Does selling by auction limit your buyers’ pool?
“David speaking, hello.”
“Hello, this is Mark from Best Auction Company. I would like to know if you’re interested in selling your home in Honeydew, Johannesburg by auction.”
“Um…not right now. Please send me more information on how the process works.”
Selling a home on auction in South Africa is often, wrongly, perceived to mean that the seller cannot afford to hold onto the home and is, essentially, financially distressed. It’s an unfair assumption based almost exclusively on the fact that up until a few years ago, residential auctions were conducted on behalf of banks trying to recoup their losses on a defaulting bond holder.
Today, an increasing number of homes are sold on auction – just last year the High Street Auction Company sold a Clifton home for record price of R90m.
Sellers may like to try their hand at selling their home by auction because they are not liable for any commission on the sale – as is the case with traditional estate agent sales. Other benefits include transparency in the buying and selling process, being able to set the reserve price, being able to sell voetstoots with suspensive conditions generally not accommodated, buyers are prequalified financially and a higher price may be achieved at the auction than the seller initially wants.
It sounds almost too good to be true, doesn’t it? Australia has been selling homes by auction for many years and is considered the main route of sale. South Africa, however, has been slower to the table.
While sellers, in the vast majority, will bemoan paying an estate agent between 5% and 7% of the selling price – often forgetting that the agent takes on all the risk upfront without any guarantees of successfully selling the home – is the sale by auction really as perfect as it sounds?
Perhaps it is for sellers, but not so much for buyers. Prospective buyers with successful bids have to pay a deposit equal to 10% of the purchase price as well as the sheriff’s commission, usually between 5% and 10% of the purchase price. The other 80% to 85% of the purchase price must be paid within two to four weeks. If there are outstanding municipal rates or levies, this is for the buyer’s account as well as being responsible for the eviction of any occupiers.
Looking at the numbers, if a successful bid of R1m is accepted, the buyer will have to pay between R150,000 to R200,000 on auction day, and be able to cough up the other R750,000 to R800,000 within a month of the purchase.
Turning this on its head, selling a R1m home using an estate agent requires mandating an agent to market and negotiate on the seller’s behalf. Homes in South Africa, on average, sit on the market for about 11 weeks (or just less than three months), but once an offer to purchase has been accepted, the buyer’s affordability is assessed and a bank either issues a 100% bond or a minimum of 88.5% of the required amount. The buyer, therefore, needs to have a maximum of R115,000 to cover the shortfall; the 88.5% is financed and paid off over 20 years. Buyers who purchase at R1m also need to have just over R50,000 to cover bond and transfer fees.
Buying a home in South Africa is an expensive business – whichever way you look at it. But how big is the pool really of buyers who can afford to purchase a house within a month? Probably a lot smaller than the pool of potential buyers who can afford to buy using the traditional method. Contrary to popular belief, not all homes for sale via auctions are hot deals – in fact, most are reserved at market-related prices and can end up selling for a lot higher due to bidding wars or buyers not being properly prepared or, at the very least, educated.