AT a recent auction, a low-rise apartment with a price tag of RM18,000 was sold to a 30-something for RM22,000. It is unlikely she is going to stay. The place looks rather rundown. “A very good buy. A mamak restaurant downstairs. Easy to rent,” says the auctioneer.
The picture of the next property is flashed on the screen, a medium cost high-rise unit. The reserve price of RM82,000 is bid up to RM136,000.
In less than an hour, the Saturday morning auction is over.
Foong Chon Wai, the chief operating officer of Ng Chan Mau auction house says the RM22,000 flat can be rented out for RM300.
In a year, that’s RM3,600. Divided by a RM22,000 investment, that’s an annual gross gain of 16%. That is better than what the bank can offer, says Foong.
“Only at auctions, can you buy properties for less than RM100,000,” he says. From the interest surrounding auctions these couple of years, it is likely that prices of auctioned properties may be trending up.
He explains: “If a house with a reserve price of RM82,000 can be sold for RM136,000, the next time such a property comes to me in that location, I will price it at RM140,000.”
The auction story underscores the popularity of auctions.
These buyers turn to auctions because prices are more manageable, says Foong.
Properties on auction generally trail the market by 15%-20%. One just needs to Google and a list of auctions in different parts of the country will pop up. A couple of banks also hold monthly auctions, which means there are more auctions today than a decade ago.
“Cheap and nice, sometimes you have people being killed there. Or it could be bad feng shui. People do not bother anymore,” says Foong.
The stigma of buying an auctioned property is slowly dissipating. Foong also expects more properties to enter this market towards the end of this year, 2016 and 2017. Divorces, unemployment, financial mismanagement are some of the reasons why properties enter the auction market.
He expects three trends to emerge. Properties purchased on developers interest bearing schemes (DIBS) will enter this market. Some of these properties were bought with down payments as low as 5%, says Foong.
This may lead to “more expensive properties” in the RM400,000-RM500,000 range unlike the predominantly low- and medium-cost properties today. Small units in that price range were sold a few years ago. If buyers are unable to get rentals that cover the monthly mortgage amount, they may have to let them go. But before this happen, there will be “tell-tale” signs like inconsistent mortgage repayment.
Foong also expects more professionals to have their properties auctioned off. He did not elaborate.
According to several valuers, they are indeed getting more bank requests to value properties that are heading towards the auction market.
Views from valuers
Property consultancy VPC Alliance (KL) Sdn Bhd managing director James Wong says the number of valuation for this market has increased by a fifth since the second quarter of this year, while the number of mortgage valuations have dropped by about 10% since the fourth quarter of last year.
“This trend is expected to continue at least until the end of the year,” says Wong. He addes that most of the properties coming under the hammer are medium- and low-cost high rise units.
Jordan Lee & Jaafar managing director P. Tangga Peragasam says he noticed the rising numbers in the first quarter of this year.
This is mainly due to a large number of investors in the property market a few years ago.
“They may not be able to pay due to various reasons and some of these properties were bought at inflated prices and may be 15km to 20km from the city. Those who can afford will not want to live so far away and they may have problems getting these units rented out,” Tangga says.
He says the trend usually begins with residential units before the commercial properties are affected. About 60% of the total properties sold are from the residential segment.
Tangga provides a simple time line and process. On defaulting, the lending institution will give the borrower three letters asking for payment. If the mortgage remains unsettled over a period of time, the bank’s lawyer is informed. The bank also assigns a valuer to value the property.
The lawyer gets a court application to sell and an auctioneer is appointed and a date fixed. The period between the loan default and the auction may be between four and six months.
Das Gupta, the principal of property consultancy Stocker Roberts & Gupta Sdn Bhd, says mortgage valuations – which is needed when buyers buy from the secondary market – is down by 35% compared to a year ago, and auction valuations requested by lending institutions are up by a fifth.
“It shows that the economy is not good. All these started from the beginning of this year,” Das says.