The risks of buying property at auction

Inflation and rising interest rates have contributed to South Africa’s fragile housing market. According to the Global Property Guide, house prices have increased by 69% between 2007 and 2021, and there's no sign of this slowing down. As inflation rises, South Africans continue to look for new and creative ways to invest in property. As a result, property auctions have become a popular choice for individuals looking to score a bargain, but this doesn’t always guarantee that the purchase is risk-free.

So what are the risks of buying property at auction?

The difference between buying at an auction and through a property expert

To help understand the risk of buying at an auction, we first need to understand the difference between purchasing at an auction and through a real estate agent. Here are the main variations between these two methods of purchasing property:

Price Determination

Estate Agent: The price of the property is typically negotiated between the buyer and the seller through their respective estate agents. The negotiation can be influenced by market conditions and the seller's willingness to negotiate.

Auction: The price at an auction is determined through competitive bidding. Bidders make offers in real time, driving up the price until the highest bidder wins. This can sometimes lead to properties selling for prices higher or lower than the market value, depending on the level of competition.

Timing

Estate Agent: The timing for purchasing a property through an estate agent is relatively flexible. The process can take some time, involving negotiations, property inspections, and various checks, which can lead to a longer timeframe for completion.

Auction: The process is typically faster at an auction. The auction date is set in advance, and once the gavel falls, the winning bidder is expected to complete the purchase within a specified timeframe, often within 28 or 30 days.

Competition

Estate Agent: The level of competition for a property can vary. In a less competitive market, you may have more room for negotiation. However, in a competitive market, you might face multiple offers and bidding wars .

Auction: Auctions are inherently competitive. Multiple bidders can drive up the price, which can lead to a higher final sale price but also the risk of overpaying.

Buying property at auction can offer potential benefits, but it also comes with several risks that prospective buyers should be aware of.

Here are a few risks buyers should keep in mind when purchasing property at an auction:

Limited Time for Due Diligence

Auction properties typically have a short timeframe for inspections and research. Buyers may not have sufficient time to thoroughly assess the property's condition, title, and other important details. Additionally, properties purchased at auction are usually sold Voetstoots or “as is.” This means that potential buyers receive the property with all its faults, and the seller has no legal obligation to repair faults post-purchase. It is therefore essential for buyers to be well-prepared by reviewing property information in advance, familiarising themselves with the auction rules, and attending property previews.

Competition and overpaying

Auctions are known for fostering competitive environments. Multiple interested buyers bidding on a property can lead to intense bidding wars. As a result, the final sale price can significantly exceed the property's market value. Buyers may become emotionally involved and lose sight of their budget constraints, resulting in overpayment. Buyers can mitigate this risk by keeping a cool head and sticking to a pre-determined budget. Carefully research the property's market value and condition before the auction. This will help you set a realistic bidding limit and avoid getting caught up in the heat of the moment.

There are no contingencies

One of the most significant risks of purchasing property at auction is the lack of a financing contingency. In traditional real estate transactions, buyers often make their offer contingent on obtaining a mortgage. However, in auctions, you are generally required to have your financing in order before bidding. This means that if you win the auction and can't secure financing, you risk losing your deposit and facing legal consequences. Buyers can avoid this risk by ensuring they have their financing arranged, have reviewed the property's information, and understand the auction process.

Additional risks to consider

• The buyer is responsible for any outstanding levies/rates
• The transfer may be held up if the owner has debts
• The buyer will often be responsible for the eviction of occupants

There is no risk without reward, and property auctions can be a great way to find a bargain. However, to navigate these risks successfully, it's imperative to approach property auctions with careful planning, a disciplined budget, and professional guidance. When you understand the unique dynamics of auction purchases and conduct thorough research, prospective buyers can harness the opportunities while mitigating the potential pitfalls in this fast-paced industry.