Buying a property on auction may seem like a bargain opportunity. However, anyone thinking of going this route must carefully consider both sides of the coin.
For a start, it’s important to understand that there are different types of auctions and each must be approached appropriately. The first major distinction is between voluntary and involuntary auctions.
Voluntary auction sales are usually reserved for upmarket residential properties, commercial and industrial buildings or specialised properties where the seller believes there’s an opportunity to achieve a higher price. This is not the place to be looking for bargains.
Those are rather to be found at involuntary auctions, where the seller has been forced into a sale.
There are two categories of involuntary auctions and it’s important to understand the difference. The first is a bank auction in which the owner of the property has been given an ultimatum by the bank to sell the property due to defaulting on the mortgage agreement.
“The main advantages of these auctions are that a prospective buyer is purchasing a property nett of any outstanding rates and taxes and that there is time to inspect the property and identify maintenance issues or defects,” says Tommy Nel, the head of credit at FNB Home Loans. “Occupation of the property is also not deemed to be a problem and is mostly agreed upon at the time of the sale.”
Nel believes that there are few risks in buying at these auctions, as long as the buyer understands that the property is being sold ‘voetstoots’.
The second type of involuntary auction is a sheriff’s auction, which takes place when a bank is unable to rehabilitate a debtor. The bank then approaches a court to attach the property and have it sold to recoup some of the debt.
“These auctions are usually held at the premises of the sheriff, are not well advertised and have poor turnouts,” Nel says. “They usually realise low selling prices and ‘bargains’ can be purchased.”
However, he warns that buyers may have to purchase without inspecting the property internally as tenants or owners are often reluctant to have the property inspected. They may also be reluctant to vacate the property after it has been sold, leaving the new owner with the problem of having to have them evicted.
Buyers at a sheriff’s auction must be aware that they will be responsible for all unpaid levies, rates, utility costs and taxes related to the property. They also have to pay the sheriff’s commission.
Bear in mind that when buying at any involuntary auction the hammer price is never the final purchase price. Buyers also have to pay the auctioneers’ commission and fees as well as transfer duties.
“The fact that auction sales are final and conclusive also means that they are excluded from the cool-off provisions in the Consumer Protection Act,” Nel says. “In summary, it would be wise for potential investors to do all their homework before embarking on the process of buying a property on auction. Often the advantages and opportunities do outweigh the risks associated with auctions, but they do also present material risks to the novice property investor.”
Original article published on www.moneyweb.co.za
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