[Practical Finance] Auction Market with Competitors Gone... 'Chance to Own a Home' Coming Soon

Bid-to-Price Ratio Declines for Three Consecutive Months, Lowest in 2 Years 6 Months
Essential to Verify Rights Analysis and Registry Certificate

[Asia Economy Reporter Cha Wanyong] ‘Repeated failures to sell.’ Recently, court auctions have become quite sluggish. Even auction items without any particular issues typically fail to sell once or twice. The number of auction participants has drastically decreased compared to earlier this year, and it is rare to see dozens of bidders flocking to a single item. Conversely, this means that the current auction market, with fewer competitors, could be an opportune time for investment.

In fact, the auction industry is paying close attention to as early as the end of this year or the beginning of next year. If the Bank of Korea takes a ‘big step’ (a 0.50%p increase in the base interest rate) due to the ripple effects of the US interest rate hikes, properties purchased through gap investment using borrowed money (debt investment) are likely to enter the auction market. This could create opportunities to buy good properties at bargain prices.

"Disappeared Competitors Could Become a Chance to Own a Home"

There is an investment adage that auction real estate investment shines during a real estate downturn. Because the real estate outlook is bleak, competition rates have noticeably dropped. The winning bid rate, which is the ratio of the final bid price to the appraised value, has also significantly decreased.

In fact, last month, the winning bid rate for apartment auctions in Seoul was 89.7%, the lowest in two and a half years since March 2020. The Seoul apartment winning bid rate fluctuated after surpassing 100% at 103.1% in January this year, rising to 110.0% in June. However, it dropped to 96.6% in July and continued to fall for two consecutive months to 93.7% in August and 89.7% in September.

Last month, a total of 67 apartment auctions were held in Seoul, but only 15 were successfully sold, resulting in a winning bid rate of just 22.4%. The winning bid rate for Seoul apartments maintained the 50% range until early this year but has stayed in the 20-30% range from July to September.

The auction market in the metropolitan area has become even less competitive. The winning bid rate for apartments in Incheon rose by 2 percentage points from the previous month (78.0%) but still remained in the 80% range. The winning bid rate dropped by 4 percentage points from the previous month to 26.5%, and the average number of bidders was only 2.95, the lowest level this year. The winning bid rate for apartments in Gyeonggi Province fell by 3.2 percentage points from the previous month (82.9%) to 79.7%, failing to surpass 80%. The winning bid rate also declined to 33.8% compared to the previous month.

Auction Investment Is Not Easy, Must Check Carefully

However, just because competition is decreasing and prices are falling does not mean one should blindly invest. Especially for beginners, most end up suffering significant losses.

When buying real estate in the general market, the standard investment strategy is to buy when prices fall and sell when they rise to maximize capital gains. But auctions are different. Auction investment profits increase when the property price rises after winning the bid. Since auctions involve legal procedures, it usually takes at least six months, often close to a year, from the auction start date to completion.

When the court appraises an apartment with a market price of 350 million KRW, the sale date is set about 3 to 4 months later. If the market price has dropped by nearly 100 million KRW, buying through auction or purchasing at the market price of 250 million KRW is not much different.

In a situation like now, where real estate prices continue to fall, it is indeed disadvantageous from a profitability perspective. During such times, one must approach auctions with the goal of winning bids at low prices to avoid losses.

It is essential to remember that auction properties generally come up due to problems. Since most properties are auctioned because the owner failed to repay creditors like banks, thorough rights analysis is mandatory.

When analyzing rights, it is crucial to check the tenant’s move-in date and whether there are any mortgages through the official registry. Mistakes in rights or property analysis can lead to significant losses, so extreme caution is necessary.

The absolute principle of real estate investment, ‘on-site inspection,’ remains valid in auctions. Although the status of auction properties can be checked through documents, actual conditions often differ from paperwork. If one wins a bid without visiting the site, they risk losses not only from the property itself but also from opportunity costs related to other auction items.

Along with the appraisal report, the sale item specification and status investigation report must be thoroughly reviewed before bidding. The sale item specification allows pre-checking changes in recorded details, possession rights, and claims for distribution, while the status investigation report records the property’s use and form, the occupant’s rights, and the rent paid, enabling checks on rental yield and business status.

Since these reports are recorded by court enforcement officers who visit the site directly, they are essential materials to review. Above all, if it is judged that the property is not suitable, one should refrain from investing.