Table of ContentsWhen venturing into Japanese real estate investments, finding the most cost-effective property is often a priority. If you're seeking an option that piques your interest, auction properties might just be the answer. Nevertheless, it's essential to be aware of the associated risks. In this blog post, we will delve into the concept of auction properties, exploring their advantages and disadvantages for those contemplating a real estate purchase. We hope you find this guide useful! Call or email us here >>What are auction properties? How are they different from ordinary properties? When looking to purchase real estate at a lower price, many people think of auction properties.An auction property is a property that has been seized by the court because the owner defaulted on a debt and is put up for sale through a bidding process. Default, for example, includes non-payment of a mortgage or outstanding debt.When a property owner defaults, the financial institution or creditor that contracted the mortgage loan files a petition with the court for an auction, and the seized property is put up for auction. How are auction properties different from ordinary properties？The difference between an auction property and an ordinary property lies in the method of sale and purchase.In the case of an ordinary property, the buyer and seller conclude a sales contract and the transaction is completed. However, an auction property does not have a Seller/owner. The court issues a public notice of the auction and bids are placed within a certain period of time.Bidding is conducted by the auction method, and the highest bidder among all prospective buyers wins the property. The successful bidder pays the court the amount of the winning bid and successfully purchases the auctioned property.Can you take out a mortgage for an auction property?Some financial institutions do offer mortgage loans for auction properties. However, when dealing with auction properties, there's a key difference from regular property sales. You must pay a deposit of at least 20% of the standard sales price upfront at the time of bidding. If you win the auction but later find out you don't qualify for the mortgage loan, you risk losing the deposit and may not be able to acquire the property. To avoid such a situation, it's crucial to consult with your financial institution beforehand, seeking clarity on your eligibility and discussing the process before participating in the bidding.It's important to note that auction properties eligible for mortgages typically include single-family homes or condominiums. However, if the property is purely land without any existing structures, the collateral value might be considered low, making it challenging to obtain a mortgage loan for such cases. When considering an auction property purchase with a mortgage, thorough communication with your financial institution and understanding the specific property's details will help you make well-informed decisions and reduce potential risks. How does one find an auction property? In Japan, auction properties are conveniently accessible through the Japanese real estate auction property information platform known as BIT. This platform allows you to browse auction properties from various courts across the nation. Additionally, if you prefer a firsthand view, you have the option to visit the court that has jurisdiction over the specific auctioned property. By doing so, you can obtain more comprehensive and detailed information beyond what is available on the Internet. BIT serves as a valuable resource to explore a wide range of auction properties, making it easier for potential buyers to find suitable opportunities and gain deeper insights into each property of interest. What are the advantages of buying an auction property?Now that you know the technical definition of an auction property, let’s take a look at the merits of buying one. Merit ① They are cheapAuction properties offer a significant advantage: they are generally available at lower prices compared to regular properties. While the exact price difference varies depending on the property, as a general guideline, auction properties can be approximately 30% cheaper than regular ones. You might wonder why these properties come at a reduced price. The reason is that after purchasing an auction property, the buyer assumes various costs and risks, which are factored into the lower standard sales price.We will delve into the details of these costs and risks later on. Merit ② It’s (comparatively) easyWhen it comes to purchasing real estate, the traditional route involves negotiating with the seller and navigating the real estate registry to change ownership details. This process can be time-consuming and complex. However, opting for an auction property simplifies matters significantly as the transaction is overseen by the court. The court takes care of the necessary registration steps, including transferring ownership and canceling any existing mortgages, streamlining the title transfer to the buyer. In a regular transaction, these registration changes must be completed on the day of property handover, causing potential inconvenience, especially if the buyer handles the registration themselves. To avoid such complications, many people opt to pay a fee to a judicial scrivener to handle the real estate registration. Conversely, with an auction property, the court handles the registration process, eliminating the need for a judicial scrivener. Participating in an auction as a buyer is relatively straightforward. You only need to submit a bidding form, provide the required documents, and pay the deposit. With the court overseeing the entire process, the purchase of an auction property offers a more streamlined and hassle-free experience for potential buyers.Merit ③ You can get unusual or unique propertiesSome of the properties offered at auction are properties that do not appear on the regular real estate market.For example, you may find unusual land that you do not usually see, such as a specially shaped lot or a very narrow lot, or an apartment building that would normally be very expensive.This variety of properties is also a great advantage for those who are looking for bargain properties. What are the disadvantages of buying an auction property?We discussed the good points of auction properties, now let’s take a look at the demerits.Demerit ① You can’t look insideUnlike general properties, it is not possible to inspect an auction property before purchasing it.Therefore, the information you can obtain in advance is limited, and it may not be what you expected after purchasing the property.The following three documents are the only ones that can be used to confirm information on an auction property in advance.・Property description・Survey report of the current condition of the property・Evaluation reportThe property description is a document that describes the rights such as lease rights. It allows you to confirm whether or not there is anyone who rents the land or building that was put up for auction.The current survey report is a document that describes the property, its structure and type, etc. and also includes photos. It mainly provides information on the interior and exterior of the property that can be obtained from a private viewing.The Evaluation report is a document that contains information on the surrounding area and the assessed value of the auctioned property.This document is prepared by a real estate appraiser and can also be used to confirm drawings of the property.The decision to purchase an auctioned property is made based on these three documents, and it may be more difficult to make a purchase decision than for an ordinary property. Demerit ② There is no obligation to deliverIn a conventional real estate transaction, the seller has a legal obligation to deliver the property to the buyer. However, with auction properties, this obligation doesn't apply as there is no seller involved in the process. As a result, after successfully winning a bid at an auction, if the property is still occupied by the previous owner or someone else, the responsibility falls entirely on the buyer to take legal action.Furthermore, potential issues arise if the property contains items left behind by the previous owner or occupant, and disposing of them without permission becomes problematic. These challenges related to the property handover represent a significant disadvantage, as they can lead to unforeseen costs and complications for the buyer. Being prepared for such situations and understanding the potential risks associated with auction properties is crucial when considering this type of purchase. Demerit ③ There is no Liability for contractual non-conformityLiability for nonconformity to contract refers to the seller's liability for defects found in the property after delivery that do not conform to the terms of the contract.Since there is no seller of an auctioned property, even if defects are discovered after the property is purchased, the seller cannot claim compensation for damages due to non-conformity to the contract.Therefore, when purchasing an auction property, you should take into consideration the risk of incurring additional repair costs.In Conclusion In this issue, we have thoroughly explored the concept of auction properties and their pros and cons for potential real estate buyers. An auction property is a property seized by a court due to the owner's debt default and subsequently put up for sale through a bidding process. One of the primary advantages of auction properties lies in the opportunity to acquire a property at a lower price through a straightforward procedure.On the other hand, the disadvantage of auction properties is the inability to physically inspect the property before the purchase, which can lead to potential unforeseen issues or defects upon delivery. As the buyer, you would bear the costs associated with any problems discovered after the transaction.If you are considering purchasing an auctioned property, it's crucial to carefully weigh the disadvantages and risks before making a decision. Being well-informed and prepared will enable you to make a sound choice that aligns with your financial situation and risk tolerance. Remember that due diligence and thorough consideration are essential when engaging in any real estate auction to ensure a successful and satisfying purchase.