Cash-strapped South African's who auction off their homes in an attempt to settle their debts could still find themselves with financial problems if the house goes under the hammer for less than the market value, warns independent debt-counsellor DebtBusters.co.za.

The warning comes as figures show that more houses are being sold at auctions by owners attempting to ward-off repossession by their banks, with some auction houses even promoting the scheme as a 'recovery' solution for over-indebted people.

Auctioned properties sell for less

DebtBusters.co.za says that homeowners should talk to their bank and seek independent advice from a debt counsellor before they consider selling. Even then they should rather sell their homes on the open market because auctioned properties usually sell for a lot less than their market worth.

Luke Hirst, MD www.debtbusters.co.za, says, "Over indebted people really need to evaluate the merits of the debt counselling process before they consider auctioning off their homes in the current climate."

Paul Beadle, MD of www.justmoney.co.za agrees. "If owners are worried about losing their homes they should not be panicked in to taking the drastic step of auctioning off their property. Buyers at auctions are looking for cheap deals, so a property is likely to sell at auction for less than the market value, which could mean that sellers might not even be able to recoup enough money to pay off all their debts."

Estate agents generally agree and many feel that property auctions are ineffective and costly.

Only one in five finds a buyer

"Our experience shows that auctions to sell residential property are not drawing large numbers of interested buyers," says Tjaart van der Walt, CEO of the RealNet property group. "On average only one out of five properties currently offered on auction actually finds a buyer."

Maryna van der Merwe of RealNet's Polokwane office concurs. As regional chairman of the Institute of Estate Agents of SA, she has received reports from disappointed homeowners in Limpopo Province who went to considerable expense to put their homes on auction, just to find very low attendance and no offers that even matched the reserve price.

"Many of these prospective sellers chose the auction route precisely because they were under financial pressure and needed to sell quickly. After paying high advertising costs up front — which they could hardly afford — they ended up under even more financial pressure," she says.

Van der Merwe says owners under pressure to sell should weigh their options carefully. "In view of the poor attendance figures at auctions and low bids because of the abundance of property offered for sale in the current market, sellers may be better off if they negotiate marketing deals with reputable estate agencies."

"The chances are," says Lanice Steward, MD of Anne Porter Knight Frank, "that you will not achieve your sale price and will either have to accept a very low figure or live with the stigma of having failed to find a buyer at a public sale. You will also in many cases have had to pay the full costs of all related advertising."

Auction costs vary from flat fees of around R45 000 to commission fees of 10 percent, which is higher than the commission generally paid to registered estate agents. Some auctioneers charge additional advertising fees of R15 000.

Hirst, himself a registered debt counsellor, says that people should be doing everything in their power to keep hold of their fixed assets. Instead of selling he argues that they should be taking stock of all their expenses and seeing whether they could be saving money elsewhere. Failing that, South Africans should apply for debt review.

Going under debt review may help you keep your home

"By going under debt review, consumers are able to restructure their finances in a way that may allow them to keep their family home. A registered National Credit Act (NCA) debt counsellor will be able to restructure their debt repayments so that they have enough money to live on each month after they pay the monies that they owe."

Debt Review was introduced by the National Credit Regulator in June 2007 and aims to offer a lifeline to over indebted consumers. Once under debt review, consumers work hand in hand with their counsellor to restructure a repayment plan. The counsellor will negotiate with creditors on behalf of the consumer and get monthly payments down to a reasonable amount.

Both Beadle and Hirst advise against consumers selling their houses in the current climate unless they absolutely have to. Beadle says: "People with debt problems should always seek independent financial advice before they take such drastic action. They should talk to their mortgage lender as soon as they have problems meeting their home loan repayments, but they should also consult a registered debt-counsellor who can advise on their entire financial situation. People with major debts may well have to sell their homes, but having the advice of a debt counsellor could give them the time to sell it on the open market for its full worth."

Hirst advises that consumers try the following before rushing to auction:

  • "If you have short term debt as well as a home loan, see if you can consolidate this short term debt into your home loan. This will mean one monthly repayment at the cheapest possible interest rate. It is not always advisable to move short term debt over the long term, but these clients have no choice. If they start earning more money they can always overpay into their bond.

  • "Seek help on debt management. Consultants can help you manage your debt and reduce your budget. They will advise you on things like paying off the most expensive debt first.

  • "If it has gone too far then you need to go under debt review. Only a debt counsellor can do this. It is a fantastic method to get protection from your creditors, rearrange your debt and have the debt counsellor make a repayments proposal to the creditors to get you out of debt."