Contributed by Eunice Tan
WHEN we flip through the daily newspapers, we will see many advertisements for auction properties nowadays. The indicative price of the auction properties are way lower than the market value of the properties and this attracts a lot of potential bidders’ interest.
However, you may need to do a lot of homework to determine whether it is safe to purchase a property at auction and what is the precaution and hidden cost that you need to take into consideration before you make your decision.
Whether the property can be auctioned off?
The auction usually suggests a default of loan scenario. When there is no individual title, the purchaser or the borrower will execute a loan agreement, deed of assignment and power of attorney with the financial institution i.e. the purchaser or the borrower absolutely assign the rights interest and title of the property to the bank as security.
According to a Federal Court case, this kind of security is deemed as an equitable mortgage. The word “assignor” or “assignee” in the advertisement indicates that no separate individual title is issued and no charge can be created.
In the event of default of loan repayment, the bank is contractually entitled to sell the property by way of the public auction without any prior order for sale or consent from the purchaser or the borrower unless there is a specific restriction.
On the contrary, when a title of the property is issued and there is a charge over the property, this will be regulated by the National Land Code (NLC). In this scenario, the bank will apply to the High Court or the Land Administrator for an order to sell the property by way of an auction if there is a default of loan repayment. The process of auctioning off the property will be regulated by the NLC.
Will the reserve price be the purchase price of the auction property?
The indicated price is merely the reserve price at which the bidding will start. It doesn’t mean that the purchase price of the property will be the reserve price of the property.
The process starts with the advertisement that refers to as an invitation to treat. When a bid is made pursuant to such invitation, it constitutes as an offer and the auctioneer is free to accept or reject. When the auctioneer falls the hammer, the sale is concluded.
In the event that there are few intending bidders on the auction date, the intending bidder should firm up himself or herself a reasonable purchase price within his or her mindset.
If the intending bidder is emotional in bidding, he or she may purchase the auction property without realising that it is more than the market value. If you are this type of person, you are encouraged to engage an agent or a lawyer to represent you to bid on the auction date.
When is the best time to seek legal counsel?
The best time to seek professional help when you obtain the Proclamation of Sale (POS) to enable you to know the term and conditions of the auction property. However, the intended bidder still need to go for physical check out of the property themselves.
Condition of Sale
You will know the conditions of sale before the auction date. The intending bidder shall read the conditions of the sale before the bid. In the event that you have successfully bid the auction property, you will be bound by the conditions of the sale and you will be deemed to have entered into a contract on those terms. Therefore, a close examination of the Proclamation of Sale (“POS”) is mandatory before you go for bidding.
The time frame of the POS to pay the balance purchase price usually will be within 90 days or 120 days depending on the terms of the POS. Extension of time with interest may be allowed or disallowed wholly depending on the POS.
If you purchase the auction property by obtaining a loan, you may need to standby to pay by cash in the event that the loan cannot be disbursed before the completion date of the sale or else the contract shall be terminated and the 10% deposit will be forfeited. In the event of an extension of time is allowed with interest, having to pay interest for an extension will be an additional cost.
One of the usual conditions or common risk in purchasing auction property is that the property is sold on an ‘as is where is’ basis without vacant possession.
Therefore, the bidder shall conduct some survey on the property before he or she decides to bid the property. Usually, there is a fine print on the POS something like “intending bidders are advised to inspect the property, seek legal advice, conduct land search and make enquiries with the developer of the property...”
It is tremendously advisable to view the property as well to determine whether the property is vacant or occupied or locked and the surrounding area of the same. Other than that, you may need to check the land search and the background of the developer.
There is a classic example that the bidder purchased a property at the price of RM180,000, which is a fair price. Unfortunately, the outstanding maintenance and service charges were about RM40,000. It was ended up equivalent or slightly above the market value of the property.
What if the auction property is occupied?
It is mandatory to inspect the property before you bid. Since the property is sold without vacant possession, there is a possibility that the property is occupied by the original purchaser or tenanted.
It is not right for you to break the lock or go into the property without any court order. In this event, you may negotiate with the occupants to inform them that you are the successful bidder and would like to obtain the vacant possession within a reasonable time frame.
If they fail to cooperate, you need to appoint a lawyer to go for eviction proceeding and the writ of possession in order to obtain the vacant possession.
It may take months for the legal proceedings to be completed. As such, it is a further additional cost and the delay of the delivery of vacant possession may incur further losses to you if you intend to purchase the property for rental purposes. All these factors and estimated costs shall be taken into account if you intend to purchase an auction property.
As such, a lot of homework is needed before you purchase an auction property.
To Read More: Property Auction - The Good and The Bad
To Read More: 10 steps to buy an auction property
To Read More: Buying auction properties? Here’s a checklist before you bid
To Read More: Ask Me Anything: Auction property and stamp duty
How long does it take for a sale and purchase agreement of a property to be completed? Read the full article.
Eunice Tan is the founder of both LegalMakeover and Messrs Eunice Tan & Partners.
The views and opinions expressed in this article are solely those of the original author. These views and opinions do not necessarily represent those of StarProperty.my.
