Ask a property investor – What do I need to know before buying at auction?
Hi, I would like to buy a repossessed house on auction. Where do I start and what do I need to know that no one tells beginners who try their hand at this? – Jiyani
Hi Jiyani, auctions still present an opportunity to buy a property at a great price. With solid research, patience and discipline, it is possible to get a great deal through the process. You would need to be clear on your intended strategy once you own the property – is your intention to rent the property or buy and resell (capital flip)?
You must be prepared to properly research the property that you are interested in purchasing at the auction, understanding:
what the current market value is in its current condition,
obtaining quotations for any renovation works to be carried out,
understanding any municipal or body corporate debts that you would be liable for,
depending on your strategy, knowing the current realistic rental level or realistic selling price,
fully understanding the basis on which the current occupants, if any, reside in the property. Lease obligations may still apply after the sale of the property with the risk being you have unwanted tenants in the property. You would need to obtain vacant possession through the courts if the previous tenant or previous owner refuses to move out of the property.
The above shows some of the elements you need to research; it is not an extensive list. Ensure at the auction that you review the Conditions of Sale carefully.
You will need to show patience as you will not successfully buy every property you are interested in, research and bid on. When you arrive at an auction, only bid on the properties you have fully researched.
Discipline is required in an auction environment to ensure that you do not exceed your predetermined price point. Auctions are designed to push prices as high as possible with highly skilled auctioneers being able to create an exciting and electric atmosphere that is easy to get caught up in. Do not, no matter what, exceed your predetermined price. Rather be in a position to analyse why you may not have been successful in buying the property after the fact, than buying a property at a higher price where you no longer make money, or worse, are in a loss position.
Lastly, make sure you are aware of the associated costs with buying at auction. You would need to account for auction commission which can be as much as 10% plus VAT, and payable on the day. Additionally, you would need to have a deposit of 10% of the purchase price available to pay if your bid is successful. Other costs would include transfer costs, transfer duty and potentially VAT, if the seller is a VAT vendor. Finally, legal costs incurred in obtaining vacant possession, if the new owner needs to go through an eviction process.
Auctions are simply a mechanism to buying property, and the importance of research, due diligence and running the numbers on the property remains true for all property purchases despite the method of purchase.
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Who is Grant Smee?
Grant Smee, MD and franchisor at Only Realty, has been operating as a property investor since 2005. He has a solid financial foundation gained through tertiary studies in finance and accounting, and experience gained in large international financial institutions. Extensive property investment and rental knowledge has been gained through personal property investments and property business ventures since 2005 in both South Africa and the UK. Smee’s specialties include property investment and rentals in the residential housing market.
Disclaimer: The information above is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort offered or endorsed by HomeTimes and Only Realty. Any expression of opinion is personal to the author and the author makes no guarantee of any sort regarding accuracy or completeness of any information or analysis supplied.