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Monday Oct 02, 2017

Property auctions gaining in popularity

Auctions have become a popular market place for property buyers and sellers because of the "straight forwardness" of the transaction.

And buyers who are looking for good, market-related deals that can be finalised quickly and easily tend to be the ones turning to auctions.

"In South Africa, the average buyer looks at changing address every eight to nine years, and an auction is seldom their first route," says Luther Nelson, founder of RP Investments.

"It is mostly for clever buyers who want to buy for investment and also live in the property, as certain auctions offer a lot of equity."

Over the past decade there has been an increase in the number of people using auctions to buy property, and auction professionals say there are no signs of it slowing. ClareMart Auction Group chief executive Jonathan Smiedt says this is largely due to the speed and transparency of the process, as well as the fact that auctions operate without the hassle of deals being subject to bond approval.

Although this does not preclude buyers from obtaining bonds, Smiedt says their bidding at auction are not subject to bonds being obtained.

"Auctions attract the same buyers on any property who would participate in a private treaty sale by an agent, but auctions traditionally attract a much larger group of buyers than the private-sale marketing."

This is because of the "wide range of reach" and the "high levels of interest" with which auction buyers follow this marketing.

Auctions are also growing in popularity against a backdrop of credit ratings downgrades, with Fanie Bielderman of Aucor saying that South Africans can expect the maturing auction sector to expand as an accelerated sales platform option.

"We believe that a greater range and scope of assets will become available on auction as companies and individuals adapt to changing market conditions."

Even in the global market, auctions are growing in popularity, and Tanya Jovanovski, franchisee of Rawson Auctions Western Cape, says that, in Australia, most properties are sold via auction.

"The regular channels and methods of selling property are still effective, but the auction approach is quite different in its nature and methodology, and this difference is what appeals to specific buyers and sellers."

This appeal is generally linked to the advantages auctions offer, including:

Buyers usually pay the commission on the sale.

Buyers pay a non-refundable deposit and the commission on signature of acceptance.

The seller's reserve price is protected by the terms and conditions of the auction mandate.

A property can be auctioned within 30 days.

In addition to these "pros", Smiedt says sellers can set their reserve prices at levels they believe reflect the true values of their properties without risk of over-exposure of the properties at the wrong prices for too long.

Buyers can also "compete transparently" and see what other investors are willing to pay.

"Often the traditional sales process can be shrouded in secrecy with hints of other competing offers, that 'may not be declared' to the buyer and so creating an interest which might not exist.

"But this competitive process is built into the auction mechanism and is live for all to see at the same sitting on the auction floor."

Nelson says the only real negative to a voluntary auction is an unrealistic seller. But experienced auctioneers "will not accept these mandates". The major negative for everyone is when the auction is not held on site.

In terms of current trends, ClareMart is seeing an increase in large blocks of flats being sold on auction, with investors in the buy-to-rent market responding positively as rental incomes alone produce significant returns.

Smiedt says: "Large houses, particularly those near universities or on public transport routes, are often bought to capitalise on the student accommodation market that is expanding the world over."

Buyers bidding on properties for both investment purposes and to live in are being seen in fairly equal numbers, Jovanovski says, with Nelson adding that voluntary auctions generally attract end users, while distressed/multiple auctions attract "hardened bargain hunters".

Regardless of the types of buyer though, Smiedt says the most important aspect of auction marketing is to generate a market of interested buyers on one day, at the same time.

"The power of attracting every possible buyer for a particular property in one sitting on a specific auction day is what produces the high success rate of auctions across South Africa – a success rate which is unequalled by any other target sale mechanism."

According to ClareMart's statistics, more than 40% of all property listed at their auctions is sold.

Other reasons Smiedt says buyers go the auction route is that certain properties – many of them highly attractive – are only available through auction, including deceased estates, liquidated properties, or those under curatorship.

"So the potential buyer who does his homework and is looking for a very specific property, will look across platforms."

However, the most common reasons that owners sell on auction, centre on the need for quick sales.

"With a voluntary auction in the right location and a realistic reserve price, the auction will always be the best way of selling because qualified buyers will compete for the property," Nelson says.

He adds though that distressed auctions have dramatically decreased thanks to the banks' "help-you-sell" programmes.

"The term 'distressed' speaks for itself, but with all the 'help-you-sell' programmes offered by the banks, only the most stubborn parties end up at auction."

According to Bielderman, South Africa's auction industry has proved to be robust in both economic booms and downturns, and this is because corporate asset disposals are initiated for a variety of reasons.

These include when assets become redundant or there are surplus assets held. Online auctions are also growing in popularity, he says.

Where pricing is concerned, there is a general belief that properties bought at auction can be picked up for less than if they were sold via the traditional estate agency route.

But this is not true, Smiedt says, explaining that there are no price differences. The only difference is that the auction method is "merely a quicker way for sellers to find buyers for their properties at market-related prices".

Agreeing with this generally, Jovanovski says there are times where some houses are sold "over the area average price" and also times when there are "very good bargains".

"At the end of the day, the public determines the final bidding price."

But a lot also depends on location, Nelson says.

"The upside potential is never limited by the asking price, but in an unpopular area the opposite is also true."

  • Buyers of homes on auction need to do their homework

    Although there is more disclosure with an auction and the level of information available through the typical high-end auction catalogue exceeds that which is usually provided by estate agents, buyers should be fully aware of the terms under which they purchase, irrespective of the real estate platforms they use.

    Buyers should do their homework, inspect the home, do their calculations, and ensure they have all the finance in place before the sale, or at least have an idea of the home loan for which they qualify.

    After the acceptance of a bid by the seller, the buyer has at least 30 days to obtain finance from a bank and provide guarantees.

    Buyers should meet the auctioneer to go over any questions they may have about the auction process as well as the conditions of sale.

    The sheriff will never guarantee outstanding rates, taxes and levies, and so unskilled buyers can be in for a big surprise.

    Any tenants on the property might be a problem.

    Buyers should never attend an off-site auction where they cannot inspect the property.

    Buyers need to verify the credibility of the auctioneers, including ensuring that they are CPA compliant and affiliated to professional bodies such the Estate Agents Affairs Board and SA Institute of Auctioneers.

  • What you need in your pocket on the day

    Bidders do not need the full cash value with them on auction day, but the highest bidder needs to be able to make a securing payment at auction. This is normally between 10% and 15% of the price they expect to pay for the property, says ClareMart chief executive Jonathan Smiedt.

    This amount includes the deposit, which is deducted from the purchase price on transfer, and the auctioneer's fee. It is fully refundable, with interest, should no sale be concluded, he adds.

    However, even though the buyer is not expected to have the full price available on the day of the auction, buyers who do require finance for the purchase can make these arrangements and obtain the financial security prior to bidding.

    Smiedt says most banks will give their customers bond approval prior to their finding property. This allows buyers to set limits as they know exactly how much they qualify for.

    However, Luther Nelson of RP Investments says how much cash one has may also depend on the conditions of sale as set out by the auctioneer, seller, bank, or whoever commissions the actual auction.

    "There will normally be a 10% to 20% deposit with guarantees to be delivered within 14 to 21 days," he says.

    As an example of differing terms, Tanya Jovanovski of Rawson Auctions says their payment terms are 5% deposit of the bid amount and 10% commission plus VAT on the fall of the hammer. This is over and above the highest bid amount.

    "If your bid is the highest on the day, the deposit and commission is called for within 24 hours. Many bidders do an electronic transfer at the auction venue. We then allow for 45 days for a guarantee for the balance of the purchase price to be presented to the transferring attorney."

  • Talk to your bank if you land in arrears

    Repossessing a property is usually the bank's last resort when bond holders default on repayments.

    When a homeowner falls into arrears, the bank will "at all times endeavour to get in touch with the customer to start a process of engagement to remediate the situation through the use of an array of approved solutions", says Absa. The bank says:

    It is vital that customers immediately get in touch with their home loan consultant once contacted by the bank. Time is of the essence to develop viable solutions in partnership with the bank.

    The customer has a legal obligation to fulfil the terms of the bond agreement and remains liable for any outstanding balance on the loan account, including the cost of the judgement.

    The bank will go the repossession route only when all options suggested by the bank have been exhausted.

    The bank will always seek to support customers in troubled times. However, this is limited by the customer's willingness to work with the bank to reach a mutually sustainable solution.

    Bonnie Fourie
    Property
    Weekend Argus (Saturday Edition)

    Independent Property appears every Saturday in the Weekend Argus

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