'Gyeong-almot' Blind Investment... Losing Tens of Millions in Bid Deposits

[Asia Economy Reporter Moon Jiwon] Despite the government's real estate regulations, the auction market remains active, but cases of "blind investment" resulting in the loss of bid deposits are increasing. In particular, many investors fail to conduct even the minimum rights analysis, such as properly identifying the senior priority jeonse deposits that the successful bidder must assume, requiring investors to exercise caution.

According to Gigi Auction, an auction information provider, as of the day before, among the top 50 most viewed auction listings in Seoul on their site, 9 were items that were re-auctioned because the successful bidders failed to pay the remaining balance.

For example, a 114㎡ unit (exclusive area) in Cheonho e-Pyeonhansesang, Cheonho-dong, Dong-gu, is currently being re-auctioned at the Seoul Eastern District Court with a minimum sale price of 251.33 million KRW. Since April last year, it has been repeatedly passed over, with the price dropping to about 33% of the 2018 appraised value of 767 million KRW.

This property was once successfully auctioned in November last year. The winning bid was 261 million KRW (winning bid rate 34%). However, the successful bidder forfeited the bid deposit (10% of the minimum bid price), 25 million KRW, by failing to pay the remaining balance and abandoning the purchase. This was because they only learned after winning the auction that there was a senior priority jeonse deposit of 570 million KRW that they had to assume.

According to the Civil Execution Act, if the senior priority jeonse holder does not file a distribution claim with the court during the auction, the buyer must assume the jeonse deposit. If the jeonse holder files a distribution claim, the buyer receives the jeonse deposit from the auction price paid, but if not, the responsibility to return the jeonse deposit falls on the buyer.

In the above case, even if the successful bidder acquires the property for 261 million KRW, considering the jeonse deposit they must pay, the total amount reaches 830 million KRW, far exceeding the appraised value. This is why the property is being re-auctioned despite a previous successful bid. When a re-auction proceeds, the buyer cannot recover the bid deposit and is also barred from participating in the bidding. Gigi Auction explained, "It is judged that the payment default was due to an error in rights analysis regarding the assumption of the senior priority jeonse deposit."

Such mistakes are commonly found in housing auctions where it is difficult to know the amount of the jeonse deposit held by the jeonse holder. Omyeongwon, a researcher at Gigi Auction, said, "While it is possible to check the existence of senior priority jeonse holders through the registry, confirming the deposit amount is difficult. For apartments, it is relatively easier due to many similar properties, but for multi-family houses or general houses with diverse types, rights analysis is challenging."

The recent spread of "empty can jeonse" (Kkangtong Jeonse) also poses an obstacle to accurately grasping market prices. There are increasing cases where a seemingly shabby house is expected to have a low jeonse deposit, but in reality, the deposit is close to the sale price, causing losses.

A 60㎡ multi-family house in Suyu-dong, Gangbuk-gu, Seoul, has been auctioned three times since December 2018 but all sales were canceled due to payment defaults, and the auction is still ongoing. This property is also known to have been won without prior knowledge of a senior priority tenant with opposable rights, leading to abandonment. It is estimated that the bid deposits lost through the three sales exceed 50 million KRW.

It is also reported that more successful bidders are abandoning purchases due to failure to secure sufficient funds after winning. The auction industry explains that this often happens among beginners with little experience in auctions or loans. Especially with recent frequent real estate measures lowering mortgage loan limits, this risk is increasing.

An industry insider said, "As more participants enter the auction market due to real estate regulations, failure cases are also increasing. It is necessary to participate in bidding with more thorough auction knowledge."

Meanwhile, the auction market remains active despite the government's continuous real estate regulations. The number of auctions nationwide this month was 11,538, a 4.2% increase compared to the same month last year. During the same period, the average number of bidders increased from 3.5 to 4.2. In particular, the winning bid rate for apartments in the Gangnam 3 districts (Gangnam, Seocho, Songpa) has exceeded 100% for six consecutive months, breaking the longest record. The winning bid rate refers to the ratio of the winning bid price to the appraised value.

This content was produced with the assistance of AI translation services.