Auctions, the last throw of the dice, by Allen Denton-Miller

News > news - 25 Sep 2008
Do property auctions work? Well, yes and no. Auctions, like other methods of selling property should be used selectively, tailored to the needs of the client and appropriate to prevailing economic conditions.

In a booming property market when stock is scarce, credit easy and buyer competition fierce, auctioning a prime property in an attractive location virtually guarantees a speedy and extremely satisfactory result. Think Constantia or Clifton Beach! After all, isn’t it a basic rule of economics that scarcity pushes up price? And there’s something exciting about the atmosphere of an auction room that can loosen the purse strings of the most prudent. It’s all in the buzz, the competition, the raw machismo and the often misguided frenzy of the eager but innocent. In short, in a booming market and a sophisticated environment, property auctions work astonishingly well!

But what of KwaZulu-Natal? Generally speaking, property auctions have been viewed here as a last throw of the dice by desperate sellers with pressing debt burdens. Bargains are expected – and frequently secured. Current credit restrictions, high inflation and general caution as to where this market is heading have made traditional methods of selling difficult. Today even the most skilful estate agent may need time to sell an attractively priced home.

Comfortably placed sellers can, of course, afford to wait out the market but time is an unaffordable luxury for sellers whose creditors are already beating down the door. It’s in this situation that property auctions come into their own and are frequently the best and sometimes the only way to solve a seller’s problems - although the price achieved is unlikely to make him jump for joy. Unfortunately the alternative may all too often be repossession, black-listing and as Charles Dickens put it, ruin and misery!

The first and biggest advantage of an auction is speed. The second is certainty. The educated buyer will know to arrange his finance in advance and will be prepared to secure his purchase by paying a deposit of between 10 and 20% of the purchase price by guaranteed cheque on the fall of the hammer. In most cases confirmation of sale will be immediate but in others a short period of time may be allowed in which higher bids can be entertained.

Notwithstanding, guarantees are usually payable within thirty days thus helping to ensure a speedy transfer. Once in the auction ring you can forget about requesting time to arrange a mortgage bond – auctions aren’t for cissies. In the sale room cash is king!

So what sort of costs are involved?

Well, if the seller insists on setting a high reserve price, or indeed any reserve price at all, advertising will almost certainly be for the his account, and that can be expensive. After all, the auctioneer is in business to sell property, not to advertise it!

Major auction houses reserve large blocks of advertising space in the national press – that’s costly and a full page in a national Sunday or a prestige magazine costs a great deal of money. Clients are therefore faced with an advertising bill of anything up to R50 000, payable in advance! When properties are offered without reserve and with reasonable certainty of selling, the auctioneer can sometimes, (but not often), afford to be more flexible with regard to advertising costs. However, there is some relief for the seller in that the auctioneer’s commission, which can range upwards of 10% plus VAT, is payable by the buyer.

The down side is that under present market conditions many properties will fail to achieve the inflated prices which sellers still frequently insist on. Some may even receive no bids at all. The best recipe for success at auction, or indeed for achieving a sale by any method, is to get the price right. And as my Scottish Granny used to say, "Needs must when the devil drives!"

As far as bidding goes, it’s simple - be prepared! Sort out your finances well in advance. Make sure the funds you have immediately available are sufficient to cover the likely price of the property you intend to bid for. Get there early. To guard against frivolous bids the auctioneer may ask for a surety of anywhere from R5-10, 000 before issuing you with a buyer’s card, so be prepared.

Make sure you understand fully the terms and conditions of sale read out by the auctioneer prior to the sale. If you don’t, ask, or you may very well live to regret it. Don’t get stampeded into bidding above your limit. Be aware that bids are irrevocable for the full amount of the bid and you will be held accountable and required to pay a substantial percentage of the purchase price in the form of a bank guaranteed cheque on the fall of the auctioneer’s hammer. This can be as high as 20% of the full purchase price and is allocated both to securing the sale and paying the auctioneer’s commission for which the purchaser is responsible.

In many cases, (and it’s certainly preferable), confirmation of the sale is immediate. The purchaser is then required to put up his guarantees within thirty days or less. Should confirmation be delayed for whatever reason a competing bid may be received and if you really do want that property of your dreams you may have to dig a little deeper into your pocket. It’s a cut-throat world out there and to secure a bargain you’ll need to have plenty of hard cash readily available. You’ll need luck – but you’ll also need money!

Allen Denton-Miller
Denton-Miller Estates
039 695 9293/072 717 7771
denton.miller@mweb.co.za
www.natal-south-coast-estates.co.za
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