Property auctions in South Africa are increasing in popularity as distressed sellers try to offload homes they can no longer afford.
However, buying or selling at auction may not, according to a media release by Realty 1 International Property Group, be the best option for either party.
“There is most certainly a case to be made for the sale of property by auction in some instances,” says Mike Bester, CEO of the group, “but the current belief in the market place that it’s the solution to every sale is misleading.”
When a property is auctioned, the seller has the advantage of knowing upfront that the deal is secured, the buyer must provide a guarantee of finance, and he cannot include suspensive conditions in the offer to purchase. The buyer, on the other hand, has the benefit of purchasing a property clear of any interdicts or other binding agreements, as a reputable auction house will ensure that the property is unfettered before accepting it for sale.
“That’s really where the advantages end,” says Bester. “In these difficult economic times, many of the properties sold on auction come from liquidated estates and are in effect repossessed properties, or properties in possession. The biggest problem with such properties is that generally the former owner has been unable to sell the property on the open market, and for some time may not been able to afford to perform proper maintenance, so the buyer may find a large number of problems on the premises.”
Because of the immediate nature of the auction sale, he says, it’s not always possible for potential buyers to request professional inspection of the property, and this means the ‘voetstoots’ principle applies in its entirety. “So while the buyer may think he is getting a bargain, this may not necessarily be the case and he may find he has to spend sizeable amounts of money to fix up the property.”
Then there’s the price issue. The slowing economy is now being felt even in the auction environment, as auction house The Alliance Group discovered when a multiple sale of 19 properties was held in Cape Town in May. Most of the properties, according to Bester, sold for 25% less than sellers wanted, and four properties had to be set aside as there were no starting bids at all. "There is no question things have tightened," said the group’s Christian Stewart after the auction.
“This makes it clear that the old way of thinking – that an auction virtually guarantees a sale –no longer applies,” says Bester. “In addition, the lower prices realised prove that a forced sale, whether due to a liquidation or simply because the seller needs to offload the property urgently, may not realise a true market value.”
“Once the property has been put up for auction, while the seller and the auctioneer may have agreed on a minimum or ‘reserve’ price, the seller does not really have the power to reject the winning bid if it doesn’t meet his expectations,” he says. “Although the concept of a ‘seller confirmation period’ supposedly empowers the seller to accept only the price he wants, in a distressed sale the seller generally cannot afford to reject the winning bid and wait until the next auction to try again.”
“In a traditional property sale, however, sellers have the right to reject any offer less than their mandate price, and in this way they maintain some control over the value of their asset.”
And what about the savings on commission? “Most agents are prepared to negotiate against the traditional 7% commission these days,” says Bester, “but on auction the auctioneer usually takes around 10% of the sales price of the property, and this cost is paid by the buyer. So while the seller may save on commission, he risks getting a lower price for the property, and there are no savings on costs for the buyer that can be found by going this route.”