Johannesburg, 2 October 2017 - When purchasing a property, whether it be to live in or for investment purposes, property buyers are always looking for the best ways to pick up a bargain. One of the traditional ways of purchasing property for a bargain price has been through Sheriff Auctions. “After all, the current owner of the property would have to be in some sort of financial trouble as that the property is being auctioned and so buyers are able to purchase the property at a reduced price” says Jonathan Kohler, CEO of the Landsdowne Property Group.
Whilst the above sounds like a good idea, if you do not have experience in purchasing property at a Sheriff Auction, it can become a nightmare. Below are 5 tips to keep you protected:
Approximately two weeks before the auction is held, a list of properties which will be on auction, on a specific date and at a specific venue, is released. In these two weeks prior to the auction I would recommend making a list of the properties you are interested in and actually going to inspect those properties.
Kohler says that a mistake that he once made was bidding on a property which appeared on the Sheriff Halfway House auction list without actually physically seeing the property prior to the auction. “I had simply read the description of the property which stated that it was a 2-bedroom 1-bathroom loft apartment in a development that I knew well. I purchased the property for R690 000.00, thinking that at that price it was an absolute steal. Later that day, when I finally inspected the property, I discovered that it was in actual fact a 1 bedroom 1-bathroom loft and with outstanding levies, rates and taxes and a squatting owner. I had certainly overpaid for the property”.
The remainder of the purchase price must be paid by way of bank guarantees within 21 days of the date of the sale. “In other words, this is a cash deal” says Kohler. It is simply too risky to rely on a bank to approve finance for the remainder of the purchase price as there is no guarantee that the bank’s evaluators will even be given access to the property you have just purchased. People who are residing in these types of properties are either cash strapped owners or tenants who have no obligation whatsoever to be accommodating to you or the bank.
Kohler adds that it is important to remember that if a distressed property owner has not been paying his bond because of financial difficulties, which have ultimately culminated in the auction of the property, the likelihood is that he also has outstanding levies, and rates and taxes. These costs must be included in the purchase price when considering what offer to make at auction.
The last thing you want as a proud new owner of a home or investment property is a squatting owner or tenant refusing to move out of the property. Eviction orders are costly and lengthy processes that people do not give enough consideration to when purchasing a property on a Sheriff Auction. “That is why it is imperative to gain access to the property prior to the auction and to make contact with the owner or tenant to discuss the possibility that you will be purchasing the property” advises Kohler. Forming a relationship with the occupier of the property prior to purchasing could be the difference between negotiating a peaceful exit or rental amount, and a long, lengthy legal battle.
As a purchaser it is important to know who is bidding against you and what price margins they are looking to make. Firstly, you have your investors who are generally at the same auctions week after week looking for a bargain. They will usually have a very similar price in mind as you which they will be willing to bid up to. The margins they are seeking to make will have to be sensible, as making a R50 000.00 saving will not be worth their while. Secondly, you have your home owners. A home owner will generally be someone who lives in the same complex or area as the auctioned property in question. They will generally bid higher than the investor, as a R50 000 saving on a 1-bedroom apartment for R600 000.00 is an 8.3% saving on the listed purchase price.
Thirdly, you have your banks, who are in most cases the largest bond holders over the property. They will usually bid up until the reserve amount, which generally covers the majority of what the owner owes the bank.
Kohler remembers bidding on a property that was up for auction on Coronation Road in Sandhurst, a suburb in northern Johannesburg. “After doing a deeds search of properties that had sold in the area over the last couple of years, I estimated that the correct purchase price would be approximately R 20 million. I had contacted one of my investors and we had agreed to bid up to R10 million. The idea was to then put the property back on the market and try and get as close to the R 20 million as possible. What I did not realise was that the outstanding bond over the property was approximately R 19 million, and so the bank had a representative at the auction making sure that the property was not sold for anything less than the amount that was owed to them. The bank subsequently purchased the property back for themselves at the outstanding amount, taking the property onto their balance sheet”.
Gone are the days of making a quick and easy bargain at a sheriff auction as there are many factors which now play a role in purchasing properties on auction. “But if you do your homework and apply the 5 tips as discussed above, you can still win” Kohler concludes.