The Risks of Buying Property on Auction

Reports would have us believe that the popularity of auction sales in South Africa has increased by up to 40% in 2019. The stat didn’t break down whether these were repeat or first-time buyers. Regardless we thought it would be wise to point out the risks of buying property on auction.  Auction sales don’t always mean that you will end up with a bargain.

 

An auction is a public sale in which goods or properties are sold to the highest bidder.  There are different types of auctions and before you attend an auction it’s important that you understand the rules of the game. There are voluntary and involuntary auctions. 

 

Voluntary auction sales are generally those that are reserved for upmarket properties where the seller believes that they are in a position to achieve a higher selling price and often a reserve price is set which is subject to the seller’s acceptance. These auctions favour the seller. Bargain hunters should steer clear of voluntary auctions.  If you are looking for lower prices that favour the buyer, rather attend an involuntary sale in which case the seller has been forced into the sale.

 

Involuntary auctions are divided into two categories: Bank Auctions and Sheriff Auctions.  Different rules regulate the different categories of auction.  At a Bank Auction, the bank has placed the house on auction because the seller is in arrears with their bond payment. A Bank Auction favours the buyer as the sale price is generally at a greatly reduced selling price with all the usual warranties.  Only upon transfer will the rates and taxes transfer to the buyer.  Another advantage to the buyer is that they will have the opportunity to inspect the property prior to purchase in order to assess any defects or maintenance issues.  Very importantly, occupation of the property is generally agreed to at the time of the sale.

 

Sheriff Auctions are those where the property is sold in execution subsequent to a court order for debts owed by the owner.  The auction is carried out of the sheriff of the court to the highest bidder on a voetstoots or “as is” basis, and the buyer will have to settled all the outstanding debts on the property, such as rates and taxes, municipal accounts, levies, and the like.  The buyer will frequently not have had an opportunity to view or inspect the property meaning that any defects will be an unwelcome additional expense. 

 

An added burden on auction purchases may be if the occupier, being the previous tenant or homeowner, has refused to vacate the property. The buyer will then be in the unfortunate position or having to evict the occupier of their new property, often both a time consuming and costly exercise.

An important tip with regard to auctions is to ask for and understand the terms of the sale as these terms allow some insight as to possible risks involved.

 

To the experienced investor who has done their research, visited many auctions before the time to understand the process, ensured that they have secured bond finance in advance, auctions may offer many opportunities. However, for the novice property investor, many material risks may be presented.

 

Should you find yourself in a difficult situation following a purchase on auction, please don’t hesitate to contact us on 011 897 1900 or [email protected].

 

 

Article contributed by Diane Charles of Tuckers Inc.