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What are auction properties/ lelong properties?
Auction properties are properties that are foreclosed by banks, and it can be due to numerous reasons. Generally, auction properties are cheaper than secondary markets (sub-sales). In recent years, auction properties have gained significant attention as a way of investing in real estate.
Imagine buying a property at 30%–50% below the market value. One can definitely accumulate wealth easily through auction properties. However, like all good things, buying an auction property has its opportunities and challenges. We will discuss this further in this write-up below.
Understanding the auction property market in Malaysia
Auction properties are real estate assets sold to the highest bidder through a public auction. Public auctions are generally held in a public venue, but nowadays, most auctions are done online via e-lelong by the government or online bidding through the auctioneer’s own channel. Auction properties may include residential homes, commercial buildings, lands, factories, and others.
With the increasing cost of acquiring and maintaining a property, many people turn to auction properties to reduce the costs. Buying a property at a discount of up to 50% of its market value allows the purchaser to renovate and fix up any issues that may arise.
When it comes to investing in properties, old-timers and many asset holding companies look into auctions to fast-track their property portfolios. Rather than buying a newly built condominium for investment, which can get investors an estimate of a 3-5% rental return, buying an auction property at the discounted price allows possibilities to reach 9% in rental return.
Types of Auctions in Malaysia
If you are planning to purchase an auction property in Malaysia, it is important to know the types of auctions that are available to get yourself prepared. There are two types of auctions in Malaysia: one being Loan Agreement cum Assignment (LACA), and the other being Non-Loan Agreement cum Assignment (Non-LACA). Both types of auctions have their own set of rules, which we will go through here.
Loan Agreement cum Assignment (LACA) Auctions
LACA involves properties that are repossessed by financial institutions due to loan defaults. These auctions are also known as bank auctions in Malaysia. Bank auctions usually occur when the individual title or strata title has not been issued.
There are many reasons why a property would go on auction, but the most common one is that the landlord of the property is unable to repay their monthly mortgage payments. Defaulting on mortgages allows the bank to sell the property without applying for an order of sale.
One good thing about LACA cases is that many new or recent development auction cases are in this category. A new development, especially one with high rises, will have a lesser risk of property damage that incurs a high cost of repair.
Government Auctions (Non-LACA)
Government auctions are usually known as auctions that are held by the high court or land office in Malaysia. When you hear someone mention “court auction” or “high court auction,”, it usually refers to non-LACA cases. Non-LACA auctions generally have a clear-cut rule and are always straight to the point. Unlike the title issue with LACA cases, non-LACA cases mainly consist of titles that have already been issued (strata titles or individual titles).
With titles already being issued, the process of obtaining an auction property is much simpler, as there won’t be issues with double Memorandum of Transfer fees (MOT) and other hidden costs.
Advantages and disadvantages of buying an auction property in Malaysia
Advantages of buying an auction property in Malaysia
1. Cheaper acquisition price
One of the main purposes of buying an auction property is that the price is cheaper than market value. If you are buying the property for your own use, a property at 30%–50% below market value would allow you to use the extra money for renovations, furnishings, and repairs. If you are buying a recently developed township or development, you may even find them in good condition!
2. Higher investment returns
If not for personal use, buying an auction property compared to traditional sub-sales markets or new launches can also give you a higher return on investment (ROI) and return on rental (ROR). Investing in a property in a hot location allows investors to find tenants for rentals easily. Not only that, property flipping is also possible, as the investor has more room for bargaining.
3. Buying into a neighborhood with low supply
When it comes to residential, there are certain addresses where it is hard to obtain a landed house due to low supply. For instance, Damansara Heights, Mont Kiara, and Bukit Tunku generally have a low supply of landed houses available. With auction property, there may be a chance for a property at these addresses to be foreclosed, allowing buyers to obtain it at a lower price.
Not only that, if you are looking for shop lots in prime areas like SS2, Puchong, and SS15 at a lower price, the auction market allows you to have the chance!
Disadvantages of buying an auction property in Malaysia
1. Unable to view the property
Buying an auction property is like opening a box of chocolates. You wouldn’t know what condition the property is in, and occasionally these damages may result in high repair costs. It is recommended to conduct a “site visit” to the auctioned property before entering the auction.
Viewing the exterior of the property and finding out about it from the neighbors are just some of the things you should do before buying an auctioned property.
2. Overpaying for the property
You’d be surprised to hear that many auction cases ended up with the auctioned unit higher than the secondary market price. This usually happens when the bidder gets too excited and keeps bidding to win. You should always be aware of the current market price of the unit that you are bidding for to avoid going above it.
It is important to know what you’re buying into and do your due diligence to find out more about the property before joining the auction. You can also work with an agent or agency that specializes in auctioned property. Doing so will make the purchasing process much easier and smoother.
3. Unexpected complications with land, title, or developer
With auctions, there is a possibility that you’re buying into an auctioned property that is currently having issues with its title, developer, or even the land itself. One of the common complications that you should look out for is whether there are any caveats or encumbrances to obtaining the property. You can do so by conducting a land search with one of our representatives (free of charge).
Other than caveats, you may also encounter a double memorandum of transfer (MOT) issue with the developer. This issue happens in some developments where the developer has already issued a strata title for the landlord, but the landlord has not made the payment for the MOT. In cases like these, you may have to pay double MOT to obtain the auction property, from the developer to the landlord and from the landlord to yourself after you have won the auction.
You should try your best to find out more about the property regarding the caveats, encumbrances, developer consent, etc. before committing to the auction. We would recommend working with an experienced auction agent to smooth the process.
4. Unexpected charges (hidden costs)
Buying an auction property does not necessarily have a “hidden cost,” but there are some charges that you should be aware of when buying an auction property. One of the main hidden costs is the auction property’s unresolved utilities and maintenance fees. Every auction case has its own set of rules, which you can check in the “proclamation of sales” (POS). In some cases, the bank will bear the fees of the unpaid utilities, while others won’t.
Another unexpected charge you should be aware of is repair costs. When buying auction properties, they are typically purchased on an ‘as is, where is basis’. Buying a property without the right to inspect its internals can be risky on old-landed properties. We would recommend allocating some funds to prepare for the repairs, if there are any.
Lastly, there is the double memorandum of transfer (MOT) cost that was mentioned earlier. When buying an auctioned property from a new development, this case may be encountered. It is best to do your due diligence on this, as double MOT charges can amount to a very high amount.
5. Auction being called off
Auctions are usually called off when the defaulter has paid their defaulted payments. Once the bank has received payment from the defaulter, they will send the auctioneer a message to call off the auction.
In most cases, the bidders will be informed if an auction is being called off, and it is generally not a big deal as the bank will return the deposit to the bidders.
The only bad thing about this is when bidders are not informed of auctions being called off or it is informed on the day itself. This will waste the bidder’s time as well as that of the agent they are working with.
Step-by-step guide to buying an auction property in Malaysia
Step 1: Check your loan eligibility.
Unless you are planning on purchasing fully with cash, the most important procedure in buying an auction property is checking your loan eligibility. There is no point in shopping and looking at a RM3,000,000 auction if your loan can only qualify for RM800,000.
You can check your loan eligibility with us, as we are partnered with bankers that can help you in this process. After you have checked your loan eligibility, you can start shopping for auction properties equivalent to or less than your maximum loan amount.
Step 2: Conduct research and check the market value of your desired auction property.
Once you have selected the property you intend to buy, it is important for you to conduct thorough research and check the market price of the auction property.
If you are buying for investment purposes near offices or university areas, it would be a plus if the selected auction property is near public transport or within walking distance of commuting amenities. This will ensure that the unit has a higher rental demand rate. Similarly, if you are buying a shop lot for your own usage, finding a shop lot in an area with big roads and surrounded by many parking lots is ideal.
You should also take note of the market value of the auction property. Knowing the market value of the property allows you to make better judgments based on how much you can save and how much rental or investment return you can expect. Not only that, you should always keep the market value in mind when you are bidding! This ensures that you don’t overbid your property.
Step 3: Inspect the auction property (site visit)
Inspecting the property that you would like to buy is very important to find out the general condition of it. Please take note that you can’t inspect the inside of the property, but you can inspect the exterior.
Inspecting the exterior of the property can be useful if it’s a landed unit. For houses, you can see whether there are occupants in there, and if not, you can see the condition that it is in and whether any renovation was done prior.
Viewing shop lots is also worth it, as you can see the walking traffic in the area and whether it is suitable for the type of business you intend to open (restaurants, cafés, etc.).
Step 4: Obtain information from the auctioneer or sales agent.
After inspecting the property and knowing what you’re getting into, it is important to find out more information on the property that may not be visible in the description. This can be done by obtaining the Proclamation of Sale (POS). The POS shows about 90% of the information you need regarding the property.
Dealing with a sales agent is useful in this step as they can summarize the POS for you, such as whether the auction property has any caveats or encumbrances, and how many days you need to fulfill the financing part (90 days or 120 days).
Working with a good sales agent will ease the homework part, as they usually have access to bank financing, land searches, developer contacts, and more. Another benefit is that you don’t need to pay a high commission to them, and in some cases, none!
Step 5: Registering for the auction
If all the previous steps are done and you are satisfied with the property, the next step would be to register for the auction. Registering for the auction can be tricky, as you will have to prepare all the needed documents beforehand.
Once you have all the documents, make sure you have a bank draft or cashier’s deposit equivalent to 10% of the reserved price, payable to the respective bank according to the Proclamation of Sale (POS).
With all these prepared, you can then register for the auction via the auctioneer for LACA cases or the high court or land office for non-LACA cases.
Step 6: Bid online or bid on-site.
After registering for your auction, you will be informed about the auction bidding procedure, whether it is through online or physical bidding. Online bidding is quite straightforward, and the instructions will be given when you register online yourself. If you are working with an agent, you will be guided throughout the process.
Recently, most auctions are being held online via the auctioneer’s website or the government’s own bidding portal. Online bidding is much simpler compared to physical bidding, but the thrill of physical bidding is a thing on its own.
Step 7: Sign the documents and pay the remaining balance of 10% of the successful bid price (if any).
Once you have won the auction, it is time to sign the documents (usually the COS form) and pay the difference between the 10% reserved price and 10% of the new successful bid price.
For example, if you are bidding for an auction with a reserve price of RM1,000,000, your 10% deposit will be RM100,000. Let’s say there are other bidders and you win the auction for RM1,200,000, you will have to provide 10% of it, which is RM120,000, equivalent to RM20,000 in outstanding
Step 8: Financing the remaining 90%
We advise you to immediately apply for a bank loan for the remaining 90%, as you will only have 90 days or 120 days to pay the remaining balance. Failing to do so will either result in you forfeiting the auction or the 10%.
An extension of time can be requested with a valid reason. Without a valid reason, you will be charged a penalty.
Step 1: Check your loan eligibility.
Unless you are planning on purchasing fully with cash, the most important procedure in buying an auction property is checking your loan eligibility. There is no point in shopping and looking at a RM3,000,000 auction if your loan can only qualify for RM800,000.
You can check your loan eligibility with us, as we are partnered with bankers that can help you in this process. After you have checked your loan eligibility, you can start shopping for auction properties equivalent to or less than your maximum loan amount.
Step 2: Conduct research and check the market value of your desired auction property.
Once you have selected the property you intend to buy, it is important for you to conduct thorough research and check the market price of the auction property.
If you are buying for investment purposes near offices or university areas, it would be a plus if the selected auction property is near public transport or within walking distance of commuting amenities. This will ensure that the unit has a higher rental demand rate. Similarly, if you are buying a shop lot for your own usage, finding a shop lot in an area with big roads and surrounded by many parking lots is ideal.
You should also take note of the market value of the auction property. Knowing the market value of the property allows you to make better judgments based on how much you can save and how much rental or investment return you can expect. Not only that, you should always keep the market value in mind when you are bidding! This ensures that you don’t overbid your property.
3. Inspect the auction property (site visit)
Inspecting the property that you would like to buy is very important to find out the general condition of it. Please take note that you can’t inspect the inside of the property, but you can inspect the exterior.
Inspecting the exterior of the property can be useful if it’s a landed unit. For houses, you can see whether there are occupants in there, and if not, you can see the condition that it is in and whether any renovation was done prior.
Viewing shop lots is also worth it, as you can see the walking traffic in the area and whether it is suitable for the type of business you intend to open (restaurants, cafés, etc.).
4. Obtain information from the auctioneer or sales agent.
After inspecting the property and knowing what you’re getting into, it is important to find out more information on the property that may not be visible in the description. This can be done by obtaining the Proclamation of Sale (POS). The POS shows about 90% of the information you need regarding the property.
Dealing with a sales agent is useful in this step as they can summarize the POS for you, such as whether the auction property has any caveats or encumbrances, and how many days you need to fulfill the financing part (90 days or 120 days).
Working with a good sales agent will ease the homework part, as they usually have access to bank financing, land searches, developer contacts, and more. Another benefit is that you don’t need to pay a high commission to them, and in some cases, none!
5. Registering for the auction
If all the previous steps are done and you are satisfied with the property, the next step would be to register for the auction. Registering for the auction can be tricky, as you will have to prepare all the needed documents beforehand.
Once you have all the documents, make sure you have a bank draft or cashier’s deposit equivalent to 10% of the reserved price, payable to the respective bank according to the Proclamation of Sale (POS).
With all these prepared, you can then register for the auction via the auctioneer for LACA cases or the high court or land office for non-LACA cases.
6. Bid online or bid on-site.
After registering for your auction, you will be informed about the auction bidding procedure, whether it is through online or physical bidding.
Nowadays, most auctions are held online via the auctioneer’s website or the government’s own bidding portal. Online bidding is much simpler compared to physical bidding, but the thrill of physical bidding is a thing on its own.
7. Sign the documents and pay the remaining balance of 10% of the successful bid price (if any).
Once you have won the auction, it is time to sign the documents (usually the COS form) and pay the difference between the 10% reserved price and 10% of the new successful bid price.
For example, if you are bidding for an auction with a reserve price of RM1,000,000, your 10% deposit will be RM100,000. Let’s say there are other bidders and you win the auction for RM1,200,000, you will have to provide 10% of it, which is RM120,000, equivalent to RM20,000 in outstanding
If you did not win the auction, don’t worry! Your deposit will be returned to you.
8. Financing the remaining 90%
We advise you to immediately apply for a bank loan for the remaining 90%, as you will only have 90 days or 120 days to pay the remaining balance. Failing to do so will either result in you forfeiting the auction or the 10%.
An extension of time can be requested with a valid reason. Without a valid reason, you will be charged a penalty.
Summary
Buying an auction property can be a thrilling experience. If you are into property investing, you should definitely look into auction properties. Buying a property 30% to 50% below market value can definitely fast-track your property portfolio and maximize your returns.
However, you should not neglect the research needed when buying an auction property, as you can also end up paying more than the market value of the property if you are not careful!
Nevertheless, if you need assistance in buying an auction property, feel free to contact our team, as we exist to help our clients make better judgments in buying auction properties as well as make it easier by doing all the homework needed!
We wish you all the best in your auction property journey!
