Quick Guide to Auctions
Buying Property on Auction
Buying Property on Auction
- You must view and inspect any property in which you are interested well before the auction date - or get someone you trust to do so on your behalf if the property is in a distant location. All properties on auction are sold "voetstoots" (which means "as is"), so you must know if there is any damage to the property or work to be done before you decide how much you are prepared to bid.
- You should gather as much additional information as you can about the property and the area ahead of the auction. Good auctioneers will be able to supply you with copies of the title deed, the site diagram, the plans of the property, any lease agreement and the zoning certificate if relevant. In addition, you should look up the property on a website like Lightstone or Afrideed to get information about the average price recently paid for properties in the same area, schools and other local facilities, and the ownership history of the property.
- Next it is essential that you get a copy of the Conditions of Sale for the property and read it very carefully before auction day. You must be sure you understand exactly what is being offered for sale and exactly what else you might be taking on - such as an outstanding municipal service account perhaps, or a tenant who is still in residence. A winning bid at auction is legally binding and cannot be retracted later without considerable financial loss.
- If you decide to bid on a property, you must arrange the finance you will need to buy it well ahead of time. Auction sales are non-suspensive, which means that they do not allow time for you to go and arrange mortgage finance after the fall of the hammer. If your bid wins, you will have to pay the deposit on the purchase price and the auctioneer’s commission (incl VAT) on the same day, and then give the seller’s attorney a "guarantee" for the balance of the purchase price within a short time. If the property on auction is bank-owned, the institution concerned will generally look favourably on mortgage applications from potential bidders. However, if the property is an office, industrial or retail building, you should ask your financial consultant about all your financing and gearing options before making a decision.
- If you want to make your bid by phone, you will also need to arrange this in advance. You will have to complete a proxy form that mandates the auctioneer or assistant to record your bids, and you will need to pay the (refundable) auction registration fee. You will probably also be asked to make a good faith deposit of a significant percentage of your likely bid, which will also be refunded if you are unsuccessful.
At the Auction
- You must register as a bidder and get a number or a bidder’s "paddle" valid for the specific auction you are attending. You will need your ID document, proof of your residential address (such as a municipal account), and the registration fee, usually payable by EFT or bank guaranteed cheque. This is fully refundable if you decide not to bid after all, or if your bid is unsuccessful. You still need to register even if you will be bidding on behalf of someone else or a legal entity such as a close corporation or trust, and in such cases you will be asked to produce proof of your authority to bid. You may also be asked to sign an undertaking (surety) making you responsible to go through with the purchase if the other person/ entity drops out after a successful bid.
- Check to see if there have been any amendments or additions to the Conditions of Sale that you obtained in advance of the auction. You will probably be asked to sign acceptance of these conditions and acknowledgement that you understand the terms of the auction contract. If you have any questions or concerns, be sure to raise them well before the bidding starts.
- Obtain a copy of the Order of Sale sheet and find out the lot number of the property on which you wish to bid. Make sure you are in a position where the auctioneer can see you, and be ready to bid quickly and decisively when your lot comes up.
- Auctions may be conducted with or without a "reserve price" - a minimum price known to the auctioneer and seller of the property. Absolute auctions are sales where there is no reserve price and the property is simply knocked down to the highest bidder. This is usually the case at sales "in execution" - that is where the property is being sold following a judgment against the owner for unpaid debt. When there is a reserve price but the highest bid at auction does not reach this price, the sale will probably be made subject to confirmation by the seller. If yours was the highest bid, you can expect an answer from the seller within a short time, and you will remain bound by your bid during that time.
- If your bid is immediately successful, you will be asked to sign off on the Conditions of Sale, confirming your purchase of the property, before you leave the auction site. You will also need to pay the auctioneer’s commission (usually 10% of the purchase price plus VAT) and a deposit of at least 5% of the purchase price, less your initial registration fee. The balance of the purchase price will only be payable on transfer of the property, but you will need to have the funds available very shortly after the auction so you can provide a "guarantee" of payment to the seller’s attorney.
- Before you leave the auction, you should double check when the risk in the property passes to you as the purchaser - on fall of the hammer or only on registration of transfer. You may need to arrange suitable insurance immediately, so that you will be protected against financial loss in the event of the property being damaged or destroyed by accident or natural disaster.
After the Auction
- It is too late after the auction to express dissatisfaction with a property you have bought. All auction properties are sold "voetstoots", which means "as is", and the bids are made in public, which means that you have no recourse if you made a mistake and bid for the wrong property, and cannot negotiate price if you later discover things wrong with the property you bought. This is why it is so important to thoroughly inspect any property in which you are interested before the auction.
- If you default on the sale after the auction, the property seller will have the right to take legal action against you and force you to fulfil the contract. There is usually a provision in the Conditions of Sale that if you then cannot or will not do so, all monies that you have already paid will be forfeit as "rouwkoop". It is legally and financially very serious to go into breach of contract so unless you are absolutely sure you want and can afford the property, it would be better to refrain from bidding.
Auction – A public sale in which goods or properties are sold to the highest bidder.
Bid – An offer of payment made or tendered at an auction by a prospective buyer.
Commission – The amount the auctioneer charges in return for organising a successful sale. It is usually paid by the buyer.
Conditions of Sale – The terms under which a property is being sold at auction.
Deposit – There are two kinds of deposit payable at auctions: a registration deposit which entitles you to bid and is refundable if you are unsuccessful; and the deposit which is a percentage of the purchase price of any property you buy.
Fall of the Hammer – Signals the end of a period of bidding for a particular item or property at an auction and means no further bids for that item will be accepted.
Gearing – The process of funding the acquisition of assets through borrowing, such as buying a property by getting a home loan from a bank.
Lot Number – The number assigned to a certain item or property at an auction.
Non-Suspensive Sale – A property sale which is not contingent upon the buyer being able to obtain mortgage finance, for example, or having to first sell his existing property.
Order of Sale – The order in which lots at an auction will come up for sale. This will not necessarily be numerical as similar items with widely varying lot numbers may be grouped together for convenience.
Properties in Possession (PiPs) – Properties that have been taken back by a bank following a legal process resulting from owners defaulting on their home loans.
Proxy – A person authorised to perform certain actions on behalf of another, like bidding on their behalf at an auction. The word may also refer to the document authorising the stand-in.
Reserve Price – A minimum price for any item or property on auction that has been agreed on by the seller and the auctioneer. If the bids do not reach the reserve price, the seller is not obliged to go through with the transaction.
Rouwkoop – Money paid, such as a purchase deposit and the auctioneer’s commission, which will be forfeit if the buyer later defaults on the sale agreement.
Sale in execution – A sale of goods or properties that have been attached by a sheriff following a judgment for debt obtained by a creditor.
Surety – A pledge given to protect the recipient against loss in case the terms of a contract are not filled.
Title Deed – The legal document that proves ownership of a particular property
Voetstoots – A terms that describes the sale of a property exactly “as is” or with all its faults, and where the seller has no legal responsibility for its condition.