Authors: Nicholas De Decker – Candidate Attorney
Supervised by: Penny Chenery – Director & Head of Real Estate and Kobus De Beer – Director
The promise of snatching up luxury real estate for a fraction of the price has always attracted buyers to the auction market. But prospective buyers beware: turning a profit on a property is not as straightforward as it may seem.
Two types of auctions
It is important to note that there are different types of auctions: voluntary auctions and involuntary auctions. A voluntary auction is when a seller opts to sell their property via the auction process in the hopes of pitting various buyers against one another to drive up the asking price. Accordingly, these types of auctions usually favour the seller. If you are a potential buyer looking for a good deal, voluntary auctions are perhaps not the way to go.
Conversely, an involuntary auction is when the seller is forced by circumstance to sell their property through the auction process to try and create liquidity for their creditors. These auctions generally take place after the seller has a court order obtained against them, and the property is sold to satisfy the court order. These auctions are also referred to as “sheriff auctions” because they are executed by a sheriff of the court.
Generally, involuntary auctions favour buyers more than the seller. This is because the entity that has obtained the court order, usually the bond holder, sees no way of recouping all their costs from the owner. As a result, they decide to sell the property to the highest bidder to try and get some of their money back. The creditor is only entitled to what they are owed and any excess funds must be paid to the seller. Therefore, the creditor has no incentive to sell the property for more than the amount of the secured debt. Thus, a shrewd auction hunter could snap up a deal from a distressed seller. That being said, sheriff auctions do pose significant risks to prospective buyers as there could be multiple hidden costs involved.
The risks
The first potential problem that prospective buyers face, is that the property might still have inhabitants at the time of purchase. Because sheriff auctions are a consequence of a court order, the seller has been forced to auction the property, meaning that they’re most likely still in occupation at the time of purchase. The new owner will then need to take steps to evict the occupants.
Section 26 of the Constitution specifically guarantees the right to adequate housing. As such, where a residential property is involved, there are certain procedures that have to be followed before the eviction can occur. These are clearly set out in the Prevention of Illegal Eviction from and Unlawful Occupation of Land Act 19 of 1998 and the Extension of Security of Tenure Act 62 of 1997. These pieces of legislation are not applicable to commercial property and only need to be followed where residential property is involved. Either way, evictions are costly and lengthy procedures, and an uncontested eviction can cost anywhere between ZAR10 000 and ZAR25 000. A contested eviction, with a particularly stubborn occupant, can cost as much as ZAR100 000. Thus, it’s important to ascertain whether or not the property has inhabitants at the time of purchase to avoid incurring these additional expenses.
Looks can be deceiving: When purchasing a property at auction, you will be provided with photos, as well as a description of the property. However, even seasoned property buyers can be tricked by a well-positioned picture or an eloquently worded paragraph. Accordingly, an inspection in loco is the best way to avoid being caught out by the dreaded voetstoots clause, a provision in the sale agreement which stipulates that purchasers agree to buy the property as is, with all its associated problems. Inspecting the property in person will allow the soon-to-be bidder to confirm the extent of the defects in the property, so they can adjust their bids appropriately. It’s important to note that a buyer will have no right of recourse against the seller, or the auctioneer, in respect of any of the property’s defects.
Examine the title deed
The title deed is the single most important document for immovable property as it shows proof of ownership. What most people tend to overlook is that the title deed also contains all of the relevant title conditions for the respective property. These title conditions dictate how the property can be used by the owner, meaning that restrictive title conditions can severely hinder a prospective buyer’s plans for the property. It’s possible to have certain title conditions removed, but this generally requires a town planner and a public advertisement process, which invariably drives up costs.
The title deed will also show if there are any servitudes registered against the property. Servitudes are limited real rights registered over immovable property that take the form of either personal servitudes, in favour of a specific individual, or praedial servitudes registered in favour of another property, and bind successors in title. Servitudes encumber the servient tenement by giving the beneficiary limited use of the property. Servitudes are difficult to remove and can be a burden for the landowner.
Similarly, buyers should also ensure that the property conforms with the current land zoning. For instance, even if a property has been used for commercial purposes for years, the actual property might still be residentially zoned. In this case, the new owner would be required to rectify the zoning and bear all the concomitant costs. Therefore, bidders should familiarise themselves with both the property’s title deed and the relevant zoning map, to avoid an unwanted post-purchase surprise.
Financing and hidden costs
Purchasing immovable property is an expensive endeavour and few can actually afford to pay the full amount upfront. Purchasers generally have about 60 days to furnish the full purchase price. This is usually done through a bond grant, which is a suspensive condition for the sale.
However, it’s important to note that auction sales are not subject to bond approval and the purchaser becomes unconditionally liable at the auction’s conclusion. Accordingly, if you plan to bid at an auction, you need to either have the full cash amount required, or be fairly certain that you will qualify for a prospective loan.
Purchasers also need to have enough cash in advance to pay the auctioneer’s commission, which is around 10% for voluntary auctions and 5% for sheriff auctions. This amount is over and above the highest bid price and is due on the fall of the hammer.
Further, a deposit of around 5-10% is also payable at the conclusion of the auction. You could incur penalty interest on the outstanding amounts if you fail to pay timeously. If you do not furnish the seller with the full purchase price within the stipulated window, the property could be taken back to auction and you will lose your auctioneer’s commission payment as well as any deposit paid.
Another cost that buyers will have to bear in mind is whether the seller is registered as a VAT vendor. If so, then the 15% tax that has to be paid on the sale of the property will be built into the purchase price. If the seller is not VAT registered, then the purchaser will have to pay an additional transfer duty to SARS. This amount varies on a sliding scale for purchase prices that are over ZAR1 million.
The purchaser also has the obligation to pay the transferring attorneys their fees to facilitate the transfer of the property at the Deeds Office. This amount is also contingent upon the purchase price of the property.
Lastly, the most excessive potential cost could be the hidden services and levy account bills. When you purchase a property, the seller has to produce rates clearance certificates stating that all of the water, electricity and municipal service accounts, as well as any Homeowners’ Association levies in sectional titles and other developments, are up to date. However, when a property is sold in execution at a sheriff auction, these rates clearances are not required. A property could therefore be sold with an exorbitant outstanding bill which, in certain instances, could even exceed the value of the property itself. The sheriff will usually provide prospective buyers with an estimate of the outstanding amounts, however they are rarely 100% accurate. In the event that you do purchase a property with an outstanding bill, you will be required to settle all accounts in order to effect transfer.
A final word of caution
In light of the above, there is still plenty of potential for eager auction-goers to find a real bargain. However, keep this article in mind when trying to decide on a property to bid on, as there are numerous risks involved. Always do thorough research and proceed with caution to ensure that your savings are not going… going… gone!
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