Property investment should be the “bricks and mortar” of your investment portfolio, and a great place to create wealth and residual income. Like any venture, fortune favours the bold, so there is no time like now to get out there and make it happen. No one can give you any broad advice on what property to buy as there are so many variables and, of course, much depends on your circumstances.  You need to choose what suits you and become an expert in that space.

I got hooked by the property bug buying my first property at an auction. It was an old house bordering on a commercial node that was part of a deceased estate. I knew there was a lot of interest but I had a tenant lined up already. I remember watching the bidders at the auction from my seat and when they were exhausted fighting it out against each other and the hammer was going to fall, I put in my first bid. It is a really exciting process with the best opportunities to find bargain properties. You really need to understand the rules of the game.

Let’s explore some of those: 

Firstly, there are different types of property auctions, so choose which type of auction you go to carefully. In South Africa there is a growing trend to sell your house through an auctioneer in a VOLUNTARY auction. The prime purpose is to get a better price for the property playing buyer against buyer in a live environment. These auctions can work well for the seller in an active property market, but seldom work for the buyer. The seller has a reserve price and the sale is subject to the seller's acceptance.

Look out for the bank auctions, also a type of voluntary auction, which are organised by the bank. The distressed seller (who is significantly in arrears with his bond) is given an ultimatum to sell at the auction, subject to the bank accepting the bid. In most circumstances the properties are sold at a discount and the bond holder agrees to write off the shortfall on the outstanding bond. In fact, they give the seller an unsecured loan with soft terms for the shortfall. So, in this circumstance, you are buying a home from a seller with all the normal warranties, and on transfer the rates and taxes will have been settled by the seller. This is a great place to source realistically priced property without the risks inherent in forced sales.

SHERIFF auctions – The ultimate source of great value property is, of course, the SHERIFF auctions. Where the bank is unable to rehabilitate the bond holder and they see no chance of recovering their funds, the bank applies to the court to attach the property and sell it to the highest buyer as it stands. This is called a sale in execution. These transactions are executed by the sheriff of the court. They are not well advertised with poor turnouts and often postponed. In most cases the only party at the auction is the bank. The bank will let the property go at a big discount - often around 50% of value - and this is where the real opportunities lie.

PIP – When the bank buys the property in at a sale in execution they have to incur significant costs, attend to transfer, evict the errant occupants, make good the damage and secure the vacant property. On top of that there are many stalling tactics that can hold the process back and the bank gets locked up in litigation, which prevents them from selling the property. They add all the costs incurred and try to recover the total when they sell. This is the property in possession, or PIP, and therefore not great buys in most cases.

If you are ready to go and get in on the action, here are 5 Lessons you should remember before buying at a sheriff auction:

1. Make sure you can follow through with the purchase. If you can’t make the guarantees, you will forfeit the deposit and still be liable for sheriff’s fees.

2. The property is sold as is and it is your responsibility to settle all outstanding rates, taxes, municipal services, body corporate levies and don’t rely on the figures given by the sheriff.

3. The majority of these properties are occupied and it is your problem to evict the occupants.

4. If the owner is sequestrated, the transfer can be held up for extended periods of time. The owner is often allowed to have occupation while this is in process and you cannot get transfer, so your deposit and costs are locked up.

5. You will have little time, or often no access to the property before the auction, so there is considerable risk that the property is in a reasonable condition.

Article by Justin Clarke of Private Property