For those looking for a bargain, and even a quick investment buying property at auctions, otherwise known as lelong in Malaysia can be an appealing option. While it’s correct that auction homes can be purchased at a tiny segment of the business esteem, it’s additionally fundamental to comprehend that when it relates to purchasing properties on lelong auctions, you’re confronting a scope of dangers and issues. However, in some cases, buyers may end up with unexpected hidden costs of an auction property, legal disputes or financial blows that make a seemingly attractive deal turn into a costly mistake.
In this article, we will discuss the biggest risks involved in purchasing property at auctions in Malaysia and ways you can tackle these risks to make an informed purchase.
1. Risk of Losing Your Deposit
In Malaysia while participating in a lelong property auction, you are required to pay a deposit as part of the bidding. There are two types of auctions: LACA and Non-LACA. These two auction types have different deposits and terms of payment.
- LACA Auction: A deposit of 5% of the reserved price is required, with the balance of the purchase price due within 90 days.
- Non-LACA Auction: A higher deposit of 10% is required, with the balance due within 120 days.
Also, if you win the auction and do not manage to pay the remaining balance within the stipulated time, your deposit is forfeited. That is one of the most common risks to be caught by buyers when they are buying auction properties. You need to be sure that you have enough cash flow or you’re pre-‘financed’ so you can do the transaction on time. Losing your deposit can be a substantial amount depending on the property, and even a slight delay in payment can eventuate in your deposit being lost.
As far as the financial part is concerned, before you put in a bid, always check your balance first and do not risk buying unless you have the money ready before the payment deadlines. If you’re counting on bank financing, make sure you have the loan approved before you start your project.
2. Unwise Investment Choices
Even though some auction properties are bargains at auctions, not all auction properties are wise investments. There are many reasons why a payment is discounted, whether foreclosure, or dispute, or poor market conditions. It is also very likely that these factors will reduce the property’s long term capital appreciation potential and rental yield.
Or you may end up with a property where the prices have stagnant or actually declined which can mean you will struggle to sell or rent your property. Before you place a bid on a property, you need to assess the potential. Factors to consider include:
- Location: Is the property situated in an area with good demand for housing, commercial activity, or infrastructure development?
- Market trends: Is the property situated in a market that is expected to appreciate in value in the future?
- Property type: Will the property suit your investment goals (whether for capital gains, rental income, or for your own use)?
Further, some of the properties listed for auction may be quite risky areas — subject to natural disasters, high crime rates, or infrastructure problems for example — which would continue to limit the upside potential. Whether the low price seems appealing or not, buyers still need to be diligent and do their homework before placing any bids on any property they want to buy.
3. Evicting Occupants Can Be Complicated and Costly
One of the most daunting issues that come with purchasing a lelong property is the likelihood that there are current tenants. Some auction properties may be vacant, but many are not, and you may end up acquiring tenants, previous owners or even squatters. Often, this is a complex and expensive situation that can delay your move in or renovation of the property.
There are two things you have to do in order to legally evict an occupant in Malaysia: you must first own the house officially. After transfer of ownership, you can start a legal process for eviction (which normally involves a distress order in courts). This can take weeks and you may need to bring in legal help to help you through the proceedings. On top of that, legal fees and court orders can cost up to RM1,500 to RM2,000 as well, which will not be cheap to you already.
You may have potential previous owners or tenants that you could get headaches negotiating with, such as disgruntled or reluctant people to leave. They may even damage your property before they leave and that could end up costing you even more. Consequently, it is important to make sure that a property is not occupied before bidding, and to take into account the difficulties and costs associated with ejecting the occupants.
4. Outstanding Bills and Financial Liabilities
A common issue for buyers after winning a property at auction is finding that there is an unpaid bill, or some other financial liability attached to the property. These can include:
- Utility bills: Unpaid electricity, water, and gas bills can sometimes amount to thousands of ringgit.
- Maintenance fees: If the property is part of a condominium or gated development, there may be outstanding maintenance or management fees.
- Quit rent and assessment tax: These property taxes are often left unpaid by previous owners and can result in significant back payments.
The buyer who successfully bid on an auction property is usually responsible to settle on all the liabilities of the property. You may have your utility services disconnected if you don’t pay these bills or you may get into legal trouble.
This is why it is so important to engage in good due diligence before the auction. Contact the auction house and request to be given a Proclamation of Sale (POS) and use it to make contact with the utility companies, property management office, and local tax authorities to find out whether there are any unpaid bills or charges that would make your sale invalid. By doing this, you’ll know more or less what the total cost of the property is, and if it’s worth bidding for.
5. Repair and Renovation Costs Can Be Expensive
Properties that are sold at auction are sold ‘as is,’ so often the property needs extensive repairs and renovations before it can be occupied or sold. The repairs can be costly and the property can be in relatively bad shape with cosmetic problems, or major structural problems.
Before placing a bid on the property it’s important to do everything possible to assess its condition. Though you cannot peer into the inside of the property, you can get a feel for how the structure is, while visiting the outside of the home. In addition to that, a contractor or builder may be worth consulting with in order to get an estimate on how much it would cost to repair the property, based on its condition.
These repairs can include fixing plumbing, electrical systems or replacing flooring and other repairs associated with termite damage, water leaks or mold. Very quickly these costs can run up and impact the overall value of your investment. Purchasing an auctioned property may not be the best option if you aren’t prepared to spend potentially high repair costs.
6. Legal Complications: Caveats and Title Issues
When you purchase a property at auction, there is always a risk that the title is encumbered with legal issues, i.e. a caveat or restriction. A caveat is a legal notice that means the property cannot be sold or transferred. It can be placed on the property by a creditor, co-owner or some other such interested party. Buying a property with a caveat can create legal problems when trying to transfer the title in your name.
Sometimes, properties may be marked as Bumiputera lots, but can only be sold to Bumiputera buyers. The reality is if you’re not eligible, you may not be able to actually transfer the property title to your name, and hence the purchase is nullified.
It’s very important to verify the status of title of the property before bidding with the relevant authorities to ascertain that there are no legal encumbrances, caveats or restrictions which could make the sale difficult. By working with a property lawyer or real estate professional you will be able to navigate these legal aspects and avoid pitfalls.
7. Lack of Transparency in Property Condition
Selling auction properties “as is,” however, often means that the seller (typically a bank or court) is not liable for any defects or any defects in the property. While you are able to see the outside of the property, you may not get a chance to look inside properly. That means you may find yourself unable to sell the property, or stuck with one in need of serious repair, or one with underlying problems like structural damage, mold or pest infestations.
The best way to reduce the risk of this is to do your research as much as possible prior to the auction. If the property is available to be viewed, contact the auctioneer and ask for any information you can get as to the property. If at all possible, see the property in person or have an inspector check out its condition. The more data you have, the better prepared you will be to decide whether or not to go through with the auction.
Conclusion: Due Diligence is Crucial
Buying a property at a lelong auction can be a great opportunity to secure a bargain, but there are risks. There are several factors to consider before bidding, from losing your deposit to unexpected legal and financial challenges. But to mitigate these risks, you must do your due diligence, which includes checking for outstanding bills, checking the property’s title status and assessing the condition of the property.
After considering all these risks, and if you are confident to continue to the next steps, check out how to buy a Lelong Property in Malaysia.
Making a successful investment is possible with good research and careful preparation, as there are ways to reduce the risks and boost your odds of successful investment. If you’re new to property auctions it’s best that you get some professional advice from a property lawyer or real estate agent, who can guide you through the process and help you to stay clear of common pitfalls.
However, with the right approach purchasing an auction property can still be a good investment. Though, it is important to note it is knowledge and preparation that are your best tools to keep your investment both sound and profitable.
