In a slowing economy amid global financial crisis, buying auction or foreclosure property during crisis times could be regarded as an opportunity to acquire asset at bargain prices. But buying an auction property is by no mean an easy process as there are many things one should look for to minimise pitfalls and risks associated with buying an auction property.
www.intproperties.com looks into type of property auctions and things to consider when buying auction properties in Malaysia.
In Malaysia, basically there are two category of public property auctions ie judicial auction and non-judicial auction.
Judicial auction refers to auction property with title whereby a charge has been created under the National Land Code. These foreclosure properties are being auctioned by way of court order either at the High Court of the respective state or district land office in accordance to the relevant sections ie. Section 256 –269 of the National Land Code.
Whilst non-judicial auction refers to auction property without individual or strata title but created by way of loan agreement cum assignment which normally refer to as LACA cases. LACA cases are mostly comprise of high rise stratified units - flats, apartments and condominiums, shop lots within shopping centers.
More at recommended article-Making a bid at a public auction.
b) Proclamation of Sale (POS)
In the case of public auctions at Penang High Court, the terms and conditions of the auction sale in the Proclamation of Sale (POS) are quite standard whereby auctioneers are required to adopt a uniformed set of terms and conditions in the POS. Intending buyers are required to come out with 10% deposit payment of the reserve price to quality for bidding and successful purchasers are required to settle the balance payment within 120 days or 4 months. There is no extension on the completion period.
Whilst for LACA auction cases, its POS is non-standard and varies amongst the commercial banks. The assignee bank has the right to determine the reserve price and its terms and conditions in the POS are contractual. As the POS is non-standard and prepared by the assignee solicitors, hence it is advisable for intending buyers to collect a copy of POS and scrutinise it carefully prior to auction date.
For LACA auction cases, the deposit payment for bidding may vary at 5% or 10% whilst its completion period is set at 90 days or 3 months depending on the particular assignee bank.
c) Conduct on site inspection
After you have obtained a copy of POS, it is necessary to conduct on site inspection of the auction property and its surrounding neighbourhood to ascertain the physical conditions of the house. You may not be able to carry out internal inspection as some of these auction properties may have been tenanted or locked or abandoned by its owner. If the house has been abandoned for years, then you ought to consider how much cost is needed to refurbish the house. The stage of upkeep and maintenance of the auction property has a significant effect on its value. Consult a qualified valuer who is familiar with the area to give you an indicative market value of the auction property and compare it with the reserved price. Don’t do the deal unless you are confident that you understand the value of the property!
Besides on site inspection, intending buyers are advised to conduct title check to find out on the latest title status whether any encumbrances such as private caveat has been lodged on the title of the property. Consult your lawyers if there is such a private caveat lodged on the title as removal of caveat may require court order and therefore incur cost.
e) Outstanding maintenance charges/rates/taxes/utilities charges
These include quit rent, assessment, maintenance charges, utility charges etc. For high court auction cases, these charges are to be paid out from the balance purchase price up to completion date of auction. Example of the clause in POS:
Plaintif hendaklah dalam tempoh 14 hari selepas menerima baki harga Belian membayar semua sewa kepada Pihak Berkuasa Negeri atau pembeli pajakan ( jika gadaian yang berkenaan adalah gadaian ke atas pajakan) perbelanjaan-perbelanjaan lain (termasuk cukai tanah dan pintu) yang hendaklah dibayar kepada Pihak Berkuasa Negeri dan Kerajaan tempatan, caj perkhidmatan (jika ada), caj-caj air dan elektrik, caj Indah Water Konsortium Sdn Bhd yang tertunggak sehingga tarikh penyempurnaan daripada harga belian harta tersebut.
On the contrary, for LACA auction cases by commercial banks, the amount deductable from the balance purchase price is limited to quit rent, assessment and maintenance charges only excluding utility charges, developer consent etc up to date of sale only. Example of the clause in POS:
QUIT RENT & OTHER OUTGOINGS
a) All arrears of quit rent, assessment and service/maintenance charges due and payable in respect of the subject property up to the date of sale shall be paid out of the purchase money upon receipt of full auction proceeds including all interest on late payment (if any), provided that the Assignee/Bank is in receipt of the relevant quit rent and assessment bills issued by the relevant authority and the Developer’s invoice/statement of account from the Purchaser within ninety (90) days from the date of sale, failing which the same shall be borne by the Purchaser solely. All such sums accruing due and payable from the date of sale shall be borne and paid by the Purchaser. All charges other than quit rent, assessment, service/maintenance charges including but not limited to fees, taxes, rates, interest, sinking funds and any amount whatsoever outstanding to the Developer and/or to any other authority/parties shall be paid directly by the Purchaser.
b) The Purchaser shall bear and pay all fees and expenses including but not limited to all legal fees, stamp duty and registration fees in connection with, incidental to or pursuant to the Assignment and all other documents necessary for effecting the transfer or assigning the beneficial ownership in the property to the Purchaser.
Another Example :
…Any arrears of maintenance charges, which may be due to any relevant authority or Developer shall be borne by the Lender/Bank up to 10% (ten percent) only of the reserve price of the property….
All arrears of the quit rent, assessment, taxes, rates, fees, utility bills (namely water, electricity , gas or sewerage charges) and any other monies due and payable in respect of the property shall be borne by the purchaser….
Some assignee bank also put a limit of claims on outstanding maintenance charges up to NOT more than 10% of the reserve price. Meaning that any excess of outstanding charges will be borne by the purchaser. So, look out for clauses on payment of outstanding maintenance charges as there are also foreclosure properties which require purchaser to bear ALL the outstanding charges.
f) Other hidden charges
Unlike high court auction cases, most non-standard POS for LACA auction cases also require purchasers to bear developers’ consent fees and utility charges. So, do your homework to find out these charges. Look out for any warrant compound and penalty charges imposed by the local council.
Also check out for any unsettled late interest charges on progressive payments during construction period and amount owed to the developer for renovation package, if any, taken up by the assignor.
g) Consent from housing developer/state authority
For high court and Land office auction cases where the property sold at a public auction is subject to restrictions in interest, the consent of the State Authority is not necessary to give effect to any certificate of sale issued to the purchaser(Section 301 of National Land Code). However, if the property cannot be sold successfully at a public auction, but is instead sold through private treaty, consent is still required if the auction property is subject to such restrictions in interest.
For LACA auction cases involving low and medium cost housing schemes developed by PDC, UDA and PERDA in Penang State but subject to restriction in interest, consent from such bodies / the state authority is required. Purchaser is responsible at his own cost to apply for such consent. Example :
The Purchaser shall be responsible to apply for consent (if applicable) from the Developer/Proprietor and other relevant authorities, in respect of the sale and all fees, charges and expenses including administrative fees in connection with or incidental to the application shall be borne by the Purchaser.
h) Vacant Possession
One drawback in auction property is the issue of vacant possession. One of the terms in the POS is that the assignee bank is not obliged to deliver vacant possession. The onus is on the successful purchaser to evict any tenant or occupier from the property. Example :
The Purchaser after the payment of the total purchase price shall at his own costs and expenses take possession of the Property without any obligation on the part of the Assignee/Bank to give vacant possession.
Although the successful purchaser has the legal recourse and can apply for court order to evict the occupier, this will take time and hassle and furthermore, additional costs will be incurred to get rid of recalcitrant occupier.
It is advisable for the intending buyers to know the basic auction process, understand its terms and conditions in the POS and do enough homework prior to auction bidding if you want to avoid similar costly pitfalls encountered by this buyer -Woes beset buyer of apartment at auction.
For property seekers and investors looking for auction properties, Malaysia’s CIMB Bank has a nationwide listings on its portal -CIMB Property Mart. Register with us for more updated auction property listings of commercials banks ie CIMB Bank, Standard Chartered Bank, Hong Leong Bank, Ambank and many more…..and will guide you for a hassle-free selection of auction properties at pre-auction stage.
Public Auctions at Auction Room, Penang High Court every Wednesdays
The author is currently a licensed auctioneer based in Penang. For advisory on property purchases in Kuala Lumpur and Penang, email to us at Izrin & Tan Properties Sdn. Bhd or call us at +604 6588333 (Penang Office) or +603 92839782 (Kuala Lumpur Office) and we would be pleased to assist.