Many young people are interested in buying auctioned houses as their first home because they believe that the cost of buying an auctioned house or the price offered for this property is usually much lower than the properties offered by developers or subsale houses. The auction house buying process is not an easy process – many important factors or things need to be considered before buying an auctioned house such as the condition of the house, property status, the cost of buying an auctioned house, and so on.
Auction Property: Important Things You Need to Know
Before discussing the cost of buying an auctioned house, it’s important for you to know what is meant by auctioned property or house? Basically, auctioned property refers to properties such as houses that are sold by banks or individuals through the auction process, regardless of the type of residence, be it flats, apartments, bungalows, and so on.
Usually, the auction process is conducted by licensed individuals or auctioneers appointed by banking institutions. Basically, there are two types of auction processes for properties that you need to know:
1. Public Auction
Public auction refers to the auction process conducted in public areas such as auction halls or hotels, usually involving Loan Agreement Cum Assignment (LACA). In other words, it refers to the auction process managed by the bank for properties without individual grants or strata titles.
2. Court/Land Office Auction
Court/Land Office Auction, on the other hand, is an auction process conducted by the auctioneer at the Court or Land Office, usually involving cases of title auction. This means that Court/Land Office auctions are for properties that already have an individual grant for multi-storey apartments.
Costs of Buying an Auction House: Pre, During, and Post Auction Costs You Need to Know
The cost of buying an auctioned house can incur high expenses, especially if the house that is successfully bid on is sold at a high price. Therefore, it is important for buyers or bidders to be aware of the basic costs of buying an auctioned house or any other hidden costs of homeownership that may exist to avoid any other implications.
1. Costs of Buying an Auctioned House: Before the Bidding Process
Before the bidding process of a property auction begins, you need to prepare at least 10 percent of the price of the property you want to bid for – usually prepared in the form of a bank draft.
For example, if the reserve price (referring to the starting price of the auction) of the property being auctioned starts at RM230,000, you need to prepare a bank draft of RM23,000 and bring it on the day of the auction.
If you are represented by an agent, there will be additional costs to be paid to your agent. You can negotiate with your agent regarding this fee. Usually, the fee charged by the agent for bidding on the property is around RM500 to RM1,500, depending on the situation.
2. Costs of Buying an Auction Property: During Bidding Process
You are reminded to bring sufficient cash (or even better, more) during the auction day. This is because you will need to pay the remaining 10 percent deposit of the purchased auction house based on the final bidding price. For example, you can refer to the cost calculation below:
|Type of Payment||Price|
|Bank Draft (10%)||RM23,000|
|Final Bidding Price (Selling Price)
*Selling price must be equal to or higher than the reserve price set.
|Deposit from the Final Bidding Price (10%)||RM30,000|
|Additional payment for Final Deposit||RM30,000 – RM23,000 = RM7,000
*Cash payment for the additional bank draft that has been prepared
|Stamp Duty Cost (Contract of Sale)||RM100-RM250
*Depends on the auctioneer
Assuming that you have successfully purchased the auctioned house, these are some of the costs you need to consider when buying an auctioned house:
Bank draft for Reserve Price + Deposit from Final Bidding Price + Additional Deposit + Stamp Duty
RM23,000 + RM30,000 + RM7,000 + RM250
This means that you need to prepare at least RM60,250 on the auction day. Failure to provide the additional funds can affect the process of owning the auctioned house that you have bid for.
Therefore, you are advised to be cautious or limit your bidding amount – the higher the final selling price, the higher the cost of buying an auctioned house or expenses that you need to prepare on the auction day.
3. Costs of Buying an Auction Property: After Bidding Process
After completing the second process, you need to confirm the Contract of Sale document. Before signing this document, check all information carefully and make sure that the property-related information, including your personal details, are correct:
- Full name;
- Identification card number;
- Address of the purchased property;
- Purchase price including payments made in the form of bank drafts and other cash payments.
Then, you need to obtain housing financing from the bank as soon as possible. You need to obtain bank loan approval to settle the balance of the successfully bid house purchase within 90 days (for LACA auction) or 120 days (for master title auction).
If your application is approved by the bank, you need to sign the Letter of Offer (LO), and the bank’s lawyer will contact you to sign the housing loan agreement between you and the bank.
Costs related to the Letter of Offer (LO)
Basically, the costs related to the Letter of Offer are more or less the same as purchasing a subsale property costs. You can refer to the table below:
|Final Selling Price After Auction||RM300,000|
|Legal Fees||RM3,000 (1% for the first RM500,000)|
|Stamp Duty||RM1,500 (0.5% of the housing loan)|
|Valuation Fees||RM750 (0.25% of the housing loan)|
Costs Related to Sale and Purchase Agreement
The prices mentioned above do not include legal fees and other related costs such as caveat, land office registration, other miscellaneous expenses (transportation costs, fax, phone and photocopying costs) as well as property status search fees, bankruptcy checks and others.
Here’s a table of the basic costs associated with the Sale and Purchase Agreement:
|Final Selling Price||RM300,000|
|Stamp Duty||RM7,000 (1% for the first RM100,000, 2% for RM200,000)|
|Legal Fees||RM3,000 (1% for RM300,000)|
Cost of Renovating an Auction House
Auctioned houses usually require additional costs for repairs or home renovations. If major repairs are needed that involve structural damage (such as damage to the ceiling or roof), you may need to spend more on repairs, usually around RM20,000 to RM30,000 depending on the type of repair.
Typically, minor damages that do not involve the main structure, ceiling, or electrical wiring are usually cheaper – you may need a minimum repair cost of around RM5,000 to RM10,000 depending on the type of repair.
Other Outstanding Costs (If Any)
In addition, you also need to consider the costs of any outstanding fees that may exist, such as quit rent, parcel rent, and maintenance fees. For example, if the purchased house has outstanding maintenance fees for five years with a monthly payment of RM200, the following are the other hidden costs that you need to bear:
Monthly Cost X Arrears Period
RM200 x 60 months = RM12,000
In addition, if the auctioned house has been left unoccupied for a long time, you may need to bear other costs such as the reconnection fees for the electricity meter, water meter connection, electrical wiring inspection, and others depending on the situation.
A double-storey terrace house typically requires expenses of around RM500 to RM1,000 (or possibly more) for the reconnection of the electricity supply.
Make Early Preparations, Check Financial Strength Before Buying an Auctioned House
Financial factors or your current financial situation play a crucial role in purchasing an auctioned property. It is important for you to be financially prepared before buying an auctioned house – the cost of purchasing an auctioned house can affect you if you are not prepared or do not have sufficient savings.
Some buyers believe that the cost of buying an auctioned house can be included in a bank loan. Some even bid on a property without considering other potential costs such as repair costs, legal fees, and other costs associated with buying an auctioned house.
Buying an auctioned house involves significant costs. If you make a mistake, you may be burdened with outstanding payments that need to be settled. This aspect should not be taken lightly by buyers, investors, or bidders to avoid mistakes and jeopardize their chances of owning an auctioned house.
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