AUCTION PROPERTIES -WHAT YOU REALLY MUST KNOW
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WHY DOES A PROPERTY GOES FOR AUCTION AND HOW DOES IT WORK
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- When owner fails to service its loan and the loan becomes NPL.
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- the reserve prices drops 10% everytime the property is auctioned but no takers.
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- we bought 9 units from auctions to date so we are not a season player and relatively a noob. So this is our personal perspective .
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GRADING RELATED TO AUCTION PROPERTY
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- grade A properties has got very limited auctions
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- grade E properties with speculators tends to see few auctions every year
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- this is why banks are interested in our property grading
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AT WHAT POINT BUYING FROM AUCTION MAKES SENSE
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- we only enter auction today if we can buy at 50% below current property value
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- our purchase of all 9 units was at 70% below property’s intrinsic value. We bought commercial units in Damansara nearby MRT for less than RM100psf.
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WHAT MOST PEOPLE DONT KNOW ABOUT AUCTION
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CASH HEAVY - its really cash heavy. You can buy property from primary or subsales zero down but you cant do it with auction.( for now ). You need to standby lots of cash for:
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1. shortfall in valuation or top up
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2. maintenance fee, assessment fees, and taxes. Some banks cover this but you might be required to use your own cash first.
3. since you cant see the unit, you have no idea if the unit’s condition is okay and its a gamble. You might have to spend 5-figure to 6 figure for repairs.
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VALUE CAN DROP FURTHER - just because its 30% below market value today,
it doesnt mean the value cant drop somemore. What is 30% below market value today might be just market value 2 years later as values continues to drop.
FINANCING -
Some banks wont finance a property on subsales when there are too many units that goes for auctions and high NPLs, causing further drop in valuation.
VP - if the property is occupied, To get rid of existing occupants, can be very dramatic and taxing.
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- SPECULATORS - when theres alot of units going for auction in that development, it doesnt mean that the whole development is bad. Is just that
the development has too many speculators who do not understand what they bought, and doesnt have the required holding power..
OWN STAY - The higher number of own stayers, the lesser units that will go for auction.
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RENTAL VALUES - And the higher rental values are, the less likely you’ll see units avai for auction. ( less than 1% normally ) look at TS, Summer Suites small units, Vipod etc. This is where our Propery Grading helps greatly.
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AGENTS - Auction agents makes money from the following :
- service fee ( discretionary). Can be on success or per case.
- banks and auctioneers pay them commissions for every successful bid
- And they are the only agents who gets rewarded when their clients FAIL to buy property as they get “kawtim” money. Its not uncommon that they take kawtim money from the sold bidder in order to prevent price war.
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SUMMARY
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- Auction price isnt market value, and its usually represents a discount Vs subsale. Cant see, dont know damages, cant buy zero down and if you dont buy at 20% disc Vs subsales, you are not getting yourself a good deal. So if I were to give a guide using this example of Vista Alam :
- If actual/real subsales value for Vista Alam is RM400psf, then the auction price i would enter should be about RM320psf or at 20% discount since I need to standby budget for repairs and I have no idea how my unit is gonna look like.
- I will standby at least 20% of the reserve price as capital for downpayment and repair, so about RM80k- RM100k capital will be needed. 40k downpayment, 20k repairs and about 20k-40k to furnished the place. This is a cash heavy play. The 10% alone isnt sufficient.
The same 100k capital, can be used to buy 2-8 properties that can also give me positive cashflow and at least 10%-30% below market values. Over 10-20 years, these 8 properties will be worth a loooooooot more than the 1 property bought under auction. So that why today, i focus buying more from primary market compared to auction unless i can buy the auction property at 50%-70% discount.
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P/s : Do you know whats the best type of property you can buy from auction today? If many of you wants to know, i’ll share soon here else i’ll share in our private class je😀
Classic snake oil seller; head i win, tail you loss; load of contradiction. basically is to promote private class.
Aug 29 2019, 06:34 PM
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