Updated: Oct 16, 2019
Not too long ago, I met with Dr. Bad (pronounced Bard without the "r"). We met because he had some questions regarding AirBnB but our meeting was very much in favour of me. This man had intimate knowledge of an area that I had become interested in - auction properties.
Dr. Bad has been investing in auction properties for almost 20 years now with huge success. In addition to this, he is also a successful entrepreneur and author of Anak Muda Bebas Hutang.
I got together with him again to pique his brain on his method, strategy, and general experience investing in auction properties. Dr. Bad is generous to a fault with his knowledge, spilling all the beans on exactly how he invests.
During my interview with him, I pointed out that very few "experts" would be willing to share everything they know with no holds barred. Without batting an eye lid, his humble answer was, "This knowledge is not mine. If it can help people, why not? There are 2,000 auction properties every month, Ikhram. There's enough pie for everyone."
Dr. Bad has a mentality of abundance, which, I suspect is the primary reason for his success.
In this post, I'm going to attempt to give you as much information as possible with examples from Dr. Bad's own portfolio to give you an edge if you want to invest in auction properties. However, bear in mind that no written text is a substitute for experience.
You'll have to do it yourself, and gain experience. In the course of doing this, you may make mistakes. Therefore, do not take on more risk than you can bear to.
You'll also see below that Dr. Bad has put in a lot of effort and energy to build a competitive advantage. It did not happen overnight and it did not happen by accident. It was a deliberate, sustained effort which is the key to success in anything.
Can You Give Us a Broad Overview of Your Strategy?
I started my journey in property investment in 1997. I bought the property from a developer in Putra Perdana, Puchong. I was 23, it was my first property and I didn't have any knowledge on property investment.
After that I bought a low-cost single-storey terrace house in the secondary market.
The first property was a disaster. When I got the keys from the developer, the property condition was bad. I took the initiative to fix it and renovate it. However, 2 years on and I was unable to find a tenant for the property.
I was luckier with the 2nd property. I still remember, I was paying RM350 to the bank and collecting rent of RM450.
My blunder with the first property motivated me to work harder to increase my income. I started giving home tuition for UPSR, PMR and SPM. With this part-time income, I was able to buy a few more properties later.
I also managed to sell off the first property for a gross profit of RM40,000. To me, despite not having rental income for 2 years, making a gross gain of RM40,000 after 2 years was significant.
This money gave me the start-up capital to begin investing in auction properties.
Back then, there were no websites or online platforms with information on auction properties. I sought out these properties through newspaper advertisements and flyers.
The first auction property I bought was at Puchong Utama Court. I did some renovations to it and was able to rent it out at RM600. My instalments to the bank was RM320. I had a surplus of RM280 which, for the time was good money.
From then on, I have been an avid buyer of auction properties. 90% of all the properties I own have been acquired through auctions.
Why do I concentrate only on auction properties?
First, because there were so many developers with financial problems and poor products in 1999 and 2000 that I felt scared to venture into under-construction purchases.
Second, because I was not so sure that developers could complete their projects within the stipulated timeframe.
Auction properties on the other hand can be seen with your own eyes. It's more on the safe side to me. You just have to know how to handle the acquisition process and refurbishment.
After a few years, I was able to get significant positive cashflow in rent from all my properties. This rental income was higher than my salary. This stimulated me to work harder to acquire more properties.
My game now is flipping. This means I buy a property, renovate it, complete it with furnishing and ID work and sell.
Some good properties near MRT or LRT stations, I keep for rental income. These are low-cost and medium-cost properties that can give me as much as 200% of my monthly instalment to the bank. In some cases, higher actually.
If I may share, for one property I own, my net RoI is higher than the minimum wage. This is a low-cost, walk-up apartment on the top floor. I rent it out on a room basis.
Hang On, Aren't There Restriction to Buy Low-Cost Properties?
Basically in Selangor you cannot buy a low-cost property either from the developer or private seller if you already have 1 property.
However, in the case of Selangor or Kuala Lumpur, if you are buying an auctioned property then you are not restricted. Restrictions apply when you buy from the developer or sub-sale market, not when you are buying through an auction.
Ok, Back to Your Broad Strategy...
Whenever I decide to buy, it's always location, location, location for me. Looking at the properties I have in hand now, most of them are very near to universities, private colleges, MRT stations, Komuter stations, and LRT stations.
That is my target because you can easily get a tenant in such locations.
If you look at the current market situation, Gen Y's don't want to buy a house. They would prefer to rent a house. They try to reduce their monthly commitments. So they don't want to buy a car. Therefore, one needs to go into detail as to how to cater for this market and invest in such properties.
My point is, investors should buy properties in very good locations and it must be very near to public transportation, especially MRT or LRT.
I have condominiums at Jalan Gurney, Palladium, which I have renovated from 3 rooms to 5 and 7 rooms respectively for which my net surplus again is considerable.
This is important to me. If you're a housewife, this type of surplus is the equivalent of a monthly salary.
So every investment decision I make (for buy-to-let) is done by working out the potential rental income first.
Another reason I don't buy properties from the developer is because of the price. Nowadays, if you look at prices from developers, you'll see that they're ridiculous. Especially in the Klang Valley area. How on earth can you get positive cash flow like this? Your monthly instalments will be too high.
Let me share this with you. I have a condominium in Cyberjaya where my rental income is only RM2,000. If I were to compare this with my low-cost and medium-cost properties in KL, I get more because I do room rental.
I have a low cost flat in Putra Ria Bangsar, which is very near to LRT Bangsar and Mid Valley. My net return here is better than most overpriced mid-end properties.
So this is something I look very closely into when I plan to buy an auction property, especially for rental income.
So to sum up what I do, I buy auction properties to flip and I buy for cash flow as well.
How Do You Find These Auction Properties?
There are many sources. You have Ng Chan Mau, Ehsan Auctioneers, Arena Auctioneers, JTR Auction House, Property Auction House.... there are so many.
I go to all these websites and look for good deals. It takes a fair amount of time. You should also network with lawyers. Some of them can supply you with information on NPLs which can lead you to properties that are up for auction.
Besides Location, What Makes an Auction Property Attractive to You?
I can share with you a case. I bought a property in Kampung Pandan for RM70,000. I "touched-up" the house and furnished it completely at modest cost. I was able to make a net gain that many investors would be envious of.
This property was 50%-70% below market price when I bought it.
What? You're Telling Me That Such Deals Can Be Found Consistently?
Yes!! You have to patiently look.
In another case, I bought a medium-cost 762sf property in Kajang. It was in a walk-up building, on the top floor. I sold this house 3 years ago and bought it 2 years before that. My net gain was better than any legitimate investment instrument in the market.
You can still find deals like this now. I recently bought a property in Pandan Indah for RM183,000 with a current market value that gives me a a gross paper gain of over 100%. Of course, I bought this to flip and I'm targeting to sell it 3 to 4 months from now.
One of the Biggest Setbacks to Buying Auction Properties Is That You Cannot View Its Inside. How Do You Overcome This Problem?
Even though I can't go into the property, if someone is staying in the property, I will try to speak to whoever is staying in the house be it owner or tenant. I will get more information. When I speak to them, I get some idea on the property that helps me decide if I want to proceed or not with buying it.
Let me start with an example. I bought a property in Sri Penara way back in 2011. It is a hot area because it is close to a secondary and primary school, next to a mosque, and only 3-4 minutes walking distance to an LRT station.
I bought it for RM56,000. My monthly instalment to the bank was only RM288. I rented it out on a room basis for good gross profit.
I'm sharing this example with you to drive home a point. I knew the area was a hot area. Regardless of the condition of the house, I would buy it because I know it is good. You can easily get a tenant and a buyer.
I would check Mudah, iProperty, and other websites to see how properties in the area were transacting.
Recently I sold that property with good capital gain. On top of that, I had a positive cash flow on it for 8 years. If I wanted to buy a car, I could have bought it without having to worry about the repayments to the bank for 8 years.
(So the benefits can outweigh the problem of not being able to inspect the property inside.)
And that's how I work. If I want to buy something like a car, I must make sure I create an income stream from a property to pay for it. I don't want to burden myself with debt repayments.
In the case of the latest car I bought, before buying it I purchased 2 low-cost properties to make sure the monthly instalments for the car was paid for through income from the properties.
How Do You Get Financing for So Many Properties?
For flipping I buy in cash. I know I will be selling off the property within a year and I don't want interest to affect my profit. It will also be easier to sell the property in a few months (banks have lock-in periods for mortgages). A lot of cost is saved if you buy a property in cash.
But for rental, I get financing from the bank. I have to come up with 30% of the property value because as you are probably aware, the LTV for the 3rd house onwards is 70%. I prepare that 30% in advance.
The calculation is very simple for me. If the rental income is more than 8%, it's a go for me. 8% is more than dividends from ASB. But my rental yield is often much more than 8%. So financing is not an issue.
I don't go for high-end properties that are RM500,000 or RM700,000 and above. I go for properties that have a reserve price not more than RM200,000. I've never paid more than RM300,000 through an auction. Never.
When You Buy to Flip, What Is Your Preferred Turnaround Time?
For flipping, less than a year. I must make sure I can sell it in under a year. For some of the properties I have bought I was able to sell within 3 months. As soon as I buy the property, I start the renovation and get it on the market as soon as possible.
Have You Ever Had Trouble Getting an Owner or Tenant to Move Out?
So far I have had very few cases only but how I deal with it is like this; I share with them all the documents necessary and I also state that if they do not vacate the house within a certain timeframe, I will bring this matter up to the court. This usually frightens them and I've been lucky I've not had to push it further.
In the 20 years I've been doing this, there is only one case where I had to get a court order for the previous owner to vacate. I got the order in 6 months.
Do You Have a Team to Help You With Refurbishments?
I have a G3 license from CIDB. I do have my own Indonesian workers and a group of ID staff to look after my projects. That helps me a lot. If I do not use my own workers, definitely my cost will be much higher.
Building your own team will take some time. Getting workers, especially Indonesian workers, nowadays is not easy. You have to fulfil immigration requirements and comply with a lot of regulations to make sure your workers are legal (if they're foreigners). That would be the major issue that you need to deal with.
If you want to get into this business you must have a team of workers or contractors. If you appoint an external contractor, your cost could be more than 80% higher than if you were to do it on your own.
Remember, I told you earlier that I spent a modest amount to refurbish and completely furnish my property in Kampung Pandan? Just the renovation alone without the furniture and electrical appliances cost me about RM18,000. Had I appointed a contractor, it would have cost me about RM35,000.
I have actually checked this many times. Before I ask my own workers to start their job, I will ask a few external contractors to come and give me quotes. In one case, external contractors quoted me RM15,000 and RM18,000 for a job. With my in-house workers, it was done within RM7,000 only.
I started by finding one good Indonesian worker. This was 15 years ago and he's still with me. Through his contacts I slowly built a bigger team.
So I started with 1 person. Now I have 5 workers.
Can You Walk Me Through the Details of Attending an Actual Auction?
Ok, once you've gone through auction websites or notices and found a property that is suitable, the first thing you should do is check if you need to pay off the balance purchase price within 90 days or 120 days.
This will help you to prepare yourself if you're buying it with a bank loan. You must make sure disbursement takes place within this time frame or else whatever you've paid to the auctioneer will be forfeited.
If you know your commitment is high or after doing a pre-check with your bankers you know that you will have a hard time getting approval for loan, better not to proceed.
Or, you can buy in cash.
Next, if it is an apartment, you must check the outstanding on the property with the building management office. From the proclamation of sale itself it will be stated whether this outstanding amount will be paid by the bank or the purchaser.
If the outstanding is too high (and you have to bear the cost) it will affect the reserve price or your cost. If the total price is well below market value, I will still go ahead with buying the property. If it is above the market value then I might as well go for sub sale.
You must have at least 10% of the reserve price prepared in a bank draft and you have to submit the bank draft on the day of the auction to the auctioneer before you can be one of the bidders. So if the reserve price is RM200,000 then you have to prepare a bank draft for RM20,000.
You'll also have to prepare some cash that amounts to 10% of the difference between the reserve price and the final sale price.
If you're buying the property under your name, you have to bring your NRIC. Not just that, you have to do a search on the property with the Land Office to find out if there is a caveat on the property. If you're buying the property in KL for example, you should check with DBKL if there's any outstanding on the assessment tax and if the auctioneer (or bank they represent) will pay this outstanding amount.
If you're coming on the day of the auction to register, you should arrive at least 1 hour before the auction starts. You can register earlier.
Bidding for the property, depends on the location of the property. Some bidding can get intense. If the bidding exceeds a certain price that I have already determined, I will not proceed. Out of 100% this has happened 10% of the time to me.