How does a property end up on the auction market in the first place?
When the current homeowner (also known as the ‘beneficial’) fails to service his/her loan instalment for three months straight, it amounts to ‘defaulting’. The bank will then instruct a lawyer to sell the property by way of an auction. Here’s where it slightly differs, based on whether the final title for the property has been issued or not:
- Not issued: The lawyer will be in charge of instructing a valuer to prepare a valuation report for the property, as well as appointing a private auctioneer.
- Issued: The lawyer will apply to the court for an order for sale and will then have to appoint a valuer to prepare the valuation report. After which, an order from the court is needed to appoint a court auctioneer.
From the valuer’s hand to the private/court auctioneer, this process will take a few months, depending on the efficiency of each department involved.
The auctioneer will advertise the proclamation of sale or condition of sales, giving at least one to two months’ notice. This gives the public ample time to prepare, make decisions, as well as to inspect the property (externally). If the beneficial owner would like to resume paying and claim the property back, he’s allowed to do so before the start date of the auction.
But how are auctioned properties valued anyway?
For an auction property, the valuer will determine its worth and provide both the market value and forced sale value of the property.
When the valuer comes to inspect the property in question, he/she will normally conduct an external survey first, because they’re seldom given full access to the property. In addition, the bank rarely holds the keys, so they’re forced to make a judgment based on outer appearances only, just like any other potential purchaser.
Since this is the case, the valuer will not be able to take into account any renovations done within; vice versa, the valuer will not take note of any defects present. The property’s price will thus remain at a flat rate – which will be based on a basic unit of a similar property recorded in the Valuation and Property Services Department (JPPH) – while also having a reduction of 20%.
Why is the price of an auction property much cheaper?
Reason #1: Forced sale value
Since it’s an auction after all, the valuer is required to provide two types of prices in his report – the market and the forced sale value. The forced sale value does not usually appear in the report unless it’s specifically requested by the client.
A forced sale can be defined as a sale when the property is disposed of under extraordinary circumstances, usually reflecting one or all of the following:
- An inadequate marketing period without reasonable publicity.
- An inappropriate mode of sale and sometimes reflecting an unwilling seller situation.
- Disposal under compulsion or duress.
As such, a forced sale value is the amount which may reasonably be received from the sale of a property under forced sale conditions, and which does not meet all the criteria of a normal market transaction.
Reason #2: No bids
If there are no bidders for the property on the auction date, the lawyer will fix another date (normally after 30 days) for a subsequent auction. But this time, the reserve price will be lowered (usually by 10%), compared to the previous reserve price in order to attract interest. Now who doesn’t love a bargain!
If, for the second time around, there are no bidders for the property, the price will once again see another reduction of 10% and a third auction date will be fixed (after 30 days).
Here are some tips on how to be due diligent!
Buying an auction property would of course come with its own set of risks which you need to bear in mind. The most important of all is the fact that you’d be unable to view the interior of the property. As you’ll literally be judging a book by its cover, you can only make a decision based on the photo(s) provided on the marketing material, or if you go to the property to physically inspect the outsides.
Therefore, it’s important for you to remember the following steps, as they’re good practice. Better to be safe than sorry!
- The prospective buyer must first inspect the Proclamation of Sale that’s advertised by the auctioneer, and contact the auctioneer for more details of the property.
- Aside from looking at the basic criteria of the property such as its location, potential rental yield and capital appreciation, it’s vital to do a little bit of extra digging before committing to buying one. A title search at the Land Office is one such factor to consider; it details the particulars of the property such as the name of the owner and whether there are any *caveats lodged on the property.
- Interested purchasers should also contact the management of the property to determine the outstanding service charge amounts currently owed by the property’s beneficial owner. Also, do a quick search on outstanding quit rent and assessment charges to ensure that these expenses are within the budget of the buyer.
- Arrange (or appoint agents) to visit the property first, before deciding whether to buy or not. Some of the auctioned properties may not be well-maintained and have structural defects. By looking at the exterior, you may be able to roughly gauge the repair costs that are required. Furthermore, potential buyers should be well aware of the location and its vicinity, i.e. any cemetery or sewerage treatment plant nearby.
- Use reliable tools such as Loanstreet’s Home Loan Eligibility Quick Check to calculate if your current budget is able to handle the monthly instalments. You wouldn’t want to have the unpleasant experience of putting your property on the auction market all over again!
*A caveat serves as a notice of possible lawsuits by third parties and/or the previous owner. The caveat also prevents the transfer of title and the interests of the property until the caveat is removed.
You need a little luck, and lots of due diligence!
Although many people think that auction properties are rundown which requires loads of attention and money, some investors may unearth a really good bargain. People say you require some luck in buying properties. We say that you make sure you create your own luck by conducting due diligence before committing to buying an auction property.
As such, smart buyers and investors know how to choose a property that not only comes with a cheaper price tag, but with some renovation works, can even be used to generate passive income!