How an Auction Works
The Property Auction Industry is growing at a fast pace, but I still experience a lack of knowledge when it comes to buy or selling property the Auction way. Most SA Sellers and Buyers do not know how the auction process work, although it is the fastest selling mechanism to sell property before the bank take possession of it, or to buy at a good price that is not overloaded with agents commission or seller's greed. Auctioning of Property is big in countries like the USA, England and Australia. It is now becoming a resolution among South Africans too.
In general most (99%) of the Auctioneers do charge a marketing and advertising fee unlike Real Estate Agents who sell's your property for free. But selling through an Estate Agent means your property could sit on the market for quite a long time. It is unlikely that you will get the price you want on the auction, but you as the seller is in control of the selling price, because you have the right to put up a reserve price. The advantage to sell through an auction is, your property gets maximum exposure via auction-boards and advertising through the printing media and internet. We also have a list of registered buyers which we notify via e-mails and mobile texting (Sms) marketing. It is our job to attract a big audience to your property. It is a gamble (there is no guarantees), but at least now you (the seller) can see the real value and demand for your type of property. The auctioneer will also announce during the reading of the Terms and Conditions, that there is a reserve price, but will not mention the price. After the auction we as auctioneers allow between five to ten days for higher offers to come in, to get the best possible offer on the table for the seller. Should the seller not accept the offer most auction-houses keep the property on their records and web to draw higher offers? The highest bidding price is the price the seller gets in his pocket, because the buyer pays the auctioneer his / her commission.
Most Auctioneers offer a free evaluation of your property. I get a lot of sellers telling me his house is worth over R 2 million (an example) because his neighbor just sold his house for R1,6 million and it is not even the same quality as his. Well, every house is priced individually and every house has its own price and individual owner. I always say the house value gets determent according the attendance of the auction audience and how much the highest bidder is prepared to pay on the day of auction. It works like on a JSE (JHB Stock Exchange) or Flower Market, where the Buyers determine the value of stock or flowers. Remember a good auctioneer can generate enough excitement through his / her chanting to produce the best possible price on an auction.
There are two different buyers:
1.Â Â Â Â Â The Investor who buy and then rent out the property, or buy, renovate and then sell the property at a profit.
2.Â Â Â Â Â The Buyer who want to live there.
The best real estate deal is to buy a property on an auction. Currently it is buyer's market. Although there is a reserve price on the auction you will still get the better deal, that is if you have patience. The right property could come up for auctioning in the area you are looking in sooner than you think. Just do your homework well and register yourself with all the property auction companies as a buyer and study the newspapers for property auctions.
I see it every day; people either fall in love with the property that is on auction, or not. As an experienced auctioneer, I immediately pick up who they are and concentrate on them when I do bid-calling (Auction).
Then of course there are investors who also attend an auction to get the property at the lowest price possible. For them it is all about rental income versus the monthly bond payment. Buying private property on an auction means there is definitely a reserve price on it and that the offer is subject to confirmation by the seller. Because you buy on an auction, you must have enough cash in the bank to pay the auctioneer his / her commission on the fall of the hammer (Varies between 5 - 10%) and in some cases a Cash Deposit (between 5 - 10%). The Deposit amount is part of the bidding price, meaning you have to get finance for the balance. As a buyer, you should already be pre-qualified for a bond, because you can lose your deposit and commission if your loan is not successful. Should you be the highest bidder on the day of auction, it is not necessarily a done deal, no; there is still the matter of higher offers that can come in within a period the auctioneer announces. Always make sure you familiarize yourself with the Terms and Conditions before you bid.
Types of property on Auctions
1.Â Â Â Â Â Private Property Auction - The home owner gives an auctioneer instruction to sell his / her property on a public auction (with a Reserve Price).
2.Â Â Â Â Â PIP (Property in Possession) Auction - The Financial Institution (Bank) who gave the capital for purchasing the property appoint an auctioneer to sell the property on a public auction - (With a Reserve Price, depending on the Bank's Terms and Conditions.) In some cases there is no buyer's commission involved or Transferring duty. Always ask the auctioneer up front. Should a home owner fall behind on his / her bond payments, some banks work in accordance with the home owner and the Auction-House to get the best possible price on the house so that the home-owner can keep his credit record clean? (There is also a reserve price on these auctions.)
3.Â Â Â Â Â Liquidated Property Auctions - A Liquidator is appointed by the court where in turn he / she will give instruction to an Auctioneer to auction off a property. These properties like the sheriff's auctions have a Master Reference Number that has to appear on the Adverts and Auction-boards. (There is also a reserve price on these auctions).
4.Â Â Â Â Â Sherriff's Auction - The property was maybe already put up for sale in the open market and did not sell, then auctioned off on behalf of the Bank and Lawyer's instruction and did not reach the reserved price. Now the home owner is in "dire straits" and it is then going into insolvency where the court appoints a sheriff to auction off the property himself and other goods (vehicles, furniture etc.), to get some money back for the Bank and other claiming Creditors. Banks are usually present at these auctions and in many cases, if the property does not reach some minimum reserve price-level; they buy it back, keep it for a period, and then put it back onto the market.
5.Â Â Â Â Â Diseased Estate Auction - The appointed lawyer give instruction to an auctioneer to auction the property - (with a reserve price)
A lot of potential buyers always approach me and ask if there is a reserve on the house. Now you know, all property auctions do have a reserve price, some just lower than the other.
How to budget for an Auction.
Before you as the buyer enter into any bidding or offer, make sure your budget is planned correctly. A lot of buyers run around from one financial institution to another looking for extra finance after the auction took place and chances are they are going to lose their cash deposit and commission paid.
Always stick to the price that you had in mind to offer and your total capital outlay should include the following:
Plus 5% - 10% Auctioneers Commission
Plus 14% on the Auctioneers commission (When applicable)
Plus Transferring Attorney Fee (Transfer and Duty Fee), Ask your lawyer the price according your bidding budget.
Plus Bond Attorney Fee - Ask your lawyer the price according your bidding budget.
Plus Electrical Compliance Certificate Fee, (In some auctions) payable to a Registered electrician. Phone an electrician to get some estimates.
As a Buyer on an Auction you have to be prepared to pay the Auctioneers commission plus Vat (If applicable) and Deposit (5 - 10% in many cases) on the fall of the hammer. That means you must have cash in the bank to be able to become a qualified Bidder on an Auction. So many people bid on the property and when the bidding closes on them, suddenly they argue the fact that they did not know how the auction works. That is why the auctioneer always read out the Terms and Conditions before the Auction starts. Should you feel unsure about your financial situation, rather attend the auction quietly and make an offer afterwards when you've worked out your auction Budget. Also go to your banker and ask how much you qualify for a Bond Loan. Also remember most banks and financial institutions give only a 90% Bond. Always make sure and again, do your homework well before attending any auction.
If you curious about these auctions, you are also welcome to attend to experience the thrill and excitement of these auctions. It is usually over within minutes.
The auctioneer on a private auction usualy are very slower than usual, because the general public must have time to think about the bidding call and also it makes it easier for the public to understand the auctioneer. It is only when we do vehicle auctions and other loose assets / goods, auctions that we have to talk the talk, because the day is only so long, and everyone wants to go home eventually.
Happy Auction Hunting
This article was written by Desmond Nel - Auctioneer and Owner of Auction RoosterÂ® - www.auctionrooster.com - cell 076 113 14 11.