By Propedia Consultancy founder Sr Vicky How

A bidder was seen bidding for his coveted property.

IT is common knowledge that the value of auction properties is much cheaper than the market value of properties, but why is that the case? And how cheap it is?

Generally, auction properties are valued at a price lower by at least 20% of the market value. In certain situation, the price can be much lower.

Reason 1: Time is of the essence

Property price usually increases regardless of the market. When the beneficial owners stop servicing their loan instalments for three months, this amounts to an event of default and the bank will instruct the lawyer to sell the property by way of auction.

The lawyer will then proceed to instruct the valuer to prepare the valuation report and appoint a private auctioneer if the final title for the property has not been issued.

Otherwise, the lawyer will apply to the court for an order for sale, and the lawyer will appoint a valuer to prepare the valuation report and get an order from the court to appoint a court auctioneer. From the valuer’s hand to the private or court auctioneer, this process will take a few months depending on the efficiency of each department.

The auctioneer will then 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 and inspect the property. If the beneficial owner would like to pay and claim back his property, he may do so before the auction date.

By the time the property is up for auction, the value would have increased slightly.

Reason 2: Forced sale value

Since it is an auction case, the valuer has to give two types of values in his report, the market value and the forced sale value.

The forced sale value usually does not appear in the valuation report unless specifically requested by the client. Forced sale value is the amount which may reasonably be received from the sale of property under forced sale conditions which do not meet all the criteria of a normal market transaction.

A forced sale is defined as a sale when the property is disposed under extraordinary circumstances, usually reflecting an inadequate marketing period without reasonable publicity, an inappropriate mode of sale and/or sometimes reflecting an unwilling seller situation, and disposal under compulsion or duress.

As such, by a rule of thumb, the forced sale value is usually lowered then market value by 20%.

Reason 3: No bid

If there are no bidders for the property on the auction date, the lawyer will fix another date for auction after 30 days (Normally). The reserve price will be lower by 10% compared to the previous reserve price as there are no bidders in the first round.

In the second round, if there are no bidders for the property, the property price will be reduced by another 10%, and a third auction date will be fixed (normally after 30 days).

How are the auction properties valued?

The valuer will value the auction property and provide both the market value and forced sale value of the property.

When the valuer values the auction property, he/she will normally to do an external inspection as they are seldom given access to the property, and the bank rarely has the keys to the property. Hence, they will not be able to inspect the interior of the said property just like the potential purchaser.

As such, the valuer will not take into account any renovation being done by the beneficial owner. Vice versa, the valuer will not take into account any defects in the property, and no reduction will be made to the value of the property.

The value given by the valuer will be based on the basic unit of the property in Jabatan Penilaian dan Perkhidmatan Harta (JPPH) just like any other properties, and there will be a reduction of 20%

How to buy a good auction property?

Auction property is cheaper then the market value and many people have profited from auction property. Not many people take the risk to invest in auction property. There are horror stories of auction properties while others may have some taboos against owning auction properties.

Buying auction properties require you to bear risk because you will not get to inspect the interior of the property. One man’s meat is another man’s poison. As some may make money from auction properties, other has suffered losses.

Therefore, it is important for you to carry out some of the steps here before deciding whether to buy the bank draft.

The buyer must first inspect the Proclamation of Sale (POS) advertised by the auctioneer and contact the auctioneer for more details of the property.  Asides from looking at the basic criteria of the property such as location, potential rental yield and capital appreciation, it is vital to carry out the due diligence before committing to buy an auction property, especially title search at the Land Office.

A title search will determine the particulars of the property, such as the name of the parties, title particulars and also whether there are any caveats lodged on the property. A caveat serves as a notice of possible lawsuits by third parties and/or the previous owner. The caveat also prevents the transfer of the title and the interests of the property until the caveat is removed. Let the buyer beware!

Parties should also contact the management of the property to determine the amount outstanding service charge currently owed by the property beneficial owner. Parties should also do a quick search on outstanding quit rent and assessment charges to ensure that the outstanding expenses are within the budget of the buyer.

Parties should arrange to visit or appoint agents to visit the property first before deciding whether to buy the property. Some actioned properties may not be well maintained and may have structural defects. By looking at the exterior, you may be able to roughly gauge the repair cost of the exterior of the property.

Parties should be pretty clear and aware of the location and type of property they are buying. At least, a buyer can make sure that the property is not facing T-junction or close to a sewerage treatment plant.

Although many people may think that auction properties defect properties which require loads of attention and money, some of the investors may find a good bargain. People say you require some luck in buying properties. I say that you make sure you create your luck by conducting due diligence before committing to buy auction properties. Sometimes you may even be lucky enough to buy a well maintained and renovated property through auction.

As such, it is sometimes worthwhile to buy a landed property even if it requires some repair and renovation works because the land itself might worth more than the repair cost. In conclusion, smart investors know that by doing some renovation works, auction property may look brand new again just like putting on make-up and dress.

About the contributor

Sr Vicky How

Sr. Vicky How is the founder and principal of Propedia Consultancy. Propedia Consultancy is a property consultant company that offer services such as sales and lease of property, property management, and valuation. How is also a guest speaker for special events and a trainer for real estate agencies.

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