Property Investment
Buying at auctions
Source: theedgedaily.com
Date: 7.8.2001
Sreerema Banoo
"Three-hundred-and-fifty-thousand ringgit going once... RM350,000 going twice... RM350,000... SOLD to Mohd Ali (not his real name) for RM350,000."
These unmistakable words of the auctioneer precede the fall of the hammer. For many, auctions are associated with charity or fund-raising events but an auction is serious business, especially inMalaysia
Licensed auctioneers recall a time when moneylenders (like the chettiars) took a borrower to court and petitioned for an auction to recover the sum lent.
Of late, property auctions have become more popular with investors. This, licensed auctioneers attribute to the number of phone calls they receive after an auction notice is advertised.
Whether the interest is translated into bids is a different story but many house hunters continue to track the reserve price of properties to be auctioned, especially those in the locales of their liking.
These unmistakable words of the auctioneer precede the fall of the hammer. For many, auctions are associated with charity or fund-raising events but an auction is serious business, especially in
Licensed auctioneers recall a time when moneylenders (like the chettiars) took a borrower to court and petitioned for an auction to recover the sum lent.
Of late, property auctions have become more popular with investors. This, licensed auctioneers attribute to the number of phone calls they receive after an auction notice is advertised.
Whether the interest is translated into bids is a different story but many house hunters continue to track the reserve price of properties to be auctioned, especially those in the locales of their liking.
The process
The auction of a foreclosed property is ordered between six and 12 months from the date of default on the mortgage payment. When the originating summons is served on the defendant, he can come to court and redeem the property, explains Sundara Raju Pillai, a public auctioneer at Kevin Roy (M) Sdn Bhd. (A property is also auctioned at the Land Office if the property has a "Mukim" title.)
If the loan remains unsettled, explains Raju, a retired High Court bailiff, the judge will give an order for sale. A valuation on the property is then carried out, after which the appointed licensed auctioneer will advertise the proclamation of sale in a national newspaper.
A copy of the proclamation of sale will be served on the defendant. It will also be displayed at the premises to be auctioned as well as on the notice boards of the High Court or Land Office.
The auctioneer is also required to distribute the proclamation of sale to interested buyers. "In some cases, the proclamation is also distributed in the neighbourhood of the property," says Raju, adding that the auctioneer sometimes needs to work hard at publicising the auction to ensure there are bidders. "In choice areas, we send the proclamation to prominent people who have in the past told us to inform them of properties above RM1 million that will be auctioned."
There are times when the defendant seeks the licensed auctioneer's help to ensure the auction attracts bidders. This is because if the property remains unsold after the first auction, it will be auctioned at a lower price subsequently.
If the property is not sold at the first auction, the reserve price (the lowest bid that can be accepted for the auctioned property) drops by 10 per cent for the second auction, and then by another 10 per cent for the third. If the property is still unsold, the reserve price is shaved by 5.0 per cent at every auction until the property is sold.
The auction of a foreclosed property is ordered between six and 12 months from the date of default on the mortgage payment. When the originating summons is served on the defendant, he can come to court and redeem the property, explains Sundara Raju Pillai, a public auctioneer at Kevin Roy (M) Sdn Bhd. (A property is also auctioned at the Land Office if the property has a "Mukim" title.)
If the loan remains unsettled, explains Raju, a retired High Court bailiff, the judge will give an order for sale. A valuation on the property is then carried out, after which the appointed licensed auctioneer will advertise the proclamation of sale in a national newspaper.
A copy of the proclamation of sale will be served on the defendant. It will also be displayed at the premises to be auctioned as well as on the notice boards of the High Court or Land Office.
The auctioneer is also required to distribute the proclamation of sale to interested buyers. "In some cases, the proclamation is also distributed in the neighbourhood of the property," says Raju, adding that the auctioneer sometimes needs to work hard at publicising the auction to ensure there are bidders. "In choice areas, we send the proclamation to prominent people who have in the past told us to inform them of properties above RM1 million that will be auctioned."
There are times when the defendant seeks the licensed auctioneer's help to ensure the auction attracts bidders. This is because if the property remains unsold after the first auction, it will be auctioned at a lower price subsequently.
If the property is not sold at the first auction, the reserve price (the lowest bid that can be accepted for the auctioned property) drops by 10 per cent for the second auction, and then by another 10 per cent for the third. If the property is still unsold, the reserve price is shaved by 5.0 per cent at every auction until the property is sold.
Location matters
The time taken to dispose of a foreclosed property varies. There is no exception to the adage of "location, location, location". If the property is in a sought-after location, chances are it will be sold in the first auction. In April, a 2-storey bungalow with a reserve price of RM1.35 million in the upmarket Section 16 residential area in Petaling Jaya went for RM1.355 million the first time it was auctioned.
Then there are properties that remain unsold even after the fifth auction. Raju attributes such cases to poor location, accessibility or condition of the property.
How quickly a property is put for auction is determined by the respective courts. At the Kuala Lumpur High Court, the real estate may be auctioned five times (if there are no takers) in a year. "But in the Shah Alam High Court, you are lucky if the second auction comes up within the year," he says, adding that reasons range from a lack of manpower to missing case files.
The time taken to dispose of a foreclosed property varies. There is no exception to the adage of "location, location, location". If the property is in a sought-after location, chances are it will be sold in the first auction. In April, a 2-storey bungalow with a reserve price of RM1.35 million in the upmarket Section 16 residential area in Petaling Jaya went for RM1.355 million the first time it was auctioned.
Then there are properties that remain unsold even after the fifth auction. Raju attributes such cases to poor location, accessibility or condition of the property.
How quickly a property is put for auction is determined by the respective courts. At the Kuala Lumpur High Court, the real estate may be auctioned five times (if there are no takers) in a year. "But in the Shah Alam High Court, you are lucky if the second auction comes up within the year," he says, adding that reasons range from a lack of manpower to missing case files.
Reserve price at market value or cheaper?
Are auctioned properties cheaper? While the general perception is that a property up for auction is cheap, licensed auctioneers tell City & Country this is not necessarily true.
How is the reserve price determined? Rohan Padmanathan, head of investment sales at Jones Lang Wootton, says it must be the market value for the property as estimated by the land administrator. This is provided for under the National Land Code. A valuer, when instructed to value a foreclosed property on behalf of a financial institution, would take cognisance of the fact that the property is being auctioned.
There are two schools of thought on the valuation. Rohan says: "Some are of the opinion that the market value for the property for auction should be lower since one of the factors determining market value -- willing buyer and willing seller -- is not met. So, there should be a slight reduction in value to reflect this."
Financial institutions take this stand as property not sold means a holding cost for them. "In their opinion, if a slight discount is given, the sale can be concluded. On the other hand, there are some who believe that the reserve price should be at market value," he adds.
Licensed auctioneers tell City & Country that the reserve price for properties going under the hammer reflects the market value. "The reserve price will reflect the market or current value," says licensed auctioneer,
R Sritharan of Srico Enterprise.
City & Country's research indicates that the reserve price for properties up for auction is equal to the current asking price or higher. A 2-storey terraced unit at Taman Sri Bahtera in Cheras,Kuala Lumpur
A 2-storey bungalow in Country Heights in Kajang was put up for auction with a reserve price of RM1.62 million in June (at press time, the property with a land area of 20,000 sq ft is still unsold). A sampling done by City & Country early this year showed that asking prices for bungalows in the same locality, but with land areas of 18,000 to 21,000 sq ft were between RM1.8 million and RM2.2 million.
Are auctioned properties cheaper? While the general perception is that a property up for auction is cheap, licensed auctioneers tell City & Country this is not necessarily true.
How is the reserve price determined? Rohan Padmanathan, head of investment sales at Jones Lang Wootton, says it must be the market value for the property as estimated by the land administrator. This is provided for under the National Land Code. A valuer, when instructed to value a foreclosed property on behalf of a financial institution, would take cognisance of the fact that the property is being auctioned.
There are two schools of thought on the valuation. Rohan says: "Some are of the opinion that the market value for the property for auction should be lower since one of the factors determining market value -- willing buyer and willing seller -- is not met. So, there should be a slight reduction in value to reflect this."
Financial institutions take this stand as property not sold means a holding cost for them. "In their opinion, if a slight discount is given, the sale can be concluded. On the other hand, there are some who believe that the reserve price should be at market value," he adds.
Licensed auctioneers tell City & Country that the reserve price for properties going under the hammer reflects the market value. "The reserve price will reflect the market or current value," says licensed auctioneer,
R Sritharan of Srico Enterprise.
City & Country's research indicates that the reserve price for properties up for auction is equal to the current asking price or higher. A 2-storey terraced unit at Taman Sri Bahtera in Cheras,
A 2-storey bungalow in Country Heights in Kajang was put up for auction with a reserve price of RM1.62 million in June (at press time, the property with a land area of 20,000 sq ft is still unsold). A sampling done by City & Country early this year showed that asking prices for bungalows in the same locality, but with land areas of 18,000 to 21,000 sq ft were between RM1.8 million and RM2.2 million.
'Good' deal?
Since the reserve price of a property for auction is based on its market value, can property hunters get a good deal through an auction?
"People tend to think that they can get properties at lower prices," says Raju who has been involved with auctions for the past 30 years. This is not necessarily the case, especially if the bidders "get emotionally worked up or if a bidder likes the property very much". In fact, a buyer may end up paying more than the market value.
There are also auctions that are concluded at current market prices. A 2-storey intermediate semi-detached unit (with 7,793 sq ft land area) at Selangor's Tropicana Golf and Country Resort was sold for RM1.060 million at the second auction in April-- the reserve price was RM1.035 million.
Sritharan believes that the more bids an auction attracts, the higher the concluded price will be. At an auction last month, a 2-storey bungalow in Cheras bore a reserve price of RM765,000. Its second auction attracted eight bidders and the property was sold at RM855,000, close to its original reserve price of RM850,000!
Naturally, bargain hunters will wait for reserve prices to drop before making a bid. Take the 2-storey bungalow inCountry Heights
Undoubtedly, the soft property market is resulting in fewer bids for properties to be auctioned. "When times were good, properties were taken up quickly... At one time (in 1998), a shop lot up for auction in Banting received 270 bids," Sritharan recalls.
Since the reserve price of a property for auction is based on its market value, can property hunters get a good deal through an auction?
"People tend to think that they can get properties at lower prices," says Raju who has been involved with auctions for the past 30 years. This is not necessarily the case, especially if the bidders "get emotionally worked up or if a bidder likes the property very much". In fact, a buyer may end up paying more than the market value.
There are also auctions that are concluded at current market prices. A 2-storey intermediate semi-detached unit (with 7,793 sq ft land area) at Selangor's Tropicana Golf and Country Resort was sold for RM1.060 million at the second auction in April-- the reserve price was RM1.035 million.
Sritharan believes that the more bids an auction attracts, the higher the concluded price will be. At an auction last month, a 2-storey bungalow in Cheras bore a reserve price of RM765,000. Its second auction attracted eight bidders and the property was sold at RM855,000, close to its original reserve price of RM850,000!
Naturally, bargain hunters will wait for reserve prices to drop before making a bid. Take the 2-storey bungalow in
Undoubtedly, the soft property market is resulting in fewer bids for properties to be auctioned. "When times were good, properties were taken up quickly... At one time (in 1998), a shop lot up for auction in Banting received 270 bids," Sritharan recalls.
Pros and cons
Rohan of Jones Lang Wootton says although there is a perception that properties up for auction are "cheaper", there are disadvantages, chief of which is the condition of the property.
One auctioneer points out that one may end up paying RM500,000 for what may well be a house with just windows and a door frame!
Although, prospective bidders are advised to inspect the property, this is difficult if the property is still occupied, Rohan points out.
In a public auction, the maximum or best price for a property can be secured as anyone who is interested can place a bid. The term public auction is, therefore, a misnomer. Members of the public, licensed auctioneers say, are not allowed to attend public auctions unless they are bidding for the auctioned property. The only parties allowed to attend the auction are the bidders, plaintiff(s) and his (their) lawyer(s), the defendant(s) and his (their) lawyer(s) and the bank officers (if the property has been foreclosed). Others at an auction include the senior assistant registrar, the bailiff and the licensed auctioneer.
"It used to be that anyone could attend an auction but these observers were not allowed to make a call (to increase the bids). Now, only bidders are allowed to attend an auction," says Raju.
Name aside, public auctions are catching the interest of property hunters. Whether is it a "cheaper" way to buy a property is open to debate but it certainly is an option open to house hunters.
Rohan of Jones Lang Wootton says although there is a perception that properties up for auction are "cheaper", there are disadvantages, chief of which is the condition of the property.
One auctioneer points out that one may end up paying RM500,000 for what may well be a house with just windows and a door frame!
Although, prospective bidders are advised to inspect the property, this is difficult if the property is still occupied, Rohan points out.
In a public auction, the maximum or best price for a property can be secured as anyone who is interested can place a bid. The term public auction is, therefore, a misnomer. Members of the public, licensed auctioneers say, are not allowed to attend public auctions unless they are bidding for the auctioned property. The only parties allowed to attend the auction are the bidders, plaintiff(s) and his (their) lawyer(s), the defendant(s) and his (their) lawyer(s) and the bank officers (if the property has been foreclosed). Others at an auction include the senior assistant registrar, the bailiff and the licensed auctioneer.
"It used to be that anyone could attend an auction but these observers were not allowed to make a call (to increase the bids). Now, only bidders are allowed to attend an auction," says Raju.
Name aside, public auctions are catching the interest of property hunters. Whether is it a "cheaper" way to buy a property is open to debate but it certainly is an option open to house hunters.
Bidding for property at public auctions
Public auctions are gaining more attention from property hunters. The question then is how do you get started? The preparation, experts say, begins before the auction. There is also an etiquette that should be observed during the auction.
Public auctions are gaining more attention from property hunters. The question then is how do you get started? The preparation, experts say, begins before the auction. There is also an etiquette that should be observed during the auction.
Before the auction
- Inspect the property and check out other properties in the neighbourhood.
- Make a title search of the property to ensure there are no encumbrances.
- Check out the market value of properties in the neighbourhood. Do your research to find out if there is a possibility of appreciation in value.
- Set your budget.
- Don't be "persuaded" or convinced against bidding by "syndicates". And never negotiate with them.
(Those in the industry identify "syndicates" as those who go for auctions and actually deposit 10 per cent of the reserve price. Prior to the auction, they would approach prospective bidders and indicate an interest in the property to be auctioned. They then indicate that they are willing to not make any bids if the prospective bidder agrees to pay them off.)
For example, if the property is being auctioned at a reserve price of RM400,000 (your budget is up to RM500,000) and a member of a syndicate comes up to you and asks for RM10,000 so that he won't make a bid, you should not negotiate. Go in and "fight".
For example, if the property is being auctioned at a reserve price of RM400,000 (your budget is up to RM500,000) and a member of a syndicate comes up to you and asks for RM10,000 so that he won't make a bid, you should not negotiate. Go in and "fight".
Auction day
- Deposit 10 per cent of the reserve price in the form of a bank draft and in favour of the Deputy Registrar (for High Court auctions) or the respective state treasurer (for Land Office auctions). The deposit should be submitted together with the original identity card (IC) of the bidder.
If you are bidding on behalf of someone who cannot be present, you also need a letter of authorisation, a photocopy of the IC of the person you are bidding for and your original IC.
If you are bidding on behalf of a company, you will need to have the company's resolution and memorandum and articles of association. - During the auction, the Deputy Registrar will set the minimum quantum for the calls. The minimum varies from RM1,000 to RM5,000. Indicate that you wish to increase your bid by the minimum quantum by raising your hand. You may, however, also call a bid that is higher than the minimum stipulated.
- At the fall of the hammer, the highest bidder signs a contract of sale and makes a stamp duty payment of RM40 (for four copies that go to the court, lawyer for the plaintiff, the auctioneer and purchaser). For the unsuccessful bidders, the deposit is returned immediately after the auction.
- Immediately after the auction is concluded, the buyer is required to pay 10 per cent of the difference between the sale price and reserve price in cash. For example, if the reserve price is RM100,000, bidders will need to deposit RM10,000 prior to the auction. If the property is sold for RM150,000, then the buyer will have to pay 10 per cent of the difference. In this case, the buyer will have to fork out an additional RM5,000.
- With the contract of sale, the buyer can then approach a bank to negotiate for a bank loan, should one be needed.
- The buyer then has 90 days from the date of the auction to settle the remaining 90 per cent, failing which the deposit is forfeited.
The above tips were provided by licensed auctioneers Sundara Raju Pillai of Kevin Roy (M) Sdn Bhd and R Sritharan of Srico Enterprise.
Private tenders and treaties
A foreclosed property can be sold through a public auction, private tender or treaty.
In a private tender, the buyer is usually a company and the transacted price is normally above the reserve price set by the court, says Sundara Raju Pillai, a public auctioneer at Kevin Roy (M) Sdn Bhd. Then why go through it?
"To avoid publicity," he says, adding that this is also because of the high price of the properties, which may be development land or commercial in nature.
A private treaty is likened to bringing in a white knight to buy the property. This happens after a property has been unsuccessfully auctioned several times, following which the reserve price has dropped to levels lower than the market value. (Each time an auction is unsuccessful, the reserve price of the property auctioned dips 10 per cent for the second and third auctions and 5.0 per cent for subsequent auctions if it is still unsold.)
If the reduced reserve price is lower than the market value of the property, the defendant can bring in a third party to buy the said property at a price higher than the reserve price.
A foreclosed property can be sold through a public auction, private tender or treaty.
In a private tender, the buyer is usually a company and the transacted price is normally above the reserve price set by the court, says Sundara Raju Pillai, a public auctioneer at Kevin Roy (M) Sdn Bhd. Then why go through it?
"To avoid publicity," he says, adding that this is also because of the high price of the properties, which may be development land or commercial in nature.
A private treaty is likened to bringing in a white knight to buy the property. This happens after a property has been unsuccessfully auctioned several times, following which the reserve price has dropped to levels lower than the market value. (Each time an auction is unsuccessful, the reserve price of the property auctioned dips 10 per cent for the second and third auctions and 5.0 per cent for subsequent auctions if it is still unsold.)
If the reduced reserve price is lower than the market value of the property, the defendant can bring in a third party to buy the said property at a price higher than the reserve price.
