When John bought a single storey house at an auction, he thought that he had got a good bargain. He bought the property at 25% below the current market value and he did not have the headache of viewing and bargaining with any REN. Little did he anticipate the problems that ensued. You see, when you buy a property at an auction there are a few things that you should be aware of:
1) The owner of the property could not keep up with his monthly mortgage payments. As a result the lending bank repossesses his property. When this happens, the bank is interested in recouping the loan amount. The bank is obliged to auction it of at fair market value. If at the fair market value there are no takers, the reserve price will be lowered and will go through as many rounds of auctions needed to secure a purchaser. The reserve price will be lowered until there is a willing buyer. The bank then pays the auctioneer and other costs and recovers whatever is left of the selling price;
2) The bank is not responsible for the state of the property, unpaid water and electricity bills, quit rent and assessment bills;
3) The bank is not responsible for granting the purchaser vacant possession which means that the purchaser is responsible to ask the owner or tenant who is occupying the said property to leave so that the purchaser can occupy or rent it out;
4) The purchaser is normally given 3 to 4 months to settle the transaction and pay the bank the successful bid price. In that course of time, anyone i.e. a money lender, an estranged spouse or literally any Tom, Dick and Harry can place a caveat on the property to prevent the transfer of ownership on the property. If the purchaser has the funds to settle the property purchase in cash, he may do so and later proceed with the legal proceedings to have the remove the caveat at his own expense. If he is unable to settle the full purchase price the bank will cancel the sale and put the property up for auction again. The purchaser will lose the 10% deposit that he paid upon successful bidding for the property.
The extended period given to the purchaser with interest payment in the transaction of secondary properties does not apply in the case of auction properties.
There have been instances when the owner of the house that has been auctioned off refuses to leave the house and engages a lawyer to find ways and means to allow him to stay longer. Then the purchaser counters by cutting off the electricity and water supply. This is not allowed although the purchaser is now the legal owner of the property. As a result the purchaser has now committed an offence can be sued. He would then need to engage a lawyer and pay a fine.
So you see, buying an auction property below market value need not necessarily be a good thing. It is a good idea to buy an auction property when:
1) You have inspected the property and found it to be vacant and in good condition;
2) You have sufficient cash reserves to pay up the purchase price of the property in full in the event the bank loan does not come through in time due to technicalities;
3) You have the time and money for court proceedings should the need arise in the event of caveats placed and occupants who refuse to vacate the property .In the event the occupants do vacate the property, they may leave the property in a bad state just to spite you. That would mean additional expenses to reinstate the property into a habitable state.
After considering all of the above and you decide that an auction property is the best way to invest in properties, then get yourself a good lawyer. You are right in buying a property below the market price because that is the mark of a good investor! Good luck and God Speed!