Traps At Property Auctions

I wrote about the incredible opportunities at property auctions recently. To remind you about the possibilities here, I’ll share my own experience. A couple of years ago, I bought a double-storey link house in Subang Jaya at an auction for RM220,000, below the market price of RM300,000. I spent RM13,000 to do up the house and then sold it seven months later for RM280,000. Despite having to pay the RPGT that was still applicable then, I still made a decent profit. Just as important is the fact that I incurred zero risk during the whole episode. Decent profit, zero risk – it was a perfect investing story.

A couple of my friends did even better. One bought an apartment in KL worth RM200,000 for just RM98,000. A second friend bought a house worth RM360,000 for RM240,000. Both properties were purchased at auctions. And these are the ones that I have personal knowledge of. You can bet there are even more exciting and grander stories out there.

So there are great opportunities at property auctions. The main attraction is of course the low price of the properties. You can often get discounts of 20, 30 or even 50 percent from the market value of the property. What’s more, the supply is plentiful. You’ll run out of money before you run out of properties.

At the same time, property auctions come with their own sets of problems. Like all things involving money, there is a catch at property auctions as well. (If you have not realised it yet, there is always a catch somewhere when it comes to investments. While some are obvious traps, many others are not so obvious – you only know about them after you invested your money!) In fact, there are a lot more traps at property auctions than in most other investments. So if you don’t know what you are doing, instead of making money, you could be exchanging your hard earned money for a permanent headache!

Let me share with you a couple of traps. One of them is buying a property because it is cheap. You read the proclamation of sale: the reserve price is 40 percent off the market value. So you went to the auction, made a bid and actually won. The property is now yours. In terms of price, you’ve won big. However, you still lost because the property is in a poor location. The place is abandoned – not just your property but the whole area! You cannot rent it, sell it or even use it. Who’s going to stay in a place where there’s no living soul for 50 miles! By the way, this is not just a theoritical example. There’s a least a couple of areas, not far from KL, where this is actually happening. The new owners found out that they cannot do anything with the properties. They cannot rent it, sell it or even refinance it because no banks are willing to do so. They cannot even use it as a warehouse because thieves keep breaking into the property. And you know you are in trouble when you cannot even use the place as a warehouse.

So don’t get excited just because the price is cheap. When it comes to properties, there’s often a good reason why the property is cheap – it’s in a poor location. And because of the poor location, very few people wants the property. This means that the price will be cheap for a long long time. The good thing is that your great grandchildren may be thanking you for buying the property 70 years from now when they sell the property for a million ringgit. You however will be kicking yourself in the meantime!

Another trap is buying a property that is tenanted. Practically all the auction properties are sold on a ‘as is’ basis. What that means is that the buyer is buying the property as it is – warts and all. If the property is damaged, it’s up to the buyer to make the repairs. If the property is occupied, it’s up to the buyer to evict the tenants. How is his problem. The seller does not want to know or even care.

Now if the tenants are willing to move out, then the buyer is lucky – very lucky. If not, then his problems have just began. He may need to beg, plead or chase them out, which is easier said than done. He may need to go to court to evict the tenants. That’ll take months. Worse, the buyer may not even move out even with the court order. What will the buyer do then? Cry would be a good thing. Imagine that: it’s the buyer’s property. He has paid good money for the property but is unable to exercise his rights over it. Meanwhile the tenants are staying there – rent free, mind you – and thumbing their noses at the buyer.

Those are just two of the traps waiting for the uneducated buyer at property auctions. There’s plenty more lying and waiting in the shadows. I can’t tell you the whole bag because of lack of space and because some of them are unprintable!

So to summarize, you need to do some homework before you can consider going for auctions and bidding for the properties. The homework will include visiting the property, checking the title and checking the outstanding bills. It may sound like a lot of work but considering the rewards, I think it is a worthwhile thing to do.

But then, all worthwhile things require time, effort and sacrifices. And making money is certainly a worthwhile thing. 

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