There are a number of reasons why buying a property on auction may be regarded as a good idea. There are, however, a number of things that can go wrong, particularly when a property is being auctioned to recover a bad debt.
South Africans, like so many others around the globe, have felt the full brunt of the economic fallout that has held the world in its grip for the past couple of years. People are losing their homes and not necessarily because they can’t keep up with bond repayments. Municipalities are clamping down on errant ratepayers and other credit providers have also adopted a tougher stance towards defaulting clients.
There is no such thing as a free lunch and even though buyers may be considering purchasing a property on auction in the hope of securing a bargain, there may be hidden costs and other pitfalls that need to be factored into the equation.
Although auctions are very often an excellent way of buying a property at a more affordable price, things can go wrong and it is absolutely vital for bidders to be sure of their facts before they start raising their hands in the auction room. For example, before bidding on a property it is always advisable to check that no monies in the form of rates, electricity, water or, in the case of sectional title properties, levies are outstanding as the new owner will be liable for these amounts.
Anyone considering buying a property using the auction method should conduct thorough research before doing so. Pitching up on the day and outbidding other people may seem like a good idea, but in reality, the decision can come back to bite – hard.
Humans are funny and for some reason the auction process seems to excite them more than does a traditional sale. Many inexperienced bidders, caught up in the moment, have made rash decisions that they have come to regret. A savvy investor knows the dangers and, as with any property purchase, not only inspects the property, but also investigates why the property is being sold and what monies are outstanding. Everything is relative and even though there may be outstanding accounts, this is not necessarily a bad thing. It just means that these costs are going to be added to the final price and will ultimately form part of the purchase price.
Another common problem that is often encountered is tenants who reside on the premises when the property is auctioned. In law, although the buyer may be the owner of the property, generally speaking, the tenant comes with the property and cannot be evicted or removed until their lease with the previous owner ends.
Insurance is another factor that is often overlooked by a successful bidder. Unlike traditional sales where the risk usually only passes to the owner on transfer or occupation, in the auction process the risk may pass to the purchaser at the fall of the hammer. It is therefore highly recommended that the bidder ascertain precisely when the risk passes and take out insurance accordingly.
Houses are auctioned for different reasons and it is very important to establish why the property is being sold. With this in mind, it is advisable to determine the financial position of the seller before buying a property on auction. Under the Insolvency Act there is a danger that the sale could be set aside by a liquidator at a later stage if the seller was found to be insolvent at the time of the sale.
There are thousands of very happy South Africans who have secured bargains using the auction method. However, there have been numerous instances where the buyer has been caught unawares and ended up paying far more than he originally bargained for. Doing your homework, trusting your instincts and keeping a cool head when bidding on a property will go a long way in ensuring that the bargain on which you originally bid remains just that and doesn’t become an overpriced thorn in your side.