Property investment should be the ‘bricks and mortar’ of your investment portfolio, and in my view, the best place to create wealth and passive income. Like any venture, fortune favours the bold, so there is no time like now to get out there and make it happen.
In South Africa there is a growing trend to sell your property through an auctioneer in a voluntary auction, with the prime purpose to get a better price pitting buyer against buyer in a live environment. These auctions can work well for the seller in an active property market but seldom work for the buyer. The seller has a reserve price and the sale is subject to the seller’s acceptance.
In the case of bank auctions the properties are sold at a discount, and the bondholder agrees to write off the shortfall on the outstanding bond. In fact the bank gives the seller an unsecured loan with soft terms to repay the shortfall. So in this circumstance you are buying a home from a seller with all the normal warranties and on transfer the rates and taxes will have been settled by the seller.
A “sale in execution” is where the bank is unable to rehabilitate the bond- holder and they see no chance of recovering their funds, the bank applies to the court to attach the property and sell it to the highest bidder as it stands. These transactions are usually executed by the sheriff of the court. In most cases the only party at the auction is the bank. Understand that when the bank buys the property at a sale in execution it has to incur significant costs, transfer, evicting the errant occupants, making good the damage and securing the vacant property. Added to that there are many stalling tactics that hold the process back if the bank gets locked up in litigation. They add all the costs incurred and try to recover the total when they eventually sell. This is the property in possession, or PIP, and therefore not a great buy in most cases.
Making your bid
If you are ready to go and get in on the action, here are five lessons you should remember before buying at an auction:
1. Close the deal
Make sure you can follow through with the purchase. If you can’t make the guarantees, you will forfeit the deposit and still be liable for sheriff’s fees.
2. Take charge
The property is sold as is and it is your responsibility to settle all outstanding rates, taxes, municipal services and body corporate levies, and the figures provided by the seller may not always be 100% accurate.
3. Eviction notice
The majority of most distressed properties is that they are occupied and it is your problem to evict the occupants.
If the owner is sequestrated, the transfer can be held up for extended periods of time. The owner is often allowed to have occupation while this is in process and you cannot get transfer, so your deposit and costs are locked up.
5. Know the risk
You will have little time, or often no access to the property before the auction, so there is considerable risk that the property is not in a reasonable condition.
Like any investment you should make sure that you have done your research first before diving in. Buying on auction is the most dangerous place to make mistakes… but then with risk comes reward.
The Makwande Team.
(Contributions by J Clarke)