Friday 5 August 2016

理财 Trick - The Cunningness of Auctioneer

The Mantra:   No one can be trusted !

is really very important. Just when you thought the trust that the valuation of a property auction by the high court and banks must show a discount of 30-40% off the market value must be true, is clearly misplaced. The auctions are just as perilous as any other property purchases.

Let's drive the concept through:

Property 1:
  • date / property / price / sf / psf 
  • 5-Feb-13 / No. 113 / $46,000 / 3,079 / 15 
  • 19-Nov-12 / No. 113 / $51,100 / 3,079 / 17 
  • 6-Sep-12 / No. 113 / $56,100 / 3,079 / 18
  • 18-Jun-12 / No. 113 / $63,000 / 3,079 / 20 
  • 29-Mar-12 / No. 113 / $70,000 / 3,079 / 23 
  • 4-Aug-10 / No. 113 / $46,200 / 3,079 / 15 (sold)
  • 30-Dec-09 / No. 113 / $51,300 / 3,079 / 17
  • 7-Jul-09 / No. 113 / $57,000 / 3,079 / 19 
Initially, in Jul 2009, this property (very poor condition, totally uninhabitable) was first being auctioned off by bank for 57k due to non-payment by their client. But, there were no takers as the world market then was undergoing the Aug 2008 financial crisis. This crisis hit the property market for a good 3 - 4 years after that.

For each auction conducted remained unsold, it is the requirement by the high court that the next bank auction 4 to 9 months later, if any, its reserved price must be reduced by 10% to facilitate sale.  It was finally auctioned off in Aug 2010 at 46.2k.

Again, the Aug 2008 financial crisis continued to bite till 2012. The property was not renovated at all. There was again non-payment by the new buyer. The property was again put up for auction, but the auction reserved price was revised to 70k (an increase of 52%, i.e., ((70k - 46.2k)/46.2k x 100%) is clearly not possible for the period from Aug 2010 to Mar 2012, i.e., 1.5 years!). During this period, almost every one is still worried about their next meal ticket. How can this increase in valuation be possible? True enough, the market has spoken. The property was not sold again until it hit the reserved price of 46k (back to its original Aug 2010 price), which is the correct sentiment of the market during that time, i.e., no increase in market value.

Property 2:
  • date / property / price / sf / psf 
  • 7-Mar-13 / No.425 / $29,700 / 1,040 / 29
  • 3-Jan-13 / No.425 / $32,900 / 1,040 / 32 
  • 24-Oct-12 / No.425 / $36,000 / 1,040 / 35 
  • 9-May-12 / No.425 / $45,000 / 1,040 / 43 
  • 30-Jan-12 / No.425 / $21,400 / 1,040 / 21 (sold)
  • 10-Aug-11 / No.425 / $23,700 / 1,040 / 23 
  • 10-Mar-11 / No.425 / $26,300 / 1,040 / 25 
  • 3-Nov-10 / No.425 / $29,200 / 1,040 / 28 
  • 3-Jun-10 / No.425 / $34,200 / 1,040 / 33 
  • 21-Jan-10 / No.425 / $36,000 / 1,040 / 35 
  • 14-Jul-09 / No.425 / $40,000 / 1,040 / 38
This property told the same story as property 1. Initially, again in Jul 2009, this property (average condition, inhabitable) was first being auctioned off by bank for 40k due to non-payment by their client. But, there were no takers from Jul 2009 to Jan 2012, i.e., a good 2.5 years. This is how deep the Aug 2008 financial crisis was.

With reducing 10% prices of each subsequent auction, it remained unsold till Jan 2012 and finally sold at 21.4k.

But, the new buyer did not go through the purchase. The property was again put up for auction, but the auction reserved price was suddenly revised to 45k (an increase of 110%, i.e., ((45k - 21.4k)/21.4k x 100%) is clearly not possible for the period from Jan 2012 to May 2012, i.e., an ultra short period of 4 months!). How can this increase in valuation be possible? True enough, the market again has spoken. The property was not sold again until it hit the reserved price of 29.7k (almost back to its original Jan 2012 more reasonable price of 21.4k, there is of course an increase in number of bidders as the property is considered highly inhabitable and contributed to the winner's curse), which is the correct sentiment of the market during that time, i.e., no increase in market value.

Property 3:
  • date / property / price / sf / psf
  • 7-Dec-15 / No. 4 / $405,000 / 5,415 / 75 (sold)
  • 9-Sep-15 / No. 4 / $450,000 / 5,415 / 83 
  • 16-Jun-15 / No. 4 / $450,000 / 5,415 / 83 (technical court issue)
  • 13-Jul-10 / No. 4 / $148,803 / 5,415 / 27 (sold)
  • 21-Oct-09 / No. 4 / $165,337 / 5,416 / 31 

This property again told the same story as property 1 & 2. Initially, again in Oct 2009, this property (very poor condition) was first being auctioned off by bank for 165.3k due to non-payment by their client. But, there were no takers from Oct 2009 to Jul 2010, i.e., a good 1 year due to the Aug 2008 financial crisis.

With a reduced 10% price of the subsequent auction, it was sold on Jul 2010 at 148.8k, after a 10% reduction in reserved price.

With no new renovation (still originally uninhabitable), the new buyer could not keep up with the installment payments. The property was again put up for auction in 2015 (5 years later), but the auction reserved price was suddenly revised to 450k (an increase of 202%, i.e., ((450k - 148.8k)/148.8k x 100%) is clearly not possible for the period from Jul 2010 to Jun 2015, i.e., a period of 5 years!). How can this increase in valuation be possible? True enough, the market again has spoken. The property was not sold again until it hit the reserved price of 405k on Dec 2015 (a period known for very bad winner's curse).

it is indeed interesting to see that even at its worst, the owner is not any worse off, as the bank has assisted the owner in getting rid of a very hard to sell property and profited a clear 172%! A good thing. But, due to the non-payment of the owner to the bank. This owner can only play this trick once in his/her lifetime.

The amount of renovation to make it inhabitable is huge.

It remained to be seen if this property 3 would be out in the market again some time later.

In summary, it is difficult to see the real trend as there are so many factors influencing the auction price at any one time. It is therefore extremely wise of the investor to look before jumping. The valuation used by the auctioneers and banks are clearly a serious trickery and never to be trusted. The safest bet therefore must be to look up its historical price trend before committing to a go-for-the-auction. Otherwise, the mistake made could potentially unravel all past successes.

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