Differences between buying an Auction Property vs Secondary Market Property (Sub-sale) in Malaysia

When purchasing a residential property, the common question that comes to mind is, “Do I buy a new property from a developer, from the secondary market, or an auctioned property?” Purchasing a property in one of these categories has its own risks and advantages.

In this article, we have tabled the differences between buying an auctioned property and sub-sale property in Malaysia.

AUCTION PROPERTY SECONDARY MARKET PROPERTY (SUB-SALE)
1. Type of Purchase / Title or Without Title

Auctioned properties are usually properties repossessed by the bank, court or land office because the owner did not pay the property’s outstanding debts.

Property bidders can bid for properties under two types of auctions

Judicial Auctions

  • Court auctions
  • Properties’ titles have been issued under the name of the owner and the charge is created and perfected. These properties are known as non-Loan Agreement Cum Assignment cases (“non-LACA”) properties.
  • The creditor bank will apply to the high court for an order to sell the property if the loan payment is defaulted.

Non-judicial Auctions

  • Bank auctions, also known as “LACA” properties
  • Where the property title has not yet been issued (eg, under Master Title).
  • The bank has the right to auction off the property itself and would not need to apply for an order of sale and if the loan payment is defaulted.

Sub-sale properties are usually properties sold by an existing owner who is not a developer.

Real estate agents or negotiators usually facilitate the transaction between buyer and seller directly.

Such properties may also come with property title or without title (Master Title).

2. Type of documents

It is important for the bidders to get a latest copy of Proclamation of Sale (POS) and Condition of Sale (COS) as they contain the terms that will bind the bidder.

The successful bidder must sign the POS document.

After the auction, the successful bidder must engage a lawyer to effect the transfer (either a Deed of Assignment or a Memorandum of transfer) and loan documents (if any).

Sub-sale with title

  • Sale and Purchase Agreement (SPA)
  • Memorandum of Transfer

Sub-sale without title (Master Title)

  • Sale and Purchase Agreement (SPA)
  • Deed of Assignment (DOA)

A buyer will need to appoint a lawyer to handle the purchase documents and the loan documents (if any).

3. Funds Purchase prices may be below market value

  • Reserve prices usually begin from the market value of the property, but it will be reduced by 10% each time it is re-auctioned without a successful bidder.
  • Bidders must prepare a bank draft for 5-10% of the reserved price. Bidders must also be prepared to instantly top up the difference between that amount up to 10% of the final selling price right after the auction.
  • Bidders need to set aside another 5% of the auction price for legal fees, stamp duty, advance payment for utilities, sinking fund, quit rent, assessment and many more. Such payments may vary depending on the POS terms, so buyer beware.

Purchase prices are comparatively higher than auctioned properties as they are not sold under distressed conditions.

High upfront payment

  • 3% earnest deposit when the offer is signed
  • Up to 10% of the purchase price for down payment

Incidental costs incurred before purchasing a property include:

  • Real Estate Negotiator fees (seller pays)
  • Property Valuer’s fees (buyer pays)
  • Registration & State Consent fees (buyer pays)
  • Legal fees (buyer and seller pay)
  • Stamp duty (buyer pays)

For more information:

https://dnh.com.my/incidental-costs-applicable-to-purchasing-sub-sale-property-in-malaysia/

4. Time frame

Remaining purchase price must be paid within 90-120 days, depending on the POS which cannot be negotiated, so buyer beware.

Successful bidder risks losing 10% deposit on the purchase price if the balance purchase price is not settled within the time frame. Any extension granted may come with late interest penalty or forfeiture (worst case scenario).

For sub-sale with title

  • Freehold property – 90 days from the SPA date
  • Leasehold property – 90 days from the “Unconditional Date”; after State Consent Approval is obtained

For sub-sale without title (Master Title)

  • 90 days from the Developer’s Confirmation or upon the Vendor’s compliance with the terms stated in the Developer’s Confirmation
  • An extension of 30 days is usually granted with a late interest penalty.
5. Inspection of Property Inspection by potential bidders

  • Only inspection of the external condition of the property and viewing inside is not allowed
  • Stratified properties are closed off and inaccessible for inspection by potential bidders
  • Property sold on an ‘as is where is basis’. This means the bidder buys the property in whatever condition it exists, with all faults, whether or not immediately seen. This also includes assuming the risks of any ‘occupants’ (living or otherwise), that may come along with it.

Buyers are allowed to inspect the property for any defects before the agreement is signed. This allows the buyer to identify problems including:

  • Ceiling leakages
  • Plumbing faults
  • Electrical faults
  • Termite/mould problems

Commonly purchased on an ‘as is where is basis’ at the day of inspection or the day the agreement is signed. As a buyer, this term has to be carefully negotiated or agreed between the parties for the seller to make specific repairs before the completion of the sale.

Generally, the seller will be liable for repairing any major damages before handing the property over to the buyer during the sale transaction, if there are any substantial damage to the property during transaction.

6. Vacant possession / Legal possession Does not necessarily come with actual vacant possession.

  • Evicting occupants is a lengthy, complex, and costly process
  • Successful bidder must evict any occupants at their own cost
    • If they are tenants, the successful bidder can inform them about the property purchase and suggest signing a new tenancy agreement
    • If they are previous owner who refuse to vacate, the successful bidder will need to lodge a police report and obtain a court order
    • Obtaining an eviction order usually takes about 3 to 6 months.

Vacant possession – Upon payment of the balance purchase price and apportionment of outgoings (a list detailing all the bills prepaid by the previous owner), vacant possession will be delivered to the buyer. In simple words, this means the delivery of keys and access cards to the newly purchased property. It is the seller’s responsibility to do this.

Legal possession – If the sale is subjected to a tenancy, the purchaser may ‘take over’ the tenancy. Purchaser will get the legal title as owner of the property but not the keys and access cards to the property which are with the occupying tenant. The rental and deposits shall be transferred to the purchaser who becomes the new landlord of the tenancy.

7. Encumbrances on property

There is high change for encumbrances existing on auction properties, such as private caveats lodged by a third party; with a claim or a caveatable interest over the property to restrain the auction sale of that property.

A private caveat can cause hindrance to a successful bidder from getting the legal title of that property (or even occupying it) despite having made payment of the full purchase price.

The legal process to remove such encumbrances is lengthy and costly. So, buyer beware!

Third party’s caveats or encumbrances are Vendor’s duty to remove and the risks are manageable.

The purchaser’s lawyer will also conduct searches as part of the transaction to ensure the property is free from encumbrances.

 

There are several differences that must be considered when deciding whether to purchase a sub-sale or an auctioned property. Engaging a knowledgeable professional such as lawyers or real estate agents that are familiar with such transactions to conduct checks can save a bidder or buyer a lot of time, money and frustration.

***

This article was written by Shawn Ho (Partner) & Suzanne Fam (Senior Associate) from the property & tax practice group of Donovan & Ho.  Shawn leads the corporate practice group of Donovan & Ho, and has been recognised as a Notable Practitioner, whilst the firm has been recognised as a Notable Firm for Corporate and M&A by Asialaw Profiles 2020 and 2021.  We are also ranked as a Recommended Firm by IFLR1000 2020 and 2021.

Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. We also advise on property transactions and real-estate related tax planning. Feel free to contact us if you have any queries.

 

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