Auction Properties – Attractive but Risky Investment

20th Jan 2021                                                      By Chloe Lim & Carmen Leong

Auction properties can be attractive for its selling price which is often below market rate. This form of investment is associated with higher risk at the same time due to the encumbrances appearing on the issued document of titles of the properties. If you are interested in buying auction properties, we offer some useful tips for you here.

1. Obtain a copy of the Proclamation of Sale (POS) and Conditions of Sale (COS) from the auction lawyer.

Upon ascertaining the reserve price and the auction hearing date, you may request for a copy of the POS and COS from the auction bank’s lawyer. The POS and the COS are documents that contain all the terms and conditions for the auction transactions.

2. Conduct a land search over the auction property.

Before you or your agent bids the auction property at the High Court or auction centre, you shall conduct a land search to check and verify all conditions and encumbrances appeared on the title. Aside from the charge registered by the auction bank, the title may consist of other encumbrances. For example:

(a) Registrar Caveat

A Registrar Caveat is lodged by the Land Registrar to prevent fraud or improper dealing, OR to protect the interests of the federation or the state authority or any person who is in his opinion under the disability of minority, mental disorder or unsoundness of mind or absent from the federation, OR  to secure that the land will be available to satisfy the whole or part of any debt due to the federation or the state authority (whether secured or unsecured and whether or not judgment has been obtained), OR by reason of some error appearing to him to have been made in the register or title or any instruments relating thereto (Section 320(1) National Land Code 1965).

The effect of the Registrar Caveat is to prohibit the registration of any instrument of dealing over the land including the auction sale. The auction sale cannot be completed unless and until the Registrar Caveat is removed.

(b) Private Caveat

Any person or body claiming title or any registrable interest over the auction property may enter a private caveat pursuant to Section 323 National Land Code 1965.

A Private Caveat aims to prohibit the registration of any instrument of dealing over the land.

Private Caveats can be removed by the applicant (Section 325 of the National Land Code 1965), by application to the Land Registrar (Section 326 of the National Land Code 1965) or by a Court Order (Section 326 of the National Land Code 1965). Please bear in mind that time is of the essence and the auction sale must be completed within 120 days (Section 257(g) National Land Code 1965). If you fail to pay the balance purchase price in full within the 120 days, the auction bank is entitled to forfeit the 10% deposit absolutely.

(c)  Lease / Tenancy

Sometimes, an owner might have let the property to his tenant. Neither the owner nor the auction bank is obliged to deliver vacant possession of the property to you.

If the tenant refuses to leave the property and you intend to occupy the property, you shall evict the tenant by way of a court order with your own out of pocket money.

If you are an investor and you agree to continue letting the property to the tenant, you should enter into a new professionally drafted tenancy agreement with the tenant.

Having said that, the encumbrances mentioned above are not exhaustive. You should seek legal advice on the land search.

3. Check out the outstanding utility, quit rent and assessment bills

Apart from encumbrances appearing on the title, you are required to check with Tenaga Nasional Berhad, Indah Water Konsortium, Air Selangor/Syabas, developer and management office, land office and the relevant authorities as to whether there is any outstanding water, electricity, sewerage,  maintenance, quit rent/parcel tax, assessment charges before the auction date.

4. Get ready with the 10% deposit

Finally, you should decide as to whether you are still interested in the auction property. If you are keen to buy the auction property, you shall pay to the bank a deposit amounting to 10% of the purchase price of the auction property (Section 257(e) National Land Code 1965).

It must also be noted that 90% of the balance purchase price shall be settled by cash or loan facility within 120 days from the date of signing the POS, failing which, the bank is entitled to forfeit your 10% deposit and dispose off the property to another purchaser in the manner specified under Section 267A National Land Code 1965 (Section 257(h) National Land Code 1965). There shall be no extension of period to be granted by the court (Section 257(g) National Land Code 1965).

5. Engage a lawyer with 3R

You shall engage a responsible, responsive and reliable lawyer to represent you in the auction transaction.

The contents of this article do not constitute legal or other professional advice or an opinion of any kind. It is provided for general information purposes only. Please contact us for further enquiry.