[Practical Finance] Emergency for Empty Jeonse... Always Check 'Jeonse Rights' in Apartment Auctions

Photo by Asia Economy

Auction is an opportunity to acquire real estate at a price lower than the market value, but it is also a high-risk investment that can lead to significant losses if not handled carefully. To reduce mistakes and failures in auctions, thorough groundwork including on-site visits, rights analysis, and market price verification is essential.

As concerns over ‘Kkangtong Jeonse’ (empty shell Jeonse) spread, the number of apartment auction listings is increasing, and special attention must be paid to the ‘Jeonse right’ in apartment auctions. Whether a Jeonse right is established can be easily confirmed through the certified copy of the register. Jeonse right refers to the right to use someone else’s real estate for a certain period by paying a Jeonse deposit, with the right to get the deposit back when the period ends. A senior Jeonse right holder can recover their deposit before junior right holders or other creditors. It is a tenant’s means to protect their deposit along with ‘opposability and priority repayment rights.’

Tenants can secure opposability and priority repayment rights simply by registering their residence and obtaining a fixed date. On the other hand, establishing a Jeonse right requires the landlord’s consent and incurs costs. Nevertheless, tenants who want thorough protection often establish Jeonse rights. When a Jeonse house goes to auction, tenants can claim distribution in the name of the deposit. At this point, the Jeonse right is extinguished. The problem arises when the auction winning bid is less than the deposit. Even after the auction, there can be situations where the full deposit is not returned.

However, the situation is different for tenants who have established Jeonse rights. They have legal authority over the full deposit amount. In other words, if the tenant does not receive the full deposit, the new winning bidder must pay the remaining deposit in full. From the bidder’s perspective, although they may have purchased the property at a nominally lower price than the market value, by assuming the Jeonse right, they end up paying more than the expected or winning bid price. This is why it is important not just to choose properties cheaper than market value but to thoroughly examine the rights involved.

Even if you can buy a property cheaply through auction, ancillary costs are not cheap. Taxes, legal fees, loan interest, and all other expenses remain the same. Many novice auction participants are caught off guard by the flood of bills after hastily winning and purchasing without considering these costs.

Since many properties with complicated backgrounds come to the auction market, legal fees must be taken into account. Costs such as lien cancellation fees, delivery fees, and tax payments on behalf of others can be higher than expected. Even if resolved smoothly, moving costs are often incurred, and in some cases, eviction lawsuits may be unavoidable. It is also advisable to consider interior renovation costs after acquisition. This allows you to prepare a more accurate profitability calculation yourself, leading to successful long-term investment.

Auctioned properties are not subject to actual transaction reporting, so there is no obligation to submit a fund procurement plan. Nevertheless, meticulous financial planning is essential. The bid deposit (usually 10%) alone is not enough. The balance payment plan must also be thorough. It is recommended to check the auction loan limit in advance with your main bank.

If you find a desirable property but do not have the immediate bid deposit, you can use auction deposit insurance. Auction participants who must pay a deposit to the court can replace it with a surety insurance. Although a fee (usually around 2-3%) is charged, it allows bidding at a much lower cost than the deposit. For example, with a 3% rate, you can bid on a 1 billion KRW apartment for just 3 million KRW.