Sales in execution and their pitfalls

Bargains often seem attractive but there are pitfalls of buying what appears to be a bargain property.

Property sales in execution may sound like a bargain. After all, in many cases the properties are knocked down at a discount of 20% or more.

This means you can get fewer returns on such a purchase if you aren’t aware of the snags involved in this type of investment.

Difference between repossessions and sale in execution

Sales in execution are not the same as properties in possession. If a homeowner is substantially in arrears on bond repayments, the lender will take legal steps to attach the property.

The bank then instructs the sheriff of the court to sell the property at a public auction, which is a sale in execution.

If the highest bid at an auction doesn’t cover the outstanding balance owed to the bank, the bank can buy the property at the auction. Once that happens, it becomes a property in possession, with the bank as the new owner.

The bank then either advertises all its properties in possession – repossessed properties - for sale or appoints one or more estate agencies to market them.

Expenses

With most sales in execution, the property has been badly neglected for some time and is in a poor state. This is because the owners have not been able to keep up with their bond repayments, let alone spend money on maintaining their properties.

• All homes require regular maintenance, and if this is not carried out timeously, you can expect extensive repairs to roofing, flooring, electrical, plumbing and other installations to be urgently done. The property may also need to be painted, inside and outside, to make it habitable.

• You will also probably need to pay the arrears in municipal service fees and taxes which have been accumulated by the previous owner.

These costs are likely to be substantial, so you need to take them into account when judging whether or not the property you are considering is an actual bargain.

Access

Another problem is that you may not be able to view the property before buying.

• It often happens that the existing owner won’t allow access for inspections. If you later discover defects, you can’t hold the auctioneer and bank liable for repairs.

• Defaulting owners are often angry with the bank for taking legal action against them. They may continue to occupy the home illegally. Auctioneers cannot guarantee the occupation of a home, and evicting squatters can be tricky and time-consuming, as well as expensive.

Costs

Keep in mind that when you buy a property on auction the sale is unconditional. It cannot be made subject to the sale of another property or a bond being obtained.

In addition to the 10% deposit on the agreed sale price, you will need funds to immediately cover the 10% auctioneer’s fee plus VAT on the fall of the hammer.

You will then have a very limited time in which to find the balance of the sale price, so if you don’t have cash on hand you will need to have a bond amount approved beforehand.

Profit

Some investors have made reasonable profits on sales in execution, but they should not generally be considered as an easy way of making money.

They are only profitable if:

• You are paying far less for the property than you can sell it for.

• The property does not need extensive costly repairs.

• The previous owner does not continue to occupy the property illegally.

If well understood, sales in execution can provide you with decent returns on investment.