You Can Make Money At Auctions, But Only If You Know These 5 Things

Written by Dave Johnson on September 8th, 2016

You Can Make Money At Auctions, But Only If You Know These 5 Things

Property investing is simple, but not easy.

And when it comes to auctions, it’s no different.

There are a lot of ‘moving parts’ when it comes to hunting down property bargains, and to make money with one you need to tick a few specific boxes.

Most property investors I know, or have seen at auctions, don’t actually make any money at them.

Which is a pity, because if they only knew how close they actually were they’d kick themselves!

You can make money at an auction, but only if you know these five things.

And today I want to show them to you…

 

The 5 Steps You Need To Make Money At An Auction

 

An auction is a public sale in which goods or property are sold to the highest bidder.

Simple enough to understand.

But auctions can be a scary place, especially if you have no experience.

What average investors do when they go to auctions is gamble.

They don’t know anything about the property or the other people in the room and thus they guestimate a good price and buy property.

This is highly risky and something that a professional property investor would never expose themself to (which I’ll touch on and explain in more detail further down).

On the other hand, auctions are some of the best places to find below market value properties in South Africa.

Basically, if you do your homework you can pick up a property bargain!

Many professional investors, after they’ve been educated, thrive in the auction space and find deals that’re just begging to be taken.

But how exactly do they find them, and then make money from them?

Let’s look at the basics of an auction and how you can start investing there…

 


Auction Step #1: Find A Good Auction House

There are tons of auctions happening around South Africa and it’s important for you to find the ones that are best suited to your strategy.

Some of the sites you should start with are:

They are useful in that they provide you with up-to-date properties in an area of your choosing.

Some websites out there even require you to pay a monthly membership fee, which, provides you with a lot more detail around certain properties (this is a highly recommended route to follow).

The membership fees range from R100 per month to around R800 per month and are worth every cent!

Don’t try and save a little bit of money at the detriment of your cash flow and profitability - When buying the wrong property at an auction (due to insufficient information) this will cost you an arm and a leg!

This is, of course, your starting point.

Do some research, find an auction house that serves your strategy and is near your home, and attend auctions there.

Try not buy the first time you go to an auction, but rather get a sense of how things are run.

This will give you more confidence in the future and will prevent you from making poor buying decisions!


Auction Step #2: The Information You Need On Any Property

The trick with a lot of auctions is that you cannot always view the property before the auction.

Therefore, you don’t always know what the refurbishment costs are, which usually forms a massive part of your expenses, and adds a level of risk.

Professional property investors always try get as much information about the property as possible.

Some of the most important information includes:

  • Property Details: This includes things like the location of the property, its full address, the size of the property and if they have added a bedroom or a bathroom, and so on…
  • Property Features: Which includes the number of bathrooms, bedrooms and car ports.
  • Sales Comparables: This is information about like-for-like and comparable houses in the area, and finding out what are they sold for. This gives you an indication of the market value of the property and gives you an estimate of your potential selling price.
  • Attorney Details: This is not necessarily the most pressing detail or very important, unless you want to find out about the outstanding rates and taxes on the property. You can also speak to the attorney about stopping the property going to auction, to perhaps arrange a private deal - In that situation you’d also need to know the auction case number.


Auction Step #3: The Costs Involved In The Auction

Within every auction there are certain costs you should be aware of, namely:

  • Registration Fees: Each auction will have a different registration fee. The auction’s registration fees can range from anywhere between R2,000 and R10,000 – Which is why it’s important to make sure you check with the sheriff beforehand and take that amount of money with you. Remember, you will receive that registration fee back after you leave the auction if you aren’t successful in buying a property – IE it is refundable.
  • Auction Commission: This is a portion of the property that goes to the sheriff, who needs it to cover the running costs of the auction. The sheriff sets up the auction and runs the process and therefore gets a cut of the pie.
  • Deposit: You’re required to put down 10% of the property value on the day of the auction. So, if you buy a property of R1,000,000 you’ll need a deposit of at least R100,000 to put down on the day. I can’t tell you how many times I’ve seen investors win a bid but they haven’t accommodated for the 10% deposit, and they end up losing the opportunity.
  • Balance: You’re then required to pay the balance of the property. If we take the above amount for example, you would be expected to pay the remaining R900,000 within a 21-day period (I’ll touch on this in more detail in step #4).
  • Property Debt: If there’s any debt associated to the property, like water charges, rates & taxes, building charges and so on… you’re then accountable for paying off that debt. This is another place most investors fall short. They don’t do their due diligence and after buying the property they realise they’re in debt for R100,000 and there goes all of their profits.
  • Transfer Duty: As with any house transfer, you will also have to pay the transfer duty, which will range based on your attorney as well as the actual property. The trick here is to get a good attorney that you trust and can work with you on your property deals. As you do more work with them you can arrange a type of discount for ‘bulk orders’.


Auction Step #4: The Timing You Need To Be Aware of

There are three specific times you’ll need to focus on: Before the auction, on the day of the auction and after the auction.

Let’s look at what happens during these three stages:

Before the auction

You have to do your due diligence before you attend the auction.

This is absolutely critical.

Often the auctioneer will give an indication of how much debt (like rates and taxes) is outstanding on the property.

You’ll notice that they always say the debt is Rx in good faith – Which means, it was given to them by someone.

This means that it’s not always entirely accurate.

It’s not unheard of for people to buy an auctioned property and then have to pay R100,000 in rates and taxes debt.

Those numbers are what could kill the profit in the deal, so make sure you do your due diligence before the auction!

If you can, and I know that it’s not always possible, but try and view the property before the auction.

Sometimes the property will look nice from the outside, but once you step inside you’ll see it’s falling to pieces.

This’ll obviously increase your renovation costs, as well as your offer price.

If you’re not able to view the property, put in a large contingency factor to ensure you protect yourself from any hidden fees, but even then be extremely careful.

On the day of the auction

After you’ve been successful in a bid for a property, the staff will draw up the conditions of sale, which stipulates how much the property has been sold for.

You’ll then be required to sign that conditions of sale document with the 10% down payment of the property selling price.

With that paper you’ll be seen as the new property owner, though you are technically only the property owner once the transfer has taken place.

In order to conclude the sale, you would have had to provide the relevant FICA documentation, IE valid ID book and proof of residence (not older than 3 months).

In most cases though these are required at the registration desk before the auction begins.

After the auction

After you’ve signed for the property and deposited 10% of the capital amount, you’ll be given up to 21 days to pay back the balance of the property, though most sheriffs provide a week’s extension in case.

Smart property investors know this going in, and ensure that they have the balance handy (either in access bonds or angel investors, this can vary).

If you’re not able to pay the amount within the timeframe the sheriff’s team will deduct their administrative costs from the 10% deposit and give you the rest back.

Luckily this will not break the bank, but it is wasting money!

Rather be safe, be secure, be savvy.


Auction Step #5: Knowing The Risks Involved

There are numerous risks that you need to be aware of.

Let’s dive into each one to ensure that you are protected:

  • Liability For Debt: As I’ve already mentioned, any debt associated to the property will become yours. Anything ranging from building charges to rates & taxes will become your responsibility. This shouldn’t scare you, as you should spend sufficient time doing your due diligence. Remember to factor in a contingency to cover the debt that may come with an auctioned property. 
  • You Buy What You See: Again, a mistake that most investors make is not viewing the property before the auction. This can lead to problems, especially when the property is more run-down than you expected, or if there is a tenant in the property, or if the owner still lives there – It’s your baby to manage them out of the property. Therefore, the smart thing to do is to see the property beforehand. This risk is known in South Africa as voetstoots, which says that the buyer is at risk for anything that is contained within the property.
  • Lease Obligation And Evictions: Sometimes, but not always, there’ll be a tenant living on the property who is completely unaware that the property has gone to auction. These are worst case scenarios because the tenant is not in the wrong (often they’ve paid their rent every month on time), yet they will feel the full force of the punishment. They’ll usually have a lease in place with the previous owner and this then becomes a negotiation between you and the tenant should you want that tenant out (remember, the law says that you must honour the tenancy agreement). In some instances, the tenant will be happy to move out, and other times not. It’s important to make the move as enticing for the tenant as possible, sometimes it can even be cheaper to hire a moving truck and put down the deposit for the tenants move to their new apartment. If the previous owner is living on the property you will have to follow the eviction process, which can only be started once the property has been transferred into your name. This process can take up to 3 months, so get yourself a good lawyer and begin the process as quickly as possible.

 

 

How To Snatch Up Property Bargains The Easy Way

 

Property auctions are a gold mine for smart, prepared property investors!

Unfortunately though, that’s not the case for most investors I know and most that I meet at auctions.

If you follow my five simple steps, property auction profits will be knocking on your door in next to no time!

Remember, you need to:

  • Find a good auction house or auction source
  • Find out the right information you need on the property
  • Do your due diligence and find out what costs are involved in the auction
  • Make sure you focus on the right auction timing (before the auction, on the day, and after the auction)
  • Know the risks involved and what you’re exposed to

Making money at an auction is as simple as counting to five.

So now that you know what to do at an auction, what’s stopping you from uncovering a profitable property bargain today? 

Until next time, be bold and go build that property portfolio.

Dave Johnson Signoff

Dave Johnson
Analyst, The SA Property Investor
The Money Lab