Tag: auction property

Guide To Buying Auction Properties In Malaysia

1 Comment

Guide To Buying Auction Properties In Malaysia

In recent years due to the economic slowdown, we see a significant increase in the number of properties entering into the auction property market. Many homeowners lose their holding power and start defaulting on their home loans. Many of these units are brand new, never-lived-in units purchased during the era of Developer Interest Bearing Scheme (DIBS). At that time, it was so easy to make an entry into the property market.  Buyers only need to fork out as low as RM 3000 to start owning a property. Under this scheme, buyers are not required to pay the mortgage until the property is completed. Many of these buyers probably purchased it thinking that they could flip it later for a profit. Unfortunately, due to the soft property market, they are unable to find a buyer. Also, some buyers during the point of purchasing the property may not have adequately assessed their ability to repay the loan. Once they receive their keys 3 years later, they are suddenly faced with huge loan repayments that they are unable to afford. Finally, these properties end up being auctioned.

According to an auction specialist, Leslie Low, in 2017, about 2500 properties are auctioned off every month. This is about 50% increase since 2013; during that time, there were only about 1000-1500 auctioned properties every month.

What does this mean for you? If you are looking for a property for investment or for your own stay, whether you are an experienced buyer or a first-time buyer, there are thousands of properties below market value up for grabs! If you’re looking for a great value deal, read on!

What are auction properties?

Auction properties are residential or commercial properties that go up for sale through a competitive bidding process. The buyer who makes the highest bid during the auction will get to buy the property. Once the hammer falls, a legal binding contract will be set between the seller and the purchaser.

Where do auction properties come from?

When property owners start defaulting their bank loans, the bank will send reminders to borrowers and introduce penalty by increasing the interest rate and charging overdue penalty cost. If borrowers are unable to service the interest or repay the principal over a period of more than 3 to 6 months, the borrower’s loan will be classified as a Non-Performing Loan (NPL). These properties will be moved to foreclosure or the auction department of the bank. These properties will then be sold to the open market via public auction for the bank to recover the loan given out to the defaulted borrowers.

What are the benefits of bidding for (and buying) auction properties?

Auction properties are priced at Forced Sale Value, which is usually at 20% below market value. That means buyers stand to enjoy a 20% discount off a particular property!! Should there be no bidder for the auction property, the reserve price (the lowest price at which the property can be sold) will be lowered by another 10% in the next auction date. Sometimes, you might even be able to get an auction property at 50% below market value. Besides this, you can own a property very quickly by buying from the auction market because there is no negotiation process between the buyer and the seller.

Documents required for bidding

For individuals:

  • A photocopy of your IC
  • A bank draft or cashier’s order equivalent to 10% of the reserve price
  • Additional funds to pay for the shortfall in the deposit of the successful bid vs the reserve price.
  • Authorization letter (if you are bidding on behalf of someone)

For companies:

  • A photocopy of director’s IC
  • A bank draft or cashier’s order equivalent to 10% of the reserve price
  • Additional funds to pay for the shortfall in the deposit of the successful bid vs the reserve price.
  • Board of Director’s resolution
  • Form 24 and 49
  • A certified true copy of the company’s Memorandum and Articles of Association (M&A)
  • Authorization letter (with company letterhead and company stamp, signed by at least 1 director)
  • IC and photocopy IC of the person authorized to bid

What is the process of buying an auction property?

  1. You must be at least 18 years of age to be an eligible bidder.
  2. Select your desired auction property based on the auction list or recommendations provided by your auction agent.
  3. Conduct an official title search with the relevant Land Office and make general enquiries with the developer and management office. You may engage your agent to do this for you by paying a small fee.
  4. Go to the location and conduct an external inspection of the property to ascertain the current condition of the property. Do not rely only on the description of the property. You may engage your agent to do this for you.
  5. Conduct due diligence checks on the property depending on what type of property you are bidding for – LACA/non-LACA. You may engage your agent to do this for you.

For property on master title or Loan Agreement Cum Assignment (LACA), these properties are usually auctioned by banks through a private auction house eg. Public Auction House Sdn Bhd, Ng Chan Mau & Co. Sdn Bhd, Ehsan Auctioneers Sdn Bhd, etc

Due diligence checks required are:

  • Outgoings consisting of quit rent, assessment, maintenance charges, sinking fund, TNB, SYABAS, Indah water and developer.

For Property with individual title/strata title (non-LACA), properties will be auctioned by High Court or Land Administrator.

Due diligence checks required are:

  • Title search to ensure no caveat (it is a formal legal notice to the world that you have an interest in a particular property or land)
  • Outgoings consisting of quit rent, assessment, maintenance charges, sinking fund, TNB, SYABAS and Indah water.
  1. Once you have decided to bid for the property, get a copy of the Proclamation of Sale (POS) and Condition of Sale (COS). Your agent will download a copy and explain the important clauses in the POS and COS to you.
  2. Register yourself as a bidder with the bank via the auction agent servicing you.
  3. Pre-qualify and pre-arrange financing for the selected property with your bank.
  4. Take note of the auction’s date, time and venue.
  5. Prepare a bank draft, 10% of the reserve price, as stated in the POS and COS.
  6. List down other costs not covered by the bank. These are usually stated in the POS and COS.
  7. Ensure you reach the auction venue at least 30 minutes earlier and register at the auctioneer registration counter. You will be given a bidders card with a number during the bidding. Your agent should attend the bidding with you, or if you are unable to bid on your own, you may also authorize your agent to bid on behalf of you. (You will need to provide an original authorization letter, a photocopy of your IC and bank draft to your agent)
  8. Before the bidding process, the auctioneer will read out some important clauses in the POS and COS and some information about the property. He will then announce the commencement of the auction.
  9. During the bidding, you or your agent bidding on behalf of you will raise the bidding card to indicate the bidding price. The bidding will stop when the highest price is called out 3 times by the auctioneer and no higher bids are made. At the fall of the hammer, the property is sold.
  10. (Recommended) Ensure you prepare additional cash or bank draft to top up the difference in deposit sum between successful bidding price and reserve price. This must be paid after the auction should you be the successful bidder.
  11. If you are the successful bidder, you will then have to sign the Contract of Sale. The balance of purchase price must be paid within 90 (for LACA) or 120 days (non-LACA) as per the POS and COS.
  12. Contact the bank you have selected and pre-arranged to finance the balance 90% of your purchase price.
  13. Should the current occupant refuse to vacate the property, apply for a distress order and get a court order through a lawyer to demand vacant possession.
  14. For unsuccessful bidders, your deposit will be refunded immediately after the auction.
  15. Do take note that if you are the successful bidder and later change your mind on the purchase, your deposit will be forfeited.

In the coming years, we may also have some added convenience and transparency to this process as bidders will soon be able to bid online with e-Lelong! Read more here & here.

What are the risks of buying auction properties and how we can minimize it?

As with any type of transaction, buying from the auction has its own risks. Know the risks involved and take a calculated risk before going to an auction.

  1. You do not get to view the property’s internal condition, and if the property is in bad shape, you may have to fork out extra money for repair and renovation works

If the property is tenanted, you may try to ask the tenant if they allow you to take a quick look at the property. If the property is owner-occupied, you may also ask the permission of the owner to take a quick view of the property, and at the same time, you might also wish to check if they are already prepared to vacate the property. Do expect some hostile treatment. You may also wish to consider speaking to the neighbours, they may be able to give you some valuable information.

  1. The property may have many outstanding utility bills left unpaid and you may have to quantify it

Before the auction date, do ensure you or your agent goes to the relevant utility offices, such as Tenaga Nasional Berhad, SYABAS, management office, with a copy of the POS to check on the outstanding bills.

  1. You may have trouble evicting previous occupants

Once you are the official owner of the property, you can then engage a lawyer to distress the occupant and then apply for a court order. Always check if the property is occupied before the auction.

  1. The property may have a caveat 

Ensure you or your auction agent do a title search for properties with title.

Whether you’re a property investor or a first time home buyer, the auction property market has something for everyone. Familiarize yourself with the process, ensure you do a thorough investigation of the property to get a better picture of the costs involved to ensure you get a great deal!

Keen to explore the opportunities in the auction property market?

Contact us at 03-7785 1888. Let us know what you’re looking for and our agents will contact you with a list of auction properties based on your specifications. 

Like our Facebook page for more content like this ->https://www.facebook.com/actionrealestate.my/

Action Real Estate copyrights reserved. Do not reproduce or copy the content of this post without first obtaining our consent. 

About the Author

KC LAW

Sr. KC Law is a Registered Valuer, Estate Agent and Property Manager with The Board of Valuers, Appraisers, Estate Agents and Property Managers (BOVEAP) of Malaysia. KC Law is also an electronic engineer registered with the Board of Engineer Malaysia (BEM) and received his engineering training from Tunku Abdul Rahman College Malaysia and later at Hatfield Polytechnic United Kingdom. In the 1990’s he was involved with the digital transformation of Telecommunication infrastructure for Maxis and Telekom Malaysia. His passion for Real Estate in the 2000s led him to practice as a real estate negotiator in Ace Realty and later valuation and property management in Rahim & Co International. Several years later he founded Action Real Estate and Action Valuers & Property Consultants. His areas of expertise are in Real Estate Agency, Property Valuation, Property Management and Business Valuation. He is Member of The International Association of Certified Valuation Specialists of Canada, Member of Royal Institution of Surveyors Malaysia, Member of Malaysia Institute of Estate Agents and Member of Business Valuers Association of Malaysia.

Malaysia Property Markets: New Development, Auction or Sub Sale?

1 Comment

Written by: Sr. KC Law, Principal & Valuer at Action Real Estate & Valuers

new development, auction or subsale property?

We have been frequently asked this question about the Malaysia property market –  New development, Auction or Sub sale, which market is for me? In this week’s blog entry, we will summarize the pros and cons of each property market and briefly outline the typical profile of buyers in each market.

There are typically two main reasons for purchasing real estate, i.e. for investment or for own stay. The consideration factors for both are completely different and should not overlap.

If you intend to purchase for your own stay, your emotional feelings come into play when making a decision.

For example, do you like the neighborhood, are you happy with the renovation work of the house, do you like the front porch, do you like the fittings in the house etc.

On the other hand, when buying a property for investment,  one should never let emotions come into play, only good numbers!

These numbers we are referring to are the property price, rental yield and its potential for capital appreciation.

Before hunting for a property, it is important to be clear of your purpose first!

To reiterate, 3 of Malaysia’s property markets are:-

Property market #1: New Development
New Development property market

New development, also known as the primary market is usually the choice of new/young buyers because of the low entry cost of new development projects.

The entry cost is typically between RM5k to RM10k, with most of the other cost such as legal fees, sales and purchase agreement covered by the developer.

To stay competitive, many developers also offer rebates and freebies to their purchasers.

Therefore, for new buyers that have limited savings to qualify for a sub sale purchase, this is the likeliest entry into the market.

From a buy-to-stay perspective, buying from the primary market gives you the privilege of choosing your preferred unit, it also ensures that everything within the property is brand new and the buyer can be assured that everything is in its best condition.

On completion of the project, the property is in move in condition and any defects are covered by warranty from the developer.

From an investor’s perspective, buying from the primary market may be beneficial in terms of higher potential for capital appreciation after the entire project reaches completion.

Since we can expect construction cost and property prices to rise at least in proportion with inflation, buying it in its early phase may give you an advantage.

However, this is highly dependent on many other factors such as the location, demographics, infrastructure and other developments around the area, it pays to do your due diligence of the area and surroundings before buying into any new development projects as they are not without its disadvantages as well.

For one, it is the more risky option because the project completion can be delayed since today’s cost of materials, labor, land and statutory compliance is very much higher.

So if you are buying into a new project, there is risk of the project having a construction period of more than 3 years, sometimes some projects even get abandoned mid way.

All this waiting period is risk with interest, and as buyers you will have no control over its delivery.

Also, due to the rising costs, these costs are factored into the price of the property, often times making them more expensive than its actual value, therefore causing less appreciation than expected.

The finish product’s quality is not guaranteed and may differ from that of the sample house, what you see in the show room may not always be what you will get.

Other than that, after delivery of keys, there is also the possibility that the market demand of the area may have dropped or changed after the waiting period of 3 years or more.

For instance, soon after the completion of your condo, several other high rise might have followed, causing an over supply. Some investors will be stuck with not being able to sell/rent out their unit.

Pros and Cons of New development

 

Property market #2: Auction

Auction property market

Next, let’s discuss what the auction market entails, also known as the tertiary market.

Auction properties are usually priced at 20% below market value.

An investor or a person buying to stay may be able to get a below market value deal at the auction market and transactions are typically faster since there is no need for negotiation between buyer and seller.

However, auction properties are very well publicized in the market these days not only by auctioneers but also by property agents, it is no longer easy to get a good property at bargain price.

Auction properties at prime location will also attract many bidders. This will eventually drive up the price to market value and sometimes even above market value.

The entry cost is high, as bidders need to prepare a deposit of 5-10 percent of the reserve price and be ready to top up the difference in deposit after a successful bid.

Even if a buyer manages to purchase it at below market value, the condition of auctioned properties are usually in very bad state.

The money saved from purchasing a cheap property may have to be used for major renovation works, and also pay for unpaid taxes, bills, utilities and assessments.

Interested bidders are also unable to view the property before making a decision.

Moreover, the buyer may face difficulty in obtaining vacant possession of the auctioned property and may even need to go through lengthy procedures to obtain a court order to vacate the occupant of the property.

With all that has been said, it may still be a good option to consider for properties in unpopular areas that have untapped potential or non general purpose properties that attract fewer buyers from the market.

As you can already tell, purchasing an auction property has many uncertainties, hence making it risky.

Pros and Cons of Auction

 

Property market #3: Sub Sale

Sub Sale property market
Lastly, lets discuss about the sub sale market, also known as the secondary market.

When buying a property from the developer, you can only picture what it will be like when the project completes.

For a completed property, you can have a real look and feel of the property, what you see is what you get. You can see everything about the unit, from the view, the renovation works done to the property, the surrounding area, demographics of the area and etc.

On top of that, data of transacted prices will already be available to you either through your trusted real estate negotiator or through your research on various property portals. With so much of information available, a buyer is able to make informed decisions on their purchase and reduce the risk of purchasing an overpriced property.

It pays to be good friends with real estate negotiators as they may even help you secure below market value deals in the sub sale market, why not leverage on their network and connections? You do not even need to pay the negotiator, since the seller/vendor pays the commission (for most parts of Malaysia).

The lower the property price is, the higher the rental yield and  return on investment will be. Besides, compared to new developments, the transaction is way quicker as it usually takes only about 2-3 months to get all the paperwork done and get vacant possession of the property.

From a buy-to-stay perspective, many home buyers nowadays look for renovated sub sale property as it can save them money on renovation as cost of building materials have also gone up over the years.

As for property investors, purchasing property from the sub sale market allows you to realize the rental yield immediately as you will be able to start letting out your property once you have vacant possession of the property.

For all the reasons stated above, the sub sale market is many seasoned investor’s favorite property market.

However, the same cannot hold true for new/young home buyers as it requires a high upfront payment, namely 10% down payment, legal fees, stamp duty, valuation fees, just to name a few (approximately 15% of the property price).

Other than that, buyers of sub sale properties need to spend a lot of time viewing different properties before making a decision on a purchase.

Sometimes the time taken for decision making  may cause a genuinely interested buyer to miss out on the sale due to other buyers who have made a decision quicker.  Also, with sub sale properties, there is no warranty on defects of the property, you buy a property as is.

Many times older sub sale properties may come with defects which may not be immediately apparent such as a piping defect, electrical defect or termite infestation. This may require extensive repairing work which may be costly.

Fortunately, there is good news! End of year 2016 and year 2017 is an interesting time for buyers (investors/people buying to stay) as there are many “new” sub sale properties in the market.

These may be properties that are just being handover to the owners. Many of these properties were purchase before 2014 under the developer interest bearing scheme (DIBS). So it is not uncommon to see many brand new properties for sale at competitive prices in the market now.

Pros and Cons of Sub Sale

In conclusion, buying a property depends on the purpose of your purchase (investment/buy to stay), financial readiness and risk appetite.

According to Warren Buffet, “Risk comes from not knowing what you are doing”. Therefore, it pays the best dividend to equip yourself with the skills and knowledge necessary to manage and minimize the risk of buying property.

Finally, always engage a qualified real estate agent/negotiator for all your property transactions! (Find out “Are you dealing with a certified Real Estate Negotiator?“)

New Development, Auction or Sub Sale, which is your preferred property market?  

Action Real Estate copyrights reserved. Do not reproduce or copy the content of this post without first obtaining our consent. 

About the Author

KC LAW

Sr. KC Law is a Registered Valuer, Estate Agent and Property Manager with The Board of Valuers, Appraisers, Estate Agents and Property Managers (BOVEAP) of Malaysia. KC Law is also an electronic engineer registered with the Board of Engineer Malaysia (BEM) and received his engineering training from Tunku Abdul Rahman College Malaysia and later at Hatfield Polytechnic United Kingdom. In the 1990’s he was involved with the digital transformation of Telecommunication infrastructure for Maxis and Telekom Malaysia. His passion for Real Estate in the 2000s led him to practice as a real estate negotiator in Ace Realty and later valuation and property management in Rahim & Co International. Several years later he founded Action Real Estate and Action Valuers & Property Consultants. His areas of expertise are in Real Estate Agency, Property Valuation, Property Management and Business Valuation. He is Member of The International Association of Certified Valuation Specialists of Canada, Member of Royal Institution of Surveyor Malaysia and Member of Malaysia Institute of Estate Agents.