Buying property on auction

South Africans are not used to buying and selling residential properties using auction sales. A property that is being auctioned usually conjures up pictures in the minds of people of liquidations and insolvencies. In countries like Australia, the largest percentage of residential property sales takes place through auctions.

Buying a property at an auction sale does not mean that you are going to get a bargain. Properties sold on auction are not always forced sales. It is therefore important that you do your homework before purchasing.

What is the difference between a Property in Possession and a Sale in Execution?

There is generally confusion between a sale of execution and a repossessed property. A property becomes a repossessed property when a home owner is in substantial arrears with his repayment on his home loan, the bank takes legal steps to serve the owner with a summons, take judgment and eventually attach the property. If during these stages the owner is still in arrears, the bank instructs a sheriff of the court to sell the property at a public auction.

The bank is entitled to attend the sale and to buy the property back if the bidding at the sale is of amounts that could pose a significant loss to the bank. A property becomes a Property in Possession (PIP) when the bank buys the property back at a sale in execution (public auction).

If you wish to purchase a property at this type of auction there are certain factors to consider:

Prospective buyers need to register before the auction and pay a refundable deposit;
If your bid is successful you will be required to pay a deposit normally equal to 10% of the purchase price as well as the sheriffs commission on
the fall of the hammer;
The balance of the purchase price must be guaranteed within 14 to 30 days;
The purchaser is responsible for outstanding rates and/or levies;
The purchaser is normally responsible for the eviction of any occupiers.

Advantages of buying a property on auction:

The buyer may feel more at ease knowing that the bidders who lost to his bid are prepared to pay almost the same amount for the property.  

An auction eliminates lengthy negotiation periods;
The buyer knows that the seller is certain that he wants to sell, and is not just simply testing the market;
In terms of an auction agreement, the seller is contractually obligated to transfer title of the property to the highest bidder in an absolute auction, and to the highest bidder that meets or exceeds the reserve price in an auction with reserve.

Tips for buyers:

Go to a couple of property auctions just to observe, before you decide to buy on auction. This will give you the necessary knowledge on more-or-less how it works, and also the confidence that you will not feel intimidated by the fast moving associated with auctions. Go and view the property before the sale. Assess if there are any maintenance problems that the property has. This may affect the bid that you are prepared to make at the auction sale. The other advantage of pre-viewing the property is that you may be able to conclude a contract of sale with the seller before the auction takes place. This will also depend upon the agreement that the seller has with the auctioneer. Try to determine the market value of the property before it goes on auction.

This is important as it will assist you to assess whether or not the price that you bid at the auction is reasonable or not. You do not want to overpay. You must check if the seller owes any money to the council for rates and taxes and service charges. One of the terms and conditions of the sale may be that the buyer is responsible for any of these outstanding amounts. Pre-arrange your finance. You will be required to pay a deposit at the auction sale and will then have to make arrangements to settle the balance of the purchase price with the auctioneer.

Auctioneers fees are also payable on the day of the auction. This is usually a percentage of the value of the sale. Make sure that you know what all the extra costs are and that you are prepared. Ask the auctioneer to see the contract that you will be required to sign, and read through it thoroughly. If you are unclear about anything, rather ask the auctioneer to explain the terms or consult an attorney before you attend the auction. You must get to the auction sale before it commences. The auctioneer will read out the terms and conditions of the sale in public before the auction begins.