Should you be buying a property on auction?

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Property auctions are typically seen as the playing fields of professional real estate investors more than they are for first-time buyers. You do not need to be a property tycoon  to reap the benefits of purchasing a property on auction,  but you do need to be equipped with enough information to ensure that you are making the right decision.

Here are some things you should know- and think about- before you catch auction fever:

1. What is the reason for properties being auctioned off?

There are two reasons, firstly, if the homeowner does not pay his bond for several months, the bank will file a notice of default. If the homeowner still does not pay his balance or renegotiate the loan, the home can be put up for auction. This process can take as long as a year, sometimes longer.

The second reason occurs when the owner does not pay property taxes or becomes severely indebted in terms of their other tax obligations. In these cases, it is the tax authority that seizes the property and not the original bond lender.

2. Where does an auction take place?

Auctions take place at the locations chosen by auction companies and can occur on the auctioned property in question. Additional information about upcoming auctions can also be found online

(see http://www.property24.com/auctions or http://www.privateproperty.co.za/auctions)

3. Does the highest bid guarantee ownership of the property?

Not necessarily, it will depend of the kind of auction you are attending. There are two types of property auctions. In a ‘subject to lender confirmation’ auction, the lender (bank or tax authority) does not have to accept your offer even if you are the highest bidder. In an ‘absolute’ auction, you will be entitled to the property if yours is the highest bid.

4. What is the starting price for an auction?

The starting price of the auction may be the balance remaining on the unpaid bond, or it could be an even lower amount designed to spur the bidding process. In the case of a foreclosure auction, the lender is not allowed to profit from the auction. Often, these properties are sold at a loss, but if there is any profit, it is meant to go the homeowner after the mortgage and any other debts are paid.

5. Is there any opportunity to view the property?

Some auction companies have an ‘open house’ event scheduled prior to the auction and others only allow you to drive by and see the outside, therefore it is advisable to  do your own research  regarding the listing online.

Often there is not much opportunity to see the house in as much detail as if you made use of a real estate agent. It is important to remember that while it is possible to find ‘hidden gems’ at property auctions, it is possible that the house has not been maintained due to the previous owner’s financial constraints.

Because auction properties are sold ‘voetstoots’ (as they come), you will be committing to any structural, maintenance or decorative issues that the property may have- whether or not you were aware of them at the time of purchase.

6. What does the financial obligations entails?

Many bidders at property auctions are real estate investors who can afford to pay cash, so you should make sure that you are attending an auction that allows financing and get pre-qualified ahead of time.

Winning bidders will pay auction fees and bidding fees, as well as having to put down a large deposit on the property before leaving the auction site. The winners will then go through escrow and closing, just like with any other property purchase.

Because of the extra risk involved and because fewer people may be interested in the property than if it were available through traditional channels, property prices can be lower at an auction, but buying a property at an auction still requires a lot of cash up front.

Even if you win the auction, you will not be allowed to purchase the property in some cases, like a ‘subject to lender confirmation’ auction. Similarly, the auction could have a hidden reserve price that sets the limit on the minimum acceptable price.

7. Is buying a property on auction worth my while?

Going to property auctions can be a good way for very savvy house hunters to find a good deal, but there is a lot of risk attached to buying an auction property and, even with all the other drawbacks, a lower price on the home is not guaranteed.

Do as much research as you can and try not to so caught up in the belief that you are getting a ‘good deal’ that you overlook the issues that will make the house a burden, instead of an asset, in the future.

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About BetterLife Home Loans

Since 2003 BetterLife Home Loans has been SA’s No.1 Bond Originator, handling the entire home loan application process on your behalf – free of charge! Our aim is still to source the best interest rate for you by submitting your home loan application to all the major banks. There is no easier way to apply for a Bond or Home Loan in South Africa!

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