A FEW months ago, three 4-storey shoplots at Taman Maluri, Cheras, went under the hammer. The reserve price for each unit was RM850,000, way below the market price of RM1.8 million to RM2 million. By the end of the day, they were all sold for more than double their reserve prices.

The best located unit, directly behind Amaya Maluri condominium, fetched an impressive RM2.6 million, about three times more than the reserve price, and 25% higher than the market price. The other two units went for RM2.2 million and RM2 million. The response was overwhelming, with more than 100 people turning up, says Danny Loh of Property Auction House Sdn Bhd.

In a recent City & Country poll, local auctioneers agree that interest in the auction market has picked up recently, fuelled by the hike in property prices in recent years, dwindling disposable income and lack of affordable properties in the primary market, among other factors.

A slowdown in the secondary market has also made property owners more willing to consider private auctions as they believe that their units can be sold more quickly and at the best possible price, says Abdul Hamid P V Abdu, founder of Ehsan Auctioneers.

The recent public auction of Taman Maluri shophouses set real estate online forums abuzz. "I don't understand. Why would someone pay more than market price for a leasehold auction unit with about 60 to 70 years left?" asks netizen Chen. He calculates that the ground floor rental is just RM4,000 to RM4,500 per month. For the whole block, the rental would only come up to RM8,000 per month, which works out to a yield of 3% to 4%.

Says Property Auction House's Loh: "I believe the bidders are betting on future prospects in the area. Although Taman Maluri is a matured neighbourhood, it does not have many shops. Coupled with the LRT and MRT line coming up in the vicinity, maybe the rental will catch up soon."

Two other notable transactions via private auctions, also known as open market auctions, occurred on Sept 14.

A 2-storey house at Taman Sierra Perdana in Johor, with a reserve price of RM180,000, was eventually sold for RM210,000, or 17% higher, while a flat in Taman Sri Muda, Selangor, put up for auction at RM55,000, was sold at RM73,000, or 32% more.

The transacted prices and the huge interest in these auctions raise an interesting question: is it a passing fad or a tipping point towards a new trend in the secondary property market? More importantly, is there potential for the auction industry — especially private auctions — to grow and hopefully mature into one that resembles the successful Australian model?

In Australia, the sale of private owned properties through private auction is open, efficient and transparent. Unlike Malaysia, where most auctions are used to sell distressed properties, such as those in foreclosure, auctions Down Under are a barometer of the market's strength, with newspapers devoting entire sections to the sales results, explains Loh.

According to the South Australian Government Office of Consumer and Business Affairs, sale by auction is "often the preferred option" for sellers and their agents when "the property is unique, in a sought-after location or when there is high demand for residential houses in a particular range price".

Private auctions — trend or fad?
"A few years ago, one out of 10 property owners [may] believe that they could secure a good price for their units via an auction. If we were to sit down and discuss the issue with same 10 fellows now, two or three of them will be agreeable to the option,"  says Ehsan Auctioneers' Abdul Hamid. The shift in perspective, he says, is because the public is now better informed about the business.

That said, however, the trend is still at its infancy. Several property owners, who were asked by City & Country what they thought of private auctions, say they are still wary of them, mainly because they do not know much about the process. They would only go for it, they say, if they have a hot commodity in a sought-after location, for example,  a corner shoplot in Bangsar or Taman Tun Dr Ismail.

One property owner who opted for this uncoventional way to dispose of his condominium unit in Villa Ampang Kuala Lumpur was Raj Aria, who bought the property for RM290,000 in 2003.

"I engaged several agents [to sell my property]. I even gave one exclusive rights to market my property but they were unsuccessful," he says. Raj even tried selling his unit directly to interested buyers, but the best offer he got was RM300,000.

He finally decided to try private auctions as a friend's son worked in a company that organises such auctions.

"The reserve price was set at RM355,000, which was near the market rate, and the condo was sold at the debut auction for RM375,000," says Raj. He paid 3% of the property value to the organiser after the buyer paid a 10% downpayment. He then received a cheque for the remaining amount following the signing of the sales and purchase agreement.

Raj found the process hassle-free as the company did all the marketing and arranged for the property to be viewed. "I didn't have to be at the auction or open up my unit for anyone. It was a win-win situation for me," he says.

Despite the surge of interest, most people still view the auction market in a negative light. They still think it is meant for distressed or dilapidated properties where you will get very cheap prices. Hence, there is a certain level of stigma attached to selling your house via a private auction. "No one wants their friends or neighbours to think that they are in a financial fix," says Raj Yogan Pillai, managing director of J Thilagaramraj Auctioneers Sdn Bhd.

To change that mindset, we have to start with the generation that went over-seas to countries such as England, Australia, New Zealand and Canada, and witnessed the benefits of buying properties at an auction,  says Raj. It is vital to educate the public about private auctions as an alternative way to sell their properties, he adds.

According to the auctioneers, both sides must do their homework to ensure the process goes smoothly and the best value is obtained for the properties. Buyers must do market research by cross-checking similar properties put up for sale. They have to inspect the property before the auction to check the condition and occupancy status, and do a title search.

They also need to check loan availability and have a contingency plan. If they are unable to get a loan (cash disbursement within 120 days), they have to be able to settle the balance amount in cash. The buyers are adviced to determine a maximum bidding price, and keep a cool head during the auction to avoid overbidding. It is also important to study and understand the proclamation of sale and conditions of sale.

Sellers, on the other hand, need to consult registered valuers on the market price and check out additional costs which could be incurred in the event of a successful sale, such as the commission payable to auctioneers, which differs from state to state. They also have to study and understand the proclamation of sale and conditions of sale.

Outdated law and regulations
The potential of the Malaysian auction industry is huge, but it is hampered by a lack of laws and regulations governing the auction process. This is especially so for private auctions.

Hence, it comes as no surprise that not all auctioneers are keen to offer such services for individuals.  

"We have noticed the increased interest in private auctions in recent months. We are keeping our eyes on the new fad and once we feel that the market is ready, we shall offer this service," says a representative of Ng Chan Mau and Co Sdn Bhd.

Among the reasons for their hesitation is that the laws governing auctioneers are outdated, says an industry observer. The laws have remained relatively unchanged for the past century and are different in various states.

The number of stakeholders involved in the process and lack of laws in this area have created opportunities for unscrupulous parties, which have been known to swoop in to take advantage of the loopholes for a quick buck. This could create complications.

For example, some sellers had been known to appoint private valuers to evaluate their properties so that they can fix a higher reserve price. Following this, they will try to bargain with the bankers for approval of the "adjusted" prices.  Other sellers have a very different strategy, intentionally lowering their reserve prices way below market rates so as to attract a large crowd. On the day of the auction, they will seek assistance from a relative to intentionally hike up the prices.

People in the industry are aware of this, but are powerless to stop the proceedings as the law states that anyone who turns up with the 10% deposit is allowed to bid.

The barriers to entry into the auction industry are also low. To be an auctioneer, the minimum requirements are an SPM certificate and an annual licence fee of RM10. Although less experienced auctioneers are known to charge lower-than-standard fees, oversights have been known to happen, such as selling a bumiputera unit to a non-bumiputera bidder.

Lastly, a more efficient handover system needs to be enforced. Laws need to be enacted and action must be taken against syndicates to curb their activities by identifying and weeding out their members.

This story first appeared in The Edge weekly edition of Dec 3-9, 2012.

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