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Check the pitfalls when purchasing real estate at an auction by Bobby Bertrand

The South African real estate market is no longer booming.  In the wake of higher interest rates, many owners, especially those who bought second and more properties to let, are experiencing difficulty maintaining their bond instalments. 

The situation has deteriorated to such a degree that some owners, unable to sell at the price they want by private treaty, try selling by public auction – a selling channel that has grown in popularity as a growing number of properties are being attached and sold in execution in this way. Insolvencies among individuals and liquidations of companies are serving to further swell the public auction numbers. 

Such heightened activity should serve as a reminder of the pitfalls to avoid and the steps to be followed when buying real estate at an auction. 

In the case of ordinary public auctions, including property from deceased estates, the purchaser usually pays the auctioneer’s commission, which is generally 10% of the purchase price plus VAT – an amount that must be paid at the auction, plus the deposit of 10% of the purchase price. 

While most of the other terms in the Conditions of Sale resemble those applicable to a private treaty sale, it is a good idea to check the conditions before the auction so as to obtain timeous legal advice if necessary. 

Be aware that as a purchaser you cannot impose a suspensive condition, such as the raising of finance; which implies that you are well advised to do your homework beforehand to establish how much your bank will lend you against that property to enable you to pay the balance of the purchase price when it is due. 

The seller could have imposed a reserve price, so that if that price is not reached the property will not be sold at the auction.   

If you are buying residential property registered in the name of a natural person you would normally have to pay transfer duty in addition to the conveyancing fees.

If the property being auctioned is part of the owner’s VAT-able enterprise, the purchase price should include VAT and transfer duty is not payable. 

Public auctions arising from sales in execution, which are normally handled by the Sheriff of the Court, do not have reserve prices. Court Rules limit the amount of commission that may be charged at 6% on the first R30 000 of the purchase price plus 3,5% on the balance, with a maximum of R7 000 plus VAT and a minimum of R300 plus VAT.

These sales normally provide that the purchaser has to pay the arrear municipal rates and service charges, along with body corporate levies if a sectional title property is being sold. If the property had been let, this could include service charges due by the tenant.  The Conditions of Sale do not usually oblige the seller to give vacant occupation, which means that a purchaser can incur great expense and delays in evicting the former owner or tenant. 

Therefore, check the date from which occupation will be deemed to have been given, because you could be liable to pay interest from that date and to bear the risk of any damage to the property from that date. It is advisable to arrange house-owner’s insurance cover from that date. 

Often the Conditions of Sale will require the purchaser to pay the interest accruing on the bond registered over the property from the date of sale to the date of registration of transfer. 

Apart from the amount of commission payable, the terms of public auction sales arising from insolvency or liquidation not arranged by the Sheriff are similar to the terms that apply to sales in execution. 

If a property up for judicial auction, because the bond is in arrears, does not achieve a price high enough to settle the bond, the relevant bank often buys the property at the auction, whereupon it is called a “property in possession”. 

The banks are usually keen to dispose of these properties as soon as possible and the resultant purchase is effected by private treaty from the banks. Generally speaking, the buyer does not have to pay agent’s commission, arrear rates or transfer duty. But check the provisions of the Agreement of Sale. 

Note that the banks do not normally guarantee vacant occupation, so you could have difficulty getting the former owner or tenant out of the property. 

Conventional wisdom has it that a well-advertised public auction will achieve the true market value of a property. Even so, there is a widely-held perception that properties are sold at bargain prices, especially at sales in execution.  

That may be so. If true, you need nevertheless to take great care over:

·         Liability for arrear rates and service charges;

·         The passing of risk;

·         Possible difficulties and expense in getting the former owner or tenant to vacate the property; and

·         The responsibility for payment of the auctioneer’s commission plus VAT.

Bobby Bertrand is Director, Real Estate & Conveyancing Department, Bowman Gilfillan, Cape Town

Wednesday, October 22, 2008