Thursday, March 26, 2009

Going, going ... to sales by auction

Owner sales are outstripping mortgagee sales at auctions. Given the transparent process, the lively interest in property auctions and the high probability of a quick sale, this is hardly surprising, says GRACE NG

IT used to be that property auctions were where distressed assets wound up since banks used them for mortgagee sales, as was the case in the last two recessions of 1985 and 1998.

But things have changed since, as a growing number of property owners themselves approach auction houses to sell their properties. In fact, owner sales now outnumber mortgagee sales at auctions. The proportion of owner sales has increased from 50 per cent in 1998 to 72 per cent in 2008. In comparison, the proportion of mortgagee sales has declined from 50 per cent in 1998 to just 28 per cent in 2008.

During the property boom years of 2006/2007, developers like Sentosa Cove and Tuan Sing Holdings successfully conducted auctions on an international level to sell high-end land parcels in Sentosa and several residential units in Botanika, respectively. Not only did these developers achieve record prices, they also attracted a high level of foreign participation and gained good exposure for their projects.

Singapore's property market has matured over the years, mirroring markets such as Australia where auctions are the most popular method used by owners to sell their properties. Both sellers and buyers here have grown to accept the auction mode of sale as the open bidding system is transparent and efficient.

One can find a wide variety of properties at auctions today. Properties ranging from mass market apartments at Braddell View, Telok Kurau and Tiong Bahru to high-end bungalows on Sentosa, good class bungalows at Astrid Hill as well as prestigious apartments like St Regis Residences have been put up for auction by their owners.

Properties under construction, such as those in The Clift, Sky@eleven and The Oceanfront, have also featured at auctions.

Besides residential properties, owners and companies have also used auctions to sell shop units in prime locations such as Peninsula Plaza as well as shophouses in popular suburban towns like Ang Mo Kio, Clementi, Tampines and Toa Payoh.

With deteriorating economic conditions and an expected increase in job losses, the number of repossessed properties is likely to rise in the next six months. Attendance and interest at auctions will continue to be buoyant as buyers look to auctions to find their ideal property. Strong interest is expected in the mass market segment as well as for properties priced around $1 million as upgraders seek out opportunistic buys.

Despite the lull in the property market amid the global financial crisis, the market is seeing strong buying interest at auctions. However, the sales volume is low due to a mismatch between the expectations of sellers and buyers. A turnaround is likely to take place only when buyers start to perceive that the market has bottomed out.

Auction houses like Colliers International, DTZ, Jones Lang LaSalle and Knight Frank typically hold one auction a month, usually in the function room of a hotel. It is usual for these auction halls to be jam-packed with potential buyers and attendees, who often spill out to the corridor, with hardly any standing room.

Serious buyers are flocking to auctions in search of their dream home or to clinch an opportunistic buy from a distressed sale. From just one or two requests received per day from the public to be put on the mailing list last year, auction houses are now receiving an average of five requests a day.

The strong underlying demand presents opportunities to sellers and buyers alike.

A public auction ensures that the process is transparent as there is open competition which ensures that the best price is obtained for the property. In a soft market, determining the selling price of a property can be difficult. Hence, companies that want to dispose of their excess properties or re-organise their portfolio can do it through an auction as it satisfies the objective of shareholder accountability.

If you are an owner looking to sell your property in this lacklustre market, an auction could also be the answer. Auctions generally capture a wider target market given the auction houses' prominent advertisements and extensive database and mailing lists. The publicity and interest generated consequently increase the probability of a sale.

Moreover, auctions are a quick mode of sale as the sale date is fixed. This is good for owners who need to sell their property quickly to get their finances in order.

Those who choose to sell their property via auction can expect a higher success rate as the potential buyer would have done his homework and ascertained his financing prior to the auction date, whereas in a private sale, sellers can find themselves in a situation where a buyer has to terminate the purchase because he cannot get the required financing. That's because most buyers approach the banks after they have identified the property they want.

There's another factor that contributes to the higher success rate - buyers who purchase a property at auction are required to pay a 10 per cent deposit instead of just one per cent in the case of a private sale. And they sign the sale and purchase agreement as soon as the property is knocked down to them. These are deterrents to any buyer thinking of walking away from a sale by forfeiting the option.

Even if a property fails to sell on the scheduled auction day, the property owner can take the last bid price as the basis for negotiation. This is definitely a plus point compared to a private treaty sale as the seller may not get any offers since many buyers are hesitant to make a commitment.

Tips for owners wanting to sell in a weak market
Be realistic in fixing your asking price. It should be as close to valuation as possible so that potential buyers will be encouraged to make an appointment for a viewing and consequently make a firm offer for it. On the other hand, if they think the asking price is high relative to comparable properties, they will not be interested to view your property.

Case in point: Seller A wants to sell his apartment in Bukit Timah and has set his asking price at valuation. He receives an offer, which is 8 per cent below the valuation price. After some negotiation, the seller manages to seal the deal at 5 per cent below the valuation price and he is now awaiting the completion of the sale. In this case, a buyer was found within a month of marketing the property.

On the other hand, Seller B has tagged an asking price that is 20 per cent above valuation for his apartment near Orchard Road. Despite marketing the property for three months, he was not able to attract buyers to view his property and there was no offer to purchase.

Ask the auctioneer for advice on the valuation price, comparable asking prices, recent transactions and feedback on the viewing appointments before fixing your reserve price, that is, the minimum price below which you will not sell. This will increase the chances of success.

Give the auction house at least three weeks' lead time so that there is enough time to organise the mailing list, advertisements and viewings before the scheduled auction date. The longer the lead time, the higher the chances of success.

Determine whether you are selling your property with vacant possession or tenancy and decide on the completion period. Your lawyer will need your instructions to prepare the terms and conditions of the sale. A typical completion period is three months. If you require more time than that, you can discuss fixing a longer completion period with your lawyers.

Tips for buyers in a weak market
Set a realistic budget.
Understand that the prices of repossessed properties are still guided by valuation.
Case in point: An enthusiastic foreigner quipped that in his country, the banks will sell a repossessed property for anything. Failing to understand that the price of repossessed property in Singapore is guided by valuation, he rattled off his wish list for a bungalow in Bukit Timah Road as well as an apartment on Orchard Road and asked to be notified of such good buys.

Give realistic counter-offers. Generally, auctioneers are not able to accept a counter-offer that is way below the opening price, for example, one that is 50 per cent below it. A reasonable gauge would be about 5 per cent below the opening price.

The writer is deputy managing director and auctioneer, Colliers International

Source: Business Times, 26 Mar 2009

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