The different process in purchasing property
It is unlikely to lose your deposit paid upon signing Sales & Purchase Agreement (SPA) when you purchase a property from primary or secondary market. It is because before you sign SPA, your application of mortgage loan usually has been approved. If it is not or margin of finance is lower than what you need then you can cancel your booking and recover back your booking deposit before proceed to sign SPA. Of course, please add this clause in the booking form.
Then, it is just a matter of time for the bank to disburse balance purchase price to the seller. You may even negotiate with the seller for extension of time if there is a delayed in disbursement of loan and to pay penalty for late payment.
However, it is not the same process in purchasing auction property in Malaysia.
What is the difference?
You are required to prepare a 10% deposit of the reserve price before auction date. When you successfully bid an auction property, the 10% deposit will be paid to the bank. Then you will proceed to apply mortgage loan and your bank will need to disburse balance purchase price in 90 or 120 days or your 10% deposit will be forfeited. It is strictly no extension of time allow in property auction by bank especially if it is being auction at high court or land office.
Primary and Secondary Market Process – Apply mortgage loan first then pay deposit later
Auction Process – Pay deposit first then apply mortgage loan later
What is the Risk?
You risk losing your 10% deposit if :
1. Loan is rejected
2. Lower margin of finance
3. Late disbursement of balance purchase price
How to manage this risk – 1. Loan is rejected?
If you are planning to apply a mortgage loan from bank after purchased an auction property. Please prepare all your income documentation and to consult a few bankers from different banks before auction date to check if you are eligible for the mortgage loan. Please do your research and to consult banker with experience therefore your chances of approval is higher. In addition, this is to prevent your application of mortgage loan being rejected later although banker has “confirmed” that you are eligible earlier.
Not all bankers are the same. A great banker will be able to get the loan approve faster and chances of approval is higher. In addition, there are cases that a great banker will be able to get the loan approve while others can’t. I do not mean that there is any fraud involve here. Application of mortgage loan need experience and skills especially when you are self-employed with a lot of income documentation. A great banker will be able to go through all of it, understand and propose to the bank credit officer for approval. If there are any queries from bank credit officer then a great banker will be able to reply effectively.
It will be wonderful if there are 3 or more banks which can confirm that you are eligible for the mortgage loan that you need before auction date therefore chances of not getting it is much lesser later.
How to manage this risk – 2. Lower margin of finance?
You have a risk that the bank will approve lower margin of finance that you need. For example, if you need 90% margin of finance but the bank can only approve 85% margin of finance later then you will need to pay the 5% balance purchase price or your 10% deposit will be forfeited.
Margin of finance is how much percentage of loan you would like to apply with a bank. Central Bank regulation such as margin of finance cap at 70% for 3rd residential property and bank own regulation still applies in auction properties.
Please remember that margin of finance in auction property is based on the winning bid price and not the market value of the property.
For example, if you successfully bid a residential auction property at RM300,000.00 and the market value is RM500,000.00. Your max margin of finance is RM270,000.00 (90%) only.
You can arrange a top up loan with the same bank or refinance to other bank after full disbursement of RM270,000.00 earlier, and you can get up to 80% margin of finance of RM500,000.00. Therefore, you have an additional cash out of RM130,000.00 which you may then use it as renovation cost or as personal contingency.
Please consult an experience banker if you have any specific margin of finance required and eligibility to get top up loan before auction date. You need to tell your banker that getting a mortgage loan approved is not sufficient, you need the specific margin of finance required.
How to manage this risk – 3. Late disbursement of balance purchase price?
Although after mortgage loan has approved and you have signed bank letter offer, please do not expect that all bankers and lawyers will help you to process your disbursement as soon as possible. Some bankers will not help you to follow up because they consider their job has completed after you signed the letter offer and most lawyer firm have tons of cases processing at the same time therefore may overlook yours. You might be expecting that they will be doing their job but how if in the end nobody is really doing the work as needed?
Properties auction by bank has lesser transaction in the market compare with properties in primary or secondary market. Therefore, not all bankers and lawyers have experience in auction property which they will need to process it faster and differently than primary or secondary market property cases.
That said, it is very easy to manage this risk, please choose your banker and lawyer wisely and follow up with them regularly on the progress to make sure disbursement on time.
Still worry about loan approval?
You can consult with your banker to apply mortgage loan purchasing other property with an amount of your max budget. Let’s say if you are planning to purchase a property with a reserve price of RM400k and your max bidding price is RM500k. Ask your banker to apply a mortgage loan with a property value of RM500k and to get it approve before auction date.
Then, you can now go to bid for your auction property and after successful bid, ask your banker to request with bank credit officer to change property details from the approval earlier. In this way, you are only requesting bank to change property details instead of to process your application of mortage loan again to check if you are eligible. Therefore, chances that the bank doesn’t accept your request is very low unless if the auction properties that you are buying has negative factor which the bank doesn’t accept it such as near to graveyard, T- junction, and etc. If you are purchasing an auction property with negative factor, then apply mortgage loan earlier with bank that accept this negative factor.