To bid or not to bid? 

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By Joseph Wong

Some people may find the auction process exciting, especially if they enjoy competitive bidding and the potential for securing a property at a lower price. This dynamic and fast-paced nature of auctions can appeal to those who appreciate a sense of urgency and strategy.

On the other hand, others may view property auctions as stressful or risky, particularly due to the complexities involved, the potential for unforeseen issues and the financial commitment required. The need for thorough due diligence, understanding the auction process and being prepared to act quickly can add a level of pressure that may not be enjoyable for everyone.

Regardless of which side of the fence a property buyer sits on, partaking in an auction can be a harrowing experience, especially for first timers who have not done their due diligence. And even then, it can still be a disastrous affair leading to financial loss.

There are essentially two types of property auctions - private and public auctions. In Malaysia, public auctions are mostly foreclosure auctions conducted by banks for properties without an individual or strata title or through high courts and land offices for titled properties. Property auctions present an opportunity for lucrative deals, often providing cost-effective investment options for personal or occupational purposes. In the realm of public auctions, it is crucial to be mindful of various risks. Following best practices as a bidder can help mitigate potential issues and prevent unnecessary complications.

Due diligence is a must

Some individuals mistakenly inspect the wrong property or overlook title legality issues, relying too heavily on professionals for essential property information. This has led to instances where conveying the title becomes problematic, resulting in disappointment for property buyers. This risk is particularly significant for investors or bidders who are restricted from entering the premises for inspection before the auction, as the property legally remains with the defendant until the hammer falls. However, proactive measures, such as conducting thorough title checks, obtaining the Proclamation of Sale (POS) from the auctioneer, external property inspections and thorough examinations of tenure and expressed conditions, can significantly reduce the likelihood of disappointment for bidders.

Losing the deposit

In public auctions, a mandatory initial deposit of 5% or 10% of the reserve price is required. After a successful bid, the balance purchase price for a loan agreement cum assignment (LACA) property is typically settled within 90 days while a non-LACA property allows a 120-day settlement period. This timeline is governed by the conditions of sale accompanying the public foreclosure. It is crucial to plan a property financing structure, considering a mix of debt and equity. In a debt-funded structure relying on fixed long-term loans, the risk arises if the financial institution fails to provide the required loan, leading to forfeiture of the deposit unless covered by other means. It is advisable to secure a preliminary approval from a bank and engage a registered valuer to assess the maximum bid before the auction to minimise risks. Opting for an equity-funded structure, involving cash, reduces risks significantly, as many bidders use cash or overdraft facilities to avoid financing costs and streamline the purchase process compared to the debt-funded approach.

Last-minute challenges

In some instances, defendants may place caveats on their properties right before or after an auction, catching bidders off guard during their due diligence process. While navigating this situation can be complex, successful bidders can seek assistance from legal advisors to obtain a court order for caveat removal. The risk associated with such scenarios is significantly mitigated when making a cash purchase, offering added security in auctions.

VP obligations

The responsibility of securing vacant possession (VP) for an auctioned property falls on the bidder. If the property is occupied, the successful bidder must take steps to evict occupants after winning the bid. According to Malaysian law, legal eviction requires ownership of the property. Once ownership is established, applying for a distress order through a lawyer is necessary before pursuing a court order. This process can take up to several weeks and involves substantial costs, even if the occupants are willing to move. Communication with occupants is crucial, though it can be challenging, as they may be inaccessible, unwilling to meet or refuse to open the door. Some occupants may even remove fixtures or damage the property before vacating. Prior to purchasing an auctioned property, it is essential to determine its occupancy status and whether the occupants are previous owners or tenants.

False auctions

Occasionally, false advertisements portraying properties as foreclosures appear, even in prominent publications. These purported public auctions are, in fact, private auctions organised by real estate agents or public auctioneers, where the reserve price is set and determined by the agent, auctioneer or the property owner. Unlicensed parties also contribute to these misleading advertisements. Therefore, it is highly recommended to enlist the assistance or representation of a property professional, such as a registered valuer, licensed estate agent or authorised auctioneer, when engaging in auction purchases.

For those interested in securing a bargain property through auctions, paying attention to the aforementioned details can help prevent unnecessary complications. An auction may be a good way of securing a cheaper home but it can also be a money pit, costing more than a sub-sale or new property. Ultimately, whether property auctions are considered fun or otherwise, it is crucial to prioritise the preservation of personal interest.

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