By Dheeraj Jaisinghani/Blue Address
Financial institutions, typically banks, auction properties which it has repossessed from its borrowers to recover the dues as they have defaulted on their loan for various reasons.
Bank Auctions of Real estate properties can be lucrative for investors and home buyers as some properties get listed at a highly discounted reserve price compared to the market rate.
The reserve price mentioned above is the minimum amount a seller (banks in this case) will accept as the final bid for the auction. It’s basically the listing price. Banks don’t entertain any price below that, at least during the official auction period. This will be explained further in our special tip.
IS IT WORTH IT?
One should personally look at bank auction properties only if:
(a) The net cost of acquisition of property is at least 15-20% lesser than the market price of the property
Or
(b) There’s little to no supply and great demand for that property.
Along with the above criteria, there are many important factors that play role in deciding whether to consider bank auctions, out of which we’ve mentioned 4 of them below:
- PURPOSE OF PURCHASE
I would not suggest first time home buyers to participate in bank auctions because most of the auctions are complex in nature.
Typically, most of the buyers of the auction properties are the real estate investors and individuals who are familiar with the issues involved in the auctions and the home buying process.
For those who’re not familiar with the auction process, we’ve shared a 6-step process further below for things to look out for while considering buying a bank auction property in India
- LOCATION
It’s advisable to invest/buy property in a location you’re familiar with. This makes the entire process from inspection of the property to final handover much smoother.
One should try to look only at a prime property in a prime location since real estate is illiquid in nature.
Investors should look at the historical info whether there has been a price appreciation in that asset. They should also check – how easily the asset can be put on lease and generate a decent annual rental yield if that’s the objective.
- NET COST OF ACQUISITION OF THE PROPERTY
Consider auction properties only if the net cost of acquisitions is equal to or less than the market price of the property.
While inspecting the property, for example a residential apartment, enquire about the pending dues owed to the society. These pending dues will have to be paid by the buyer. Such dues can also neutralize the benefit of the lower prices.
Bank will help you with the details of pending dues. That’s not always the case though.
Theoretically, you should also factor the cost of legal charges – where you’ll be doing the due diligence and appointing a lawyer for the same.
All in all, payment of all statutory and non-statutory dues, taxes, charges, fees is your sole responsibility. And don’t expect banks to have all the information of the dues and claims available. On a positive note, there’s a way to figure these out in the 6-step process.
Look at your renovation cost (repairs, painting, furnishing etc.) of the property as well.
- RISKS
(a) Title Document: Most common issue in properties is the original title documents. Many think that properties which the banks auction always have clear titles. One should always check if the bank has a clear possession over the property as explained in the 6-step process
(b) Funding Risk: Most of the banks don’t provide loans to prospective buyers on properties under auction. If one doesn’t get a loan from the bank auctioning the property, there’s a good chance other institutions will not lend for the same property. In this case, one needs to have enough cash.
In case, banks are willing to provide loan finance on the specific auction property, then be ready with a pre-approved loan because after the final bidder is selected, he/she has tight timelines to make the payment for the property.
Blue Address Tip: If your banker is willing to give a loan on the property under auction, then it’s assumed to be safe as they would have done their due diligence on the various aspects of the Property like the land title, O.C etc.
(c) Property Risk: Evaluate the structural condition of the property, quality of construction, age of the property, layout details, if the property has the documents in place including occupation certificate.
There’s a retail property in Bandra which has been in the auction market for sale since the past 1 year. Initial reserve price was northwards of 32 Crores. The reserve price was revised at least 8-9 times to close to 20 Crores. It still remains unsold.
Problem? No Occupation Certificate.
(d) Other Risks: You’ll notice that Banks use legal terms “as is where is” and “whatever there is” when they put out public notices for such properties. This means the bank is selling the property based on its current physical and legal conditions, including any encumbrances.
In the past, there have been cases where buyers discovered that the property was disputed, or the original borrower had got a court order against the bank auction. So, never consider any property which is under dispute.
6 STEP PROCESS FOR PARTICIPATING IN AUCTIONS
- Find a suitable property:
Whenever a new auction or a re-auction of a property comes up, financial institutions advertise them through public notes in newspapers and on their websites.
There’s a good chance you can miss out on some auctions since one cannot read all the newspapers or go through all ARC’s, Public and Private bank websites every day. Since it’s a time-consuming process, one can avail subscription services of many auction portals like bankeauctions, bid assist, tender detail etc. where one can get details of all new auctions of a particular state periodically.
I found services of tender detail economical: They charged me Rs 2000-2500 / Year (after negotiation) for details of all the property auctions in Maharashtra city. - Get all the details of the property:
You should have access to the basic information of the property before inspecting it physically. You’re entitled to know the
a) Bank Name, branch and contact details of the bank representative
b) Property address, size and its area
c) Reserve Price of the property
d) Earnest Money Deposit (Refundable amount to be paid before participating in the auction – typically 10 % of the reserve price)
e) Name and address of the borrower,
f) Outstanding loan dues of the borrower
g) Date of property Inspection, EMD submission and auction
h) City Survey Number (each individual parcel of land is assigned a CTS No.),
i) Nature of Possession (Physical/Symbolic)
Blue Address Tip: Only consider properties where banks have physical possession and not symbolic possession.
You can only inspect the property once banks have physical possession.
When banks don’t have physical possession, it’s usually because the owner has gone to court or the owner is still occupying the property.
In this case, the bank doesn’t evict the owners of the property and it becomes the responsibility of the new buyer to get the previous owner to vacate the property.
It can be very difficult to get property vacated from its previous owners. Sometimes it can even take years.
As per law, banks are required to take physical possession of the property and then transfer rights to the buyer but sometimes bank practically complete these transactions without formal physical possession.
- Inspect the property:
Once you’re satisfied with the preliminary information, you can physically inspect the property on the date set by the financial institution. On inspection you should check the age of the property and the quality of construction unless it’s a vacant piece of land. Evaluate the cost of renovation, if property is not in good shape. Try to get as much information as possible from the bank representative. He’s not a salesperson and it’s not going to make a difference to him if the property gets auctioned or not. So don’t expect the bank rep to do extra ground work if he doesn’t have the answers to all your questions. - Ground Research:
If it’s a gated society or a commercial building, speak to the manager of the society. Get information on periodic property taxes and maintenance dues of the property. The society manager and the occupiers of the nearby property will be a better judge of the property’s history and issues, if there are any. Initiate a conversation with residents about the property if it’s a residential flat.
If it’s a commercial office, talk to other office owners in the commercial building if you want details on whether it’s worth buying the property.
Their reviews and suggestions will definitely help you in making an informed decision.
If you can’t devote enough time to these independent enquiries, get a local real estate consultant involved and delegate these tasks to the consultant.
- Legal Due Diligence
The biggest issue with auctions is that you will not get access to property papers before purchase for title search. You should get a lawyer involved for the entire legal due diligence of the property. This increases the net cost of acquisition but helps you prevent costly mistakes.
This process will help us know that all the property help you understand the ownerships records of the property and also ensure that no other individual or lender has any claim on the property.
It’s necessary to do the legal due diligence beforehand because once you’ve been assigned as the final bidder of the property, bank’s legal responsibility ends there.
Blue Address Tip:
Property title can be checked from the registrar office to confirm that the financial institution has a clear possession of the property.
- Get your funding in place and Go for it!
After you’re satisfied with all the enquiries till this stage and want to go ahead with the bidding, you need to make sure you have your funds ready.
10% of the Reserve Price has to be deposited as EMD before the bidding begins
If you win, you’ve to pay 25% of the final bid amount within 24 hours of winning the bid and the balance 75% within 15-30 days of winning the bid.
If you fail to pay the specific amount and want to back out of the auction after winning the final bid, your EMD can also be forfeited.
As explained, do your research before itself regarding the loan eligibility for the property from the bank you’re dealing with.
Once you’ve won the bid, there’ll be certain regulatory and legal formalities where you’ll receive the sale certificate from the bank after making the balance 75% payment.
To complete the title transfer process, get the sale certificate registered in the Sub Registrar Office. The sale certificate will be signed by the authorized bank executive at the time of registration
Blue Address Tip:
Insist on including the defaulter as a third party (confirming party) in the sale certificate.
Blue Address Tip for Borrowers:
A borrower may typically default on EMI payments due to various reasons like loss of job, major health issues or any other financial crisis.
Many buyers hesitate in communicating the issue with their lenders. Instead, they disconnect themselves from the banks. This only makes things worse. Banks also don’t want NPA’s.
If borrowers stay connected with them and try to maintain a good relationship, the banks can come up with some solution to help the borrower’s financial crisis. It could be an extension of the loan tenure or any other solution depending on the case.
Note: Opinions expressed in this piece solely belong to the Dheeraj Jaisinghani of Blue Address Team.
