5 things that can go wrong when buying auction property (& how to avoid them)
CS Ooi, a Real Estate Agent and a director at Landserve, has written an excellent introduction to property auctions . He mentions the first 4 things prospective buyers should be aware of when buying at auctions at his company’s blog page.
Picture credit: Maya Maceka, Unsplash
As some of my readers may be aware, in 2006 I bought sight unseen at an auction a freehold 1,500 sf 3 bedroom condominium at Bukit Ceylon at RM200 psf. Being a newbie at auctions, I had not done any due diligence. I soon learnt to my considerable cost a few important things to avoid when buying at auctions.
Not checking the condition of the building maintenance fund - The developer of the 44 unit condominium was in liquidation. As a result, I soon learnt from the appointed liquidator that the developer had not transferred sufficient money to the JMB’s accounts for a strata title application. To make up the shortfall in funds to apply for a strata title subdivision and to pay the surveyor’s fees, all the owners of the 44 units had to contribute money. Prospective buyers of auction properties should in addition to the POS (Proclamation of Sale) ask for a copy of the JMB or MC’s finances.
Not checking if there are unresolved issues with the developer and its appointed agents - The developer had earlier ousted a pro-tem committee of owners who had removed its appointed property management team. The incoming JMB committee soon discovered the previous property management team appointed by the developer refused to handover some of the accounts until outstanding monies owed were settled. I recommend doing a Google search to uncover any potential conflicts or unresolved issues with the developer before any one decides to bid for an auction property.
Underestimating how much money to fix any problems in the auctioned property - Although the 1500 sf apartment was fully furnished, a lot of the furniture and fittings like aircon compressors and kitchen cabinets were in a dilapidated condition and had to be thrown away. There was also a serious water leakage problem from corroded water pipes in the ceilings of the bathrooms. This unexpected problem cost a lot of money to rectify. Finally, the electrical wiring at this building that was completed in the 1980s was old and outdated. There was no ELCB and owners even had to buy special fuses in case electric supply was disrupted. After thinking hard, I installed a new ELCB board at considerable cost because I choose a board certified electrician for the job. I suggest property investors looking at auctions should draw up a budget for replacing fittings and furniture and factor the costs in their exit strategies.
4. Underestimating the breakeven cost of owning an investment property before buying it at auction - I underestimated the actual cost of owning the 3 bedroom unit. Because there were just 44 units, the service charges and sinking fund contributions for my 1,500sf unit were relatively high -RM650 per month if my memory is correct. And I overestimated the rental income from my new investment property. The achievable rents at the 44 unit condominium which I thought should have been higher given the location in the heart of KL’s Golden Triangle turned out to be significantly lower. In hind sight, that wasn’t surprising -a lot of the amenities such as the squash court and sauna room had been mothballed due to poor maintenance, so it was tough attracting quality tenants who could pay more.
5. Not having an exit strategy BEFORE buying an investment property at auction. Think of potential buyers for your investment property and what they are looking for. Be careful of over renovating. For my 1,500 sf unit, I replaced the old kitchen cabinets with new IKEA cabinets with steel worktops. I added a in-wall fan for better ventilation , a membrane water filter to improve water quality, swapped all the wall switches with designer style toggle switches, and a folding screen door for the master bathroom. I bought new air con compressors.
But I also replaced all the sanitaryware in the bathrooms, probably not a good idea because the old sanitaryware although a bit outdated, was still in working order. That was a waste of $ in hindsight.
To get a higher selling price for my unit, I decided to follow the example of a smart property investor and his banker wife who had bought several run down units and upgraded them into very nice apartments that they rented out for as high as RM4000 pm. So I installed wood laminate flooring over the existing marble and tile floors for a more upmarket appeal. With the benefit of hindsight, this probably was not a good idea given the profile of likely tenants. I think there would be heavy wear and tear on laminate flooring compared to tiled or marble flooring.
I bought some nice pieces of hotel furniture from Kin Peun. Kin Peun started out as a furniture shop that recycles old hotel furnishings like picture frames, TVs, mirrors, dressing tables, sofas, chairs, desks, beds and even spring mattresses from 5* hotels in Hong Kong and overseas and resells them to 3* hotel operators or AirBnB operators.
At Kin Peun, prices for decorative artwork like framed prints that once hung in 5* Hong Kong hotels went for as cheap as RM40 upwards. That’s even cheaper than buying a bare picture frame from IKEA without a print. Before I discovered Kin Peun, I used to pay around RM150 to RM400 for nice artwork to stock my rental properties. After that I bought tons of framed pictures from Kin Peun for all my rental properties. You can see a sample of a RM40 framed Chinese landscape print hanging above the IKEA Malm bed in the master bedroom of the 3 bedroom Downtown Condominium unit in the YouTube video, circa 2010 below. Sometimes I found real bargains at Kin Peun. For example I still remember the day I picked up a nice print of Hong Kong harbour in a big gilt frame for just RM140. I think the gilt frame alone would have cost at least RM400. And then there were designer style coffee tables in black wood and aluminium that were a steal at RM300 - I think bought two pieces of those. You can see a picture in the Downtown video below.
I once even found lacquered Blackwood Chinoserie TV and drinks cabinets inlaid with semi precious stones from the Peninsula Hong Kong on sale at Kin Peun years ago. But recently, Kin Peun has branched out to sourcing new furniture items and even spring mattresses (I suspect these are either surplus runs or special orders) sourced from Malaysian factories. I bought a new queen size and several single spring mattresses at a good price back in 2016 when I was refurbishing my 3000+sf Kirana Residence unit.
I also installed designer style frosted glass lighting with G4 halogen bulbs that had to be replaced every 6 months. Nowadays, you can buy LED bulbs in G4 fittings - these have much lower Watt consumption and last for at least 10,000 hours. But the problem with designer style glass lighting is that they are fragile and break easily. Replacement parts, if available, are likely to be expensive. It cost me RM50 to replace a broken glass lighting fixture but I had to get the spare part from Singapore. Never again.
To recap, you need to have a viable exit strategy that gives you around a profit of 20% after factoring in your renovation cost and the auction cost of the property. So replace or install only the fittings and furniture that will help you achieve a target profit margin of at least 20%. Do not go overboard with your renovations.
Post Script:
The grainy YouTube clip on Downtown Condominium 10D, Kuala Lumpur was shot on a cheap Samsung smartphone and posted by yours truly on 17 December 2010.
As at 14 October 2021, it has racked up less than 500 views. But at least, I managed to find a buyer soon after. It was sold in 2011.
