From: Peter Martin
Well, I'm feeling very full of myself at the moment. I'm pretty much a novice at property investing and have been reading this and other forums thinking I'll never accumulate as much knowledge as seems to be shared among a lot of you. But I've managed to throw in something it looks like a lot of you have never heard of!
Here's my story about auctions and the Sheriff's Office. It's long but I think you'll find it interesting ...
I first found out about it after I was the underbidder at a "normal" auction last year. We were disappointed not to buy the house (it was to be our home). A few months later, a friend who is a real estate agent (but not the agent who auctioned the house) rang and told me that settlement had not gone through on the house because the vendor could not get clear title. As well as having a large mortgage, she also had a sale and seize order over the house as a result of a civil action she had lost. To be able to settle, she had to be able to satisfy both secured debts.
The figures were:
Price at auction: 485,000
Sale and seize warrant: 50,000 (but they were willing to take 25,000)
At this point you might be thinking: 450 + 25 = 475 so why couldn't she settle. The answer is that the greedy ol' real estate agents were holding the deposit and wouldn't release it without taking their cut. There were two separate agencies involved and between them they wanted over 20,000! And they wouldn't negotiate.
The holders of the sale and seizure warrant could see they were going to be the big losers. The bank wouldn't negotiate as long as the mortgage was below the purchase price and the agents had the whip hand because they were holding the deposit. So the warrant holders did what they were entitled to - they put the property in the hands of the Sheriff for auction. By doing this they were effectively saying "sell the house and we will take whatever proceeds you get as satisfaction of the warrant." By doing this they re-shuffled the queue of people trying to get money out of the vendor, putting themselves ahead of the real estate agents. I hope you're still with me!
Meanwhile, the people who bought the house at auction had got sick of all the mucking around and rescinded the contract. They decided to wash their hands of the whole affair (I think they may also be suing the vendor).
The vendor's mortgage was going up by almost 3,000 a month. By the time it got to the Sheriff, the mortgage was up to nearly 465,000.
So, when we got the call from our friend we decided we'd have another crack at the house. At that stage the Sheriff's Auction had been advertised (they advertise once only, 5 weeks before the auction) and there were two weeks to go. I attended the Sheriff's Auctions for the next two weeks to try to get my mind around how they work. The thing that struck me was that although I was going along to prepare myself for the auction of one specific house, almost everyone else there looked like they were after investment bargains. The crowd in attendance was virtually identical every week I went.
Anyway, how does the auction work?
The key concept is that the Sheriff is only auctioning the owner's equity in the property.
When the auctioneer starts the auction he will list all the known outstanding encumbrances on the property, including mortgages, rates and water. You need to have an idea in your head of what the property's value is.
You subtract all the encumbrances from your valuation to give you an estimate of the owner's equity.
In our example, the figures looked like this:
Rates etc: 3,500
giving a total debt of 518,500. The property's last "public" valuation was the 485,000 it achieved at auction but we had it valued at 540,000.
The outcome of the auction was that we bought it for 10,000. The 10,000 eradicated the warrant, we paid out the remaining debt and finished up with a total purchase price of 478,500 - compared to the 485,000 it originally went for. Not a significant saving but a bloody good result as far as I'm concerned.
This scenario is not a particularly appealing one for an investor because the owner had no equity in the property. However, properties appear to come up where the owner does have a reasonable equity and these can be very good investment propositions.
Imagine if the owner had an equity of 100,000 and you bought the property from the Sheriff for 40,000! You're 60,000 in front straight away.
The main things to note about all this are:
1. You need to have a good idea in your mind as to what the value of the property is. This is not always easy to do because they're not open for inspection and the owner may not allow you to do a valuation.
2. The Sheriff only takes cash, bank cheque or solicitor's trust cheque. In our case we thought we'd be up for at least 10,000 and were prepared to go to 20,000. I took along one 10,000 bank cheque, one 5,000 bank cheque and 5,000 in cash to cover all possibilities. As it turned out, I only needed the 10,000 cheque.
Sorry for going on so long. Hope you found it interesting. The phone number of the Sheriff's office is (03) 9564-5314. There is a young guy called Shane who conducts the auctions and he's quite happy to answer questions.