banks only cover quit rent, assessment tax and maintenance/service charges. What’s more, they may only allow the purchaser to claim a maximum of 10% of these bills but note that terms do vary from bank to bank.
On the contrary, non-LACA auctions which are conducted by the high court or land office, usually for properties already issued with strata or individual titles, have the benefit of deducting all debt mentioned above from the balance purchase price.
Tip #4: Find out what type of auction your intended property falls under whether LACA or non-LACA, and more importantly get your hands on the Proclamation of Sale (POS). This document states all the terms and conditions to be observed for the auction. You’ll need to read through its details for specifics on the property. Better yet, you could use a second pair of eyes to help you, as there’s much to be hidden in the fine print.
Unfortunately, the deposit will be forfeited if you are not able to come up with the balance. For LACA auctions, you normally have 90 days to pay up in full whereas non-LACA auctions give you a little more time that is a 120-day period to settle the total payment with no chance for leeway.
The issue for most is that they may need a loan upon successfully winning the auction bid. However, loans don’t necessarily come in on time, leaving you to risk losing your money altogether. If you have other options to make payment such EPF withdrawals or enough savings to cover the balance, your deposits would be more secure.
Tip #5: Getting a pre-approved loan may be your best bet if you don’t have the necessary funds on hand. You could even consider borrowing from friends or relatives, but plan ahead of time and discuss your options with your intended ‘friendly’ creditors to see if they can indeed help you out.
Any other restrictions that I need to know about?
The main causes for concern are related to the property title status, you’ll need to check if:
(1) The property is contained under a Bumiputera lot (where the purchaser is not a Bumiputera);
(2) Any caveats have been lodged;
(3) The master title has not been issued.
If your intended property comes with these limitations, trying to resolve it would be an option but only if you are prepared to face hassle, waste time and spend even more money.
Tip #6: Most of these details should be listed under the POS but to be doubly sure, check on the title status at the land office to confirm all information is accurate. Many buyers have been scammed by unscrupulous parties, so the best way to arm yourself from getting cheated is by simply being pro-active.
The Verdict: Should I purchase an auction home?
Even though there appear to be so many reasons not to purchase auction homes, there is one outstanding motivation; you COULD be getting a fantastic property at a fraction of the price. The idea is not to completely run away from auction properties but to go into it with eyes wide open to all possibilities.
Note that even as you thoroughly do your homework once you have identified your desired property, it’ll still be close to impossible to know if you are buying into a dud-deal. But that is the way it goes for auction properties, so only attempt it if you have a suitable risk appetite.
Keep in mind that any second-hand home purchase is going to come with a set of repairs, just with this home; it’ll be up to you to find them. Have funds ready to fix the place, as it will at the very least, need minor renovations and maintenance to whip it into shape.
Be sure you are ready to face these challenges that are both financially draining and mentally demanding. If you are thinking that an auction property is a quicksilver way to getting vast returns easily, remember the law of investment, big rewards = big risk, this is exactly what buying an auction property truly is.
(Written by: Desiree Nair, 18th June 2015)
For more information about auction properties, you may contact:
Property Auction House Sdn Bhd
The biggest auctioneer in Malaysia
Poly Properties E(3)0235
The main agency appointed by most banks to manage auction properties
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