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How to get home loan finance and buy property on auction

11 May 2018

Buying a house or flat on auction can be a good way to secure a home at an excellent price, but the process is more complicated than most people think and there are some important precautions that potential purchasers need to take. 

“The first of these,” says Rudi Botha, CEO of BetterBond, SA’s biggest bond originator, “is the need to establish the market value of the property before the auction, so that you can set a limit on how much you are prepared to bid and not get carried away in the excitement and competitive atmosphere of the auction. 

“And your best course of action in this regard is to seek help from a qualified and experienced estate agent who is familiar with the area where the property is located and can draw up a comparative market analysis (CMA) for you. This will provide details of similar properties recently sold in the area and the actual prices achieved. 

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“Good auctioneers will also be able to supply you with copies of the title deed, the site diagram, the plans of the property, any lease agreement and the zoning certificate if relevant. And some Internet research will reveal more details about the area, such as local schools, shopping centres and other facilities.” 

It is also important, he says, to make use of any opportunity given to inspect the property ahead of the auction to see what condition it is in - or get someone you trust to do so on your behalf if the property is in a remote location. 

It is also important, says Botha, to make use of any opportunity given to inspect the property ahead of the auction to see what condition it is in - or get someone you trust to do so on your behalf if the property is in a remote location.

“A property owner who has been forced to auction the property because of financial difficulties may well have neglected the maintenance, and because all properties on auction are sold “voetstoots” (or “as is”), the costs of any repairs necessary will need to be taken into account when you calculate your maximum bid.” 

Third, says Botha, potential buyers must thoroughly check the Conditions of Sale before an auction, so that they understand exactly what is being offered for sale and exactly what else they might be taking on, bearing in mind that a winning bid at auction is legally binding and cannot be retracted later without considerable financial loss. 

“There is often a provision, for example, that the buyer of an auction property will be responsible for any outstanding municipal rates, or levy arrears in the case of sectional title property. There could thus be a substantial amount to pay – in cash - in addition to the auction price, which could make the property a much less attractive proposition.” 

He says the Conditions of Sale could also stipulate that the auction price carries interest from the hammer fall until the transfer of ownership is registered, or that there is still a tenant in residence whose lease needs to be honoured. “In addition, the Conditions of Sale can be amended right up until the day of the auction, so it is worth double-checking them before you sign acceptance and go ahead with your bid.” 

Lastly, says Botha, potential buyers must ensure that their financing is in place well before the auction date, because auction sales are non-suspensive, which means that they are not conditional on you being able to get a bond or not. 

“As a winning bidder, you will usually be required to pay a deposit of 5% to 10% of the purchase price immediately, in cash, and possibly also the auctioneer’s commission, which is usually 10% plus VAT. Most likely you will also be required to give the seller’s attorneys a “guarantee” for the balance of the purchase price within 30 days – whether or not you have been able to obtain a bond.” 

Potential buyers must ensure that their financing is in place well before the auction date, because auction sales are non-suspensive, which means that they are not conditional on you being able to get a bond or not, says Botha.

In fact, he notes, the Conditions of Sale will usually also provide that if you default on the sale after the auction, the property seller will have the right to take legal action to compel you to fulfil the contract – or to forfeit the deposit and any other monies that you have already paid as “rouwkoop”. 

 “In most cases (unless you are paying cash for the property), the ‘guarantee’ you have to provide will be an assurance from your attorney that your bank has granted you a bond for at least the balance of the purchase price and is ready to pay that over to the seller’s attorney on transfer of the property into your name. 

“So your best move is to consult a reputable originator like BetterBond and go through the bond pre-qualification process before you go anywhere near an auction. You will then have peace of mind about being able to secure a bond and finalise the transaction – and also know what your spending limit is, so you will not be tempted to overbid.” 

To obtain bond pre-qualification, you will need your ID, proof of residence, proof of income, bank statements, a list of assets and liabilities, and a statement of your monthly expenditure. 

Your consultant will then guide you through the pre-qualification process, with reference to your gross and disposable income, the maximum monthly bond repayment you can afford, any deposit available, the additional costs associated with most property purchases, and best bond options available to you.

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