Property investment should be the ‘bricks and mortar’ of your investment portfolio, and in my view, the best place to create wealth and passive income. Like any venture, fortune favours the bold, so there is no time like now to get out there and make it happen. No one can give you any broad advice on what property to buy as there are so many variables, and of course much depends on your circumstances.
What I can tell you is that I got hooked by the property bug buying my first property at an auction. It was an old house, bordering on a commercial node that was part of a deceased estate.
I knew there was a lot of interest but I had a tenant lined up already. I remember watching the bidders at the auction from my seat and when they had exhausted themselves fighting it out and the hammer was going to fall, I put in my first bid.
All I can say is that it is a really exciting process, with the best opportunities to find bargain properties. But you really need to understand the rules of the game.
Understanding the seller
Understand that there are different types of property auctions, not all good. In South Africa there is a growing trend to sell your property through an auctioneer in a voluntary auction, with the prime purpose to get a better price pitting buyer against buyer in a live environment.
These auctions can work well for the seller in an active property market but seldom work for the buyer. The seller has a reserve price and the sale is subject to the seller’s acceptance.
Look out for the bank auctions — also a voluntary auction (sort of) — organised by the bank but where the distressed seller (who is significantly in arrears with his bond) is given an ultimatum to sell at the auction, subject to the bank accepting the bid.
In this case and in most circumstances the properties are sold at a discount, and the bondholder agrees to write off the shortfall on the outstanding bond. In fact the bank gives the seller an unsecured loan with soft terms to repay the shortfall.
So in this circumstance you are buying a home from a seller with all the normal warranties and on transfer the rates and taxes will have been settled by the seller. This is a great place to source realistically priced property, without the risks inherent in forced sales.
The ultimate source of great value property is of course the sheriff auction. Where the bank is unable to rehabilitate the bond- holder and they see no chance of recovering their funds, the bank applies to the court to attach the property and sell it to the highest bidder as it stands, called a sale in execution.
These transactions are executed by the sheriff of the court. They are not well advertised with poor turnouts and are often postponed. In most cases the only party at the auction is the bank. The bank will let the property go at a big discount, often around 50% of value, and this is where the real opportunities lie.
Understand that when the bank buys the property at a sale in execution it has to incur significant costs, transfer, evicting the errant occupants, making good the damage and securing the vacant property. Added to that there are many stalling tactics that hold the process back if the bank gets locked up in litigation.
They add all the costs incurred and try to recover the total when they eventually sell. This is the property in possession, or PIP, and therefore not a great buy in most cases.
Making your bid
If you are ready to go and get in on the action, here are five lessons you should remember before buying at a sheriff auction:
1. Close the deal
Make sure you can follow through with the purchase. If you can’t make the guarantees, you will forfeit the deposit and still be liable for sheriff’s fees.
2. Take charge
The property is sold as is and it is your responsibility to settle all outstanding rates, taxes, municipal services and body corporate levies, and don’t rely on the figures given by the sheriff.
3. Eviction notice
The majority of these properties are occupied and it is your problem to evict the occupants.
If the owner is sequestrated, the transfer can be held up for extended periods of time. The owner is often allowed to have occupation while this is in process and you cannot get transfer, so your deposit and costs are locked up.
5. Know the risk
You will have little time, or often no access to the property before the auction, so there is considerable risk that the property is not in a reasonable condition.
Like any investment you should make sure that you have done your research first before diving in. Buying on auction is the most dangerous place to make mistakes… but then with risk comes reward.
How can property debt be good? Find out here