As more foreclosed properties enter the market due to the economic fallout from the COVID-19 pandemic, there is a dire need to make auction a viable option in selling foreclosed properties.
Two academicians – Associate Professor Dr Wong Woei Chyuan of the School of Economics, Finance & Banking, Universiti Utara Malaysia and Associate Professor Dr Janice Lee Yim Mei of Henley Business School, University of Reading Malaysia – share their findings on the local property auction process.
More auction or “lelong” properties are in the news and social media now with a surge in foreclosed properties expected since the automatic loan moratorium ended on Sept 30, 2020.
Similar to the practice in countries like the US and the UK, auctions in Malaysia are also used primarily to dispose of foreclosed properties.
Our 2015 research paper in the Pacific Rim Property Research Journal showed that foreclosed apartments in Kuala Lumpur then were listed at a discount of 33.4% as compared to non-foreclosed apartments in the same building block.
While the auction market provides property investors the opportunity to reap huge capital gain, the discount on foreclosed properties is a double blow to the borrowers who defaulted. This is because borrowers not only lose their home and major financial investment but are still liable for any shortfall between proceeds from the auction and outstanding mortgages.
For instance, a borrower who owned a property with a market value of RM350,000 can only recoup RM231,000 (33.4% below market value) at the auction market and this amount could be lower than what he/she owed the banks.
Hence, it is important for the regulators to keep an eye on the auction market in the current economic condition, especially when those who default on their housing loans are likely to be low-income earners who have lost their income due to the Covid-19 pandemic.
Prominent US auction scholar Kenneth Lusht remarked in 1990: “As long as the majority of US real estate auctions are promoted as bargain hunting opportunities, they will be associated with low-end properties.” Malaysia is facing this same predicament.
Why are foreclosed properties selling way below their market value? The answer lies in the imperfections of the Malaysian auction market, ranging from the stigma on auction properties, the existence of syndicates that distort auction processes to their favour, to the use of outdated auction laws that are not helpful in fetching a fair price for the foreclosed properties.
Firstly, there is a need to change the public mindset toward auction properties, including eradicating the stigma. Educating the public on auction as a feasible selling mechanism for both foreclosed and non-foreclosed properties is a vital solution in the long run.
Secondly, speaking of syndicates, operating in groups or individuals, their presence in live auctions is an open secret in Malaysia. They have a simple objective of profiting by threatening genuine bidders from bidding when prices are in the syndicates’ favour, or by offering to ‘help’ genuine bidders secure the property for a fee. They have to go.
The existence of syndicates has distorted and reduced the maximum prices obtainable by sellers. Having said that, we view the implementation of online public auction system by the High Court (e-Lelong) and through private auction houses since 2018 as a significant move in curbing rampant syndicate activities.
This online bidding system has enabled bidders to submit bids via the internet without the need to be physically present in the court. This protects bidders from the interference of syndicates since their identities are kept confidential.
However, the adoption of online auction sales is still low in Malaysia. Our survey of High Court and one of the largest private auction websites on Dec 11, 2020 found that only 33% and 4.3% of total auction sales were conducted online respectively.
In this aspect, we can emulate China which made it compulsory for the disposal of judicial auction properties to be conducted through online platforms since January 2017.
Thirdly, it is high time the government revised the outdated auction laws that prevent foreclosed properties from being sold at a fair price within a reasonable time frame.
While potential buyers have access to the Proclamation of Sale detailing the property’s title and description, the auction/foreclosure laws do not provide prospective buyers the opportunity to inspect the internal conditions of a property, no guarantee of vacant possession and clean title (free of encumbrances) and no full discretion in setting auction reserve price.
These are the inherent risks that auction buyers take and will be reflected as discounts on the price levels they are willing to pay for the auction properties.
The current auction laws dictate a property’s reserve price to be set equal at the market value determined by registered valuers. The reserve price must be advertised in two newspapers of different languages at least seven days before the auction date.
Nonetheless, this reserve price will be reduced by 10 per cent each time the property returns to the auction market after every unsuccessful auction attempt. Bidders who are familiar with this price- reducing mechanism deliberately wait for the subsequent auction so that they can bid at a lower price.
Regulators can consider Australia’s auction model of making sellers responsible for providing good or clean property titles, a viewing period for the auction property, and allow sellers the discretion to set their own reserve price.
The first two above will improve the transparency of the auction process, thus avoiding issues such as costs to evict occupiers and utility bills arrears that work to the disadvantage of buyers. The property’s internal condition is also known, hence reducing buyers’ risks and discounts.
The third will make auction properties more marketable by allowing sellers to set the reserve price according to market conditions that increase their sales proceeds and probability. Our research paper found 33.4% in foreclosure discount point suggests that lenders may want to take a more proactive approach in making the foreclosed properties more marketable, thus minimising their loan losses.
In summary, the onus is on the government to initiate favourable regulatory changes toward making the auction process more efficient, effective and transparent. In particular, it should seriously consider making online auction compulsory for selling foreclosed properties as is done in China, which led to greater transparency and efficiency of auction sales of foreclosed properties.
Source: EdgeProp.my
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