With more properties going for auction, this could be an opportune time if you’re looking to buy a property at auction at a bargain price. However, before buying an auctioned property, it’s essential to evaluate the pros and cons beforehand.
Most people know that there are two avenues to buy a home: buy a newly-built home from a developer, or buy from the secondary market. But there’s also a lesser known way of acquiring a property that not many know of: through a property auction.
According to a Knight Frank report, there could be more properties being put up for auction this year as the number of bankruptcy petitions is on the rise. In fact, auction listings could well surge up to 50% in 2023 to 600, from 420 in 2022. This includes residential, commercial, and industrial units.
Buying an auctioned property has many advantages but there are also several downsides, read on to find out.
What is an auction property?
An auctioned house is when the said property has been foreclosed and is put up for sale by auction. This is usually because the initial owner is unable to pay the property’s mortgage payments, and the property is repossessed by the lender (e.g. a mortgage bank). The lender will then attempt to sell the property in order to recover some of the money.
When a property goes for auction, interested buyers can bid for the property and the property will then be sold to the highest bidder.
What types of properties can you get from auctions?
Any property can be put up for auction. This includes residential properties (HDB, private) and commercial and industrial properties.
Why do properties go for auction?
There are a few reasons why a property can be auctioned:
- Owner’s sale (the owner is obligated to sell the property by the court as part of a divorce proceeding, or willingly decides to sell his/her property for a fast transaction
- As a mortgagee sale/distressed sale (the owner is unable to repay the home loan and the bank forecloses the property)
- Sale of estate (the property is auctioned by a representative of a deceased)
- Public trustee auction (the property is taken over by the government and auctioned for sale if the deceased has no known family members or representatives)
- Sheriff’s Sale (the property is seized by the court after the initial owner is unable to repay the mortgage repayments. The court will then sell foreclosed property in an auction to recover the outstanding balances)
While buying an auctioned property usually means that you can buy a property below its market value, it’s also riskier and could end up costing you more.
So, what are some of the pros and cons that you need to be aware of?
Pros and cons of buying an auction property
|You can buy a property at a steal||It’s riskier|
|It’s a lot quicker||You could end up paying more than it’s worth|
|There’s full transparency||There are fewer options available|
Pros of buying an auctioned property in Singapore:
1. You can buy a property at a steal
The biggest advantage of buying an auctioned property is the opportunity to buy a property at a hefty discount. This is especially true if the owner needs to sell the property urgently due to financial distress, or wants to qualify for Additional Buyer’s Stamp Duty (ABSD) remission.
While the properties sold at an auction are usually lower than market value, discounts aren’t guaranteed. Auctioned houses usually come with a guide price, so that the lender (e.g. mortgage bank) can recoup as much of the losses as possible.
Moreover, remember that the property will go through a bidding war where it will be sold to the highest bidder. If the property is hotly contested, this will also drive up the price.
2. It’s a lot quicker
Another pro of buying an auctioned property is that the process is much faster than buying through the usual house buying way. This is because there are no lengthy delays in an auction sale.
For example, in a normal private property purchase, there’s usually no formal agreement on deadlines or timeframes. Either party could also change their minds and pull out of the deal, or try to negotiate on the price.
However, there are strict timelines to be met in an auction sale, which eliminates lengthy negotiations between buyer and seller.
Furthermore, the entire buying process is also shorter; the usual option period of two weeks in an Option to Purchase (OTP) agreement is skipped, so both parties will jump straight to the Sale and Purchase agreement.
3. There’s full transparency
Because the prices are announced to the buyers before the bidding process starts, you’ll get a full sense of the price. You’ll also know all the offers and bids made so there’s no risk of having a case where the seller accepts a higher offer from another buyer after your offer has been accepted.
Cons of buying an auctioned property in Singapore:
1. It’s riskier
The listings of an auction sale are released very close to the date of the auction sale, leaving buyers with less time to research and view the property. For example, you could be buying a property that has a pest infestation or is in a dilapidated state.
Additionally, you’ll also have less time to compare prices with properties within the same development, type, and area, or research the surrounding amenities.
Generally, interested parties have up to two weeks to visit the property before the auction, so make sure that you inspect the property for defects. If you’re buying the property for investment, check if the amenities in the area are tenant-friendly. You may also want to consider hiring an agent as they help to protect your interest.
There’s also the risk of not securing a home loan from a bank in time. In a typical auction, the buyer would need to pay about 5% to 10% deposit during the auction, and the remaining 90% to 95% within 12 weeks.
If you miss the deadline to pay the remainder, you’ll need to forfeit your deposit.
With such a tight deadline, it’s crucial that you secure the Approval in Principal (AIP) from a bank before bidding for the property. This lets you know how much money you can borrow from the bank.
To secure an AIP, you can compare the best home loan rates on SingSaver so you know which banks offer the most competitive rates.
2. You could end up paying more than it’s worth
During an auction, buyers have limited time to strategise their plans; remember that not only will you be competing against other buyers, but also investors and other seasoned property experts.
In such a high-pressured environment, you must decide then and there whether to bid, outbid or give up. There’s also a chance that you’ll get carried away and go over your budget.
To avoid overspending, you can set a cap on how much you’re willing to spend in an auction. Also, remind yourself that your goal is to buy a property below the market price.
But how do you know whether you’re buying it at a discount if you don’t know the market price?
You can check the transacted prices of properties in the same development, type, size, or in the same area on URA’s website. The data is available to the public and is updated weekly.
Then, compare the price with the median price of similar properties with the discounted price. The discounted price should fall below the median price.
3. There are fewer options available
Unlike in the open market where there are more options available, a property auction typically only has about 10 to 15 properties available for sale.
So, while you may find a home at an attractive price in an auction, there’s a greater chance of finding an undervalued property in the open market.
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Should you buy an auction property in Singapore?
There are many advantages to buying an auctioned property in Singapore: you can snag a property at a discounted price, the process is much faster, and there’s full price transparency.
On the flip side, you’ll have less time to research and prepare, and may go overboard and end up paying above the market value. There are also fewer options compared to the open market, where you can buy a property that’s closer to your needs.
So before deciding to buy an auctioned house, it’s important to evaluate the pros and cons. This way, you’ll know what to look for and how to better prepare.
Remember, once you’ve won an auction, you’ll need to pay the deposit during the auction, and secure the remainder over the next few weeks.
Unless you have enough cash laying around, you’ll need to secure a loan from a bank or financial institution. Find and compare the best home loans in Singapore on SingSaver now.
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