Property investors beware the Sheriff’s auctions
You get the cheapest properties at Sheriff’s auctions and they can earn fantastic returns, but there are significant risks.
Firstly, the sheriff does not give you vacant occupation. This means that there is usually someone using the premises and you either have to negotiate a deal with them or get an eviction order and then have the sheriff evict them. The eviction is easy and only costs about R10 000. The problem is that once you’ve got them out, you’ve got to keep them out. The chances are they’ll simply break in the next day and you cannot ask the Sheriff to go back again without a new eviction order. The police will open a case of breaking and entering for you, but that file just gets thicker and thicker and nothing actually gets resolved.
The kind of deal that we used to make was to let the occupants stay there for nothing or a very low rental provided they acted as our agent and let the remainder of the premises (inside and outside rooms) and collected the rent. The risk here is that they will hijack the building and it can be near impossible to get them out and keep them out. Then you’ll be stuck with a bond and municipal charges with no income.
When you buy at Sheriff’s auction, you take responsibility for the entire outstanding rates, water and electricity and this can be a very high figure. I once bought a property for R240 000, only to find that the municipality wanted about R500 000 in settlement. The figure the sheriff may give you is unreliable.
You have to pay 10% in cash or bank guaranteed cheque on the fall of the hammer and only have 14 days thereafter to raise a bond. You can drag this out to about 6 weeks before the deal gets cancelled, but you will need to fend off the attorneys acting for the bank or whoever put the property up for auction.
The previous owner (against whom judgement was obtained) can be vindictive and threaten you in some way. I had one property where the previous owner threated to shoot me, I tried to pull out of the deal, but the bank then threatened to sue me for performance under the contract of sale. The building cost me R1,8m so I had to raise and service a bond and could not let the building out because the previous owner kept running interference whenever I took a prospective tenant to view.
Your alternatives are commercial auctions, purchasing from the previous owner after the judgement but before the sheriff’s auction (your offer must at least equal the judgement amount and the sale must be approved by the bank), properties in possession of the banks (these are properties that they’ve bought back at sheriff’s auctions), bargain hunting. Remember, you make your profits when you buy, so never buy at market value.