Property Auction - Bidder beware!

Valayutham Subramaniam, 33, had not expected the complications he found himself facing when he bought his apartment at a private auction house last December. "I was told, prior to the auction, by the auctioneer, that the balance on services charges, assessment rates, utility bills and other maintenance charges would be settled by the bank."

When he won the bid (more than RM80,000) for the property, located in Penang's Solok Free School area, Valayutham was asked to sign seven copies of the same page of a document. "The information on that page merely stated the bid amount, the amount that had been paid and the balance."

Little did the newspaper vendor know that the page was an attachment to the last page of the proclamation of sale (PoS) that was delivered to him three weeks later. "I hadn't seen that document before the auction, so when I received it, I found out that it did not say that the bank would absorb the unpaid balance. The charges came up to RM17,000 and the auctioneer then told me that the bank would settle up to RM10,000, leaving me to pay the balance."

There were delays in obtaining the title, leading to an additional 5% interest charge after the stipulated 90-day period to complete the sale ended. He also found that there were people (who called themselves tenants) living in the apartment, and they were refusing to leave.

"I have spent about RM20,000 in legal fees, in addition to paying rental for my current home and monthly loan instalments of about RM500 per month [on the apartment]," he laments.

Auctions are one way to obtain properties at a bargain price. But for people like Valayutham, their experience has been less than positive. As the majority of the properties put up for auction are usually distressed (properties that are foreclosed by the bank), there are many terms and conditions attached to them. Here are the potential traps of buying property at auctions and tips on how you can navigate your way to a wise purchase.

1) 'As is where is' basis
The terms and conditions state that all auctioned properties would be sold on an "as is where is" basis. Thus, you could either find yourself bidding for a renovated and furnished home or a rundown, termite-infested shack. To avoid unpleasant surprises, always check out the property beforehand, says Azizi Ali, author of How to Win At Property Auctions.

"Interested buyers should always check the surrounding areas of the property. However, it may not be as easy to check the interior since you will need to get permission from the current owner and that is virtually impossible," he says.

Winston Tan (not his real name) has bought three properties at various auctions and has always made sure that he checks out the properties beforehand. "I would go in the day, and at night, to see the conditions. In order to try and gauge the damage, I would ask the neighbours about the character of the previous owner."

Tia Poh Yew, 25, bought an apartment in Jalan Duta, Kuala Lumpur, almost two years ago for 35% off its market value of RM300,000. He visited the apartment four or five times, checking its surrounding areas.

"I couldn't check the inside of the property, so I decided to speak to people staying in the same block," says the lawyer. "I was fortunate when one of them offered to let me view his apartment, which had a similar layout to the actual property."

From speaking to them, Tia discovered that the property was a good choice as the previous owner had never moved into the apartment [the owner had never registered the title, thus it was easy for him to get it transferred to him]."

2) No guarantee of vacant possession
It is usually stated in the PoS that there is no guarantee that the property would be empty at the point of auction. If the property turns out to be occupied, the bank would not be obligated to give vacant possession of the property and it will be up to you to evict the occupants, explains Foong Chon Wai, auctioneer with Ng Chan Mau & Co Sdn Bhd. "This is because it takes up too much time and hassle for banks to obtain an eviction order."

Azizi describes four scenarios that could occur with an auctioned property. "The first is that it's empty but accessible, so prospective bidders are free to go in to take a look. The second is that it's empty and inaccessible, so bidders will only be able to view it from the outside. Third, the property is occupied but accessible, that is, it could be tenanted. Bidders should ask the tenants whether they are aware that the property is being put up for auction, and whether it would be all right for them to take a look inside. The fourth scenario is that it's occupied and inaccessible — the people living there could be downright hostile. You should forget about buying the property as it would be very difficult, if not impossible, to get them to move out."

3) Charges and fees
A property that is being auctioned off would have been the subject of a legal process by the bank due to the owner's repeated defaults in payment. During that period, costs such as monthly maintenance, quit rent and assessment fees and utility bills would have piled up. If banks choose to absorb the charges, they would only do so for maintenance, quit rent and assessment up to the auction date, says Foong. "Bills such as water, electricity and Indah Water have to be paid by the buyer."

Azizi notes that the bank could choose to absorb the costs or pass it on to the winning bidder. "Charges can be very hefty, especially when it comes to monthly service charges for condominiums or apartments."

S M Mohamed Idris, president of Consumers Association of Penang (CAP), says: "Read the PoS. Find out who will pay the arrears. Some banks pay for the arrears up to the date of auction while others do not."

Bidders should allocate sufficient funds to accommodate the extra costs by bidding for the property below its market value. "I would bid for the property only if it was a minimum 20% to 30% below the market price. The property's value generally drops 10% each time it's put up for auction; I would ask the auctioneer how many times it has been on auction," says Tan. "For example, if I know the property was worth RM200,000 in the market, I would stop my bid at RM150,000 so that with the extra costs thrown in, I would still have paid on par with the market value."

In order to gauge the costs better, Tan visits the management's office if he is interested in an apartment. "Usually, they would be willing to provide information such as the maintenance charges outstanding as they would be happy that someone is interested in absorbing the costs."

4) Syndicates
Syndicates usually surface during auctions, either to make a quick profit from serious bidders or distract buyers from bidding. Usually working in groups, these individuals approach bidders, offering to back down on their bids in return for monetary gains. Other syndicates are interested in purchasing the property but resort to tactics such as distracting other bidders.

These syndicates usually work at public auctions held in the High Courts or at the land office, says Tan. "The syndicates would generally 'work' during bids for properties in hot locations and their job there is to make overenthusiastic bidders suffer by outbidding them, especially if the latter have not given them monetary gifts."

These syndicates are not illegal, says Azizi. Ignore them, he says. "If you don't talk to them, they can't distract you."

Another point is not to get too emotional when placing your bids. "Set your budget before the auction and don't budge from it," says Foong.

Do your homework
As with buying property through other means, you should do lots of background checks before making a bid for any property. Although one can get good deals at property auctions, good things don't come easy, says Azizi. "Do your homework first."

Because there are so many traps along the way, he cautions first-time homebuyers against purchasing a property at an auction. "Auctions are not for little boys. It is for seasoned homebuyers. This is because first-timers still have many gaps in their knowledge and with so many things that can go wrong, it could turn out to be a disaster."

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