South African Real Estate – How to buy a property on auction?
HOW TO BUY A PROPER ON AUCTION
When we hear that a property is being sold on auction the first thing that comes to mind is that it’s a sale in execution where the owner could no longer afford the bond repayments. But times have changed and our assumptions may be rather incorrect.
Who sells property on Auction?
Although it is true that auctions are the preferred way to sell property where the bond has fallen into arrears, any home owner who wants to sell his property can decide to put the property up for auction. As a matter of fact this way of selling property has increased considerably as it has definite benefits attached to it. In the USA auctions are a very popular way of selling fixed property and in Australia more than 80% of all property is sold on auction.
How is the process of auction controlled?
An auctioneer who sells fixed property is classified within South African law as an Estate Agent in terms of the Estate Agent Affairs Act, of 1976, and must therefore be registered as such and be in possession of a valid Fidelity Fund Certificate. When you deal with an auctioneer it is best to look for one who is a member of the South African Institute of Auctioneers as well as the South African Estate Agency Affairs Board.
How to buy property on auction?
If you have never been to a property auction before and do not know how the process works its time to do your homework.
The key to success is being prepared
Reading articles such as this is a good way to increase your knowledge. Then, for some practical training, attend a few property auctions where you just observe the entire process. If you have any questions the auctioneer will usually be more than willing to answer them for you after completion of the auction. To find properties you are interested in you can look at advertisements in the local media and on the internet. Auctioneers will also have a list of upcoming auctions that you can look it.
Previewing the property
Nobody can expect you to buy a property on auction without having had the opportunity to inspect the property. Usually the auction house will have a viewing date on which you can inspect the property. Do so properly!
Ask the auctioneer as many questions as you want to; talk to the owners if they are available, talk to neighbours and have a good look at the area. Gather as much information as possible. Obtain the terms and conditions of the sale you are interested in beforehand from the auctioneers, as well as a copy of their operating policies so that you can be properly prepared.
Financial implications - Do I need to pay cash?
A big difference between buying a house on auction and buying one through the normal channels is that with an auction there can be no conditions. You cannot buy a property on auction on condition that the bank will grant you a mortgage bond. Yet, 95% of all auction sales are financed through bond finance, so it’s not only cash buyers who can buy property on auction.
Only the required deposit in the form of a bank guaranteed cheque or cash must be available at the auction; this amounts to usually five to ten percent. Establish before the time what type of payment is acceptable to the auctioneer.
You must know beforehand that you will qualify for a bond by making bond arrangements with your bank before the sale. If your bid is accepted at an auction you will be legally bound to buy the property - you need to be 100% sure that finance will not be a problem.
So, decide what the maximum amount will be that you will bid on before the auction, then stick to it - don’t get caught up in the moment and over commit yourself.
Who pays the commission?
When you buy property through an estate agent the seller pays the agent’s commission. In case of an auction the buyer is liable to pay commission on the sale to the auctioneer. Get details regarding this from the auctioneer beforehand.
Finally – it’s auction day
If you have done proper preparation you can look forward to the excitement of the auction. What needs to be done on the day?
1. Get there ahead of time and register. You need to register as a bidder and you will be issued with a bidder’s card and a paddle with your bidder’s number on it. Before the official start the auctioneer will give information such as the lot number and description — make sure you are bidding on the right property! There is usually time allotted for questions; ask if anything still bothers you.
2. The bidding finally gets underway - Important things to remember:
- Lift your hand or paddle if you wish to bid;
- State the amount clearly — even shout if you have to;
- Make eye contact with the auctioneer to ensure that he/she acknowledges your bid;
- If the bidding exceeds your limit clearly say NO” when the auctioneer asks you.
THE FINAL BID IS AWARDED TO YOU,
- NOW WHAT?
If the final bid is awarded to you, you will sign the sale conditions, pay your deposit and make arrangements of how you will pay the balance still due.
Buying a house on auction does not guarantee you a bargain, but you may still be able to buy it for much less, so do your homework and see what’s available. Right now bargains are indeed available for qualified buyers. Time is of the essence when it comes to buying at auction. There are many steps that need to be taken before you are able to make a successful purchase.
1. Obtain copy of auction catalogues;
2. Choose the properties of interest;
3. Research the area and property;
4. Visit and inspect the area and property;
5. Check the legal pack;
6. Establish a list of the properties to bid on;
7. Repeat for all properties of interest;
8. Go to auction - Bid.
The auction route may not always result in the best price
In the prevailing market conditions, disposing of a commercial property by way of auction may not always produce the desired result. Many sellers are being persuaded to put their properties on auction on the premise that this will maximise their price, however, reserve prices are not necessarily being met.
“Generally at an auction, if the reserve price is not reached, the seller has between 24 and 48 hours to either accept or reject the highest bid”. This places a great deal of pressure on the seller to accept a bid which is lower than the original reserve price — which may well be far removed from the maximised selling price the seller may have been enticed with at the outset.
Today’s buyers are well informed and are generally seeking a good buy which will also provide sound returns. Local investors are savvy and will not naively buy something on auction that is not producing a sound yield, which at present is in the region of 10% to 11% for good commercial property. Estate Agents prefer conventional property sales methods where they can negotiate a deal in a professional and unpressurised manner where they can act on behalf of the seller and as soon as they receive a mandate negotiations can commence, and reveal the true, intrinsic value of the property coupled with its investment and/or income potential.
Property fundamentals, while not at the unsustainable buoyant levels of recent years, are still holding their own across most areas of commercial property ‘However demand has softened for certain spaces and there has been an impact on bad debt books. Listed property companies will start reflecting this in their growth, which will be muted in comparison with the high levels of the past few years. Listed property companies tend to finance over longer periods, and right now it is difficult to get long dated debt. While short-term interest rates are down, rates have actually increased for longer-term finance. Banks require higher margins, together with their more conservative credit requirements.
“It would help if the capital market improves and margins return to more normal levels, bringing liquidity back into the market. A sustained lower interest rate environment will result in better fundamentals coming through for the property sector”.
What to do at a property auction?
- When you register ask for a copy of the Conditions of Sale and thoroughly inspect them;
- Ask the auctioneer or the Alliance Group team any relevant questions before the sale;
- Ask relevant questions at the designated question time;
- Inspect the property fully before th sale commences;
- Remember that auction sales are non-suspensive and “voetstoots”. You must thus do your homework;
- Watch, listen, ask and bid only when you feel comfortable to do so;
- Settle immediately after making your purchases of movable assets or property.
- Commission and taxes may be payable over and above your bid price;
- All our auctions are taped in order to avoid confusion and disputes. Each auction is audited;
- Our auctioneers are all trained and qualified members of the South African Institute of Auctioneers and of the South African Estate Agency Affairs Board;
- All deposits are paid into valid Trust Accounts in accordance with the relevant legislation;
- To register with the auctioneers, we will place you on our e-mail and SMS “auction alert” client base;
- To visit our website regularly for more information about upcoming auction sales;
- As a strict rule we do not accept cash, fully or in part, at any auction sale;
- To make your financial arrangements prior to the auction sale.
The Estate Agency Affairs Board Act 112 of 1976 governs any person who holds himself out as a person who, whether directly or indirectly advertises that he/she, on the instructions or on behalf of any other person, sells or publicly exhibits for sale immovable property. Auctioneers who sell immovable property clearly fall within the definition of an estate agent and must be registered with the estate agency affairs board and must also hold a valid fidelity fund certificate.
Source: Business Day
Courtesy: Agent – The Official Publication of the Estate Agency Affairs Board
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