Planning to buy a house through a bank auction? Here's what you need to know
Properties bought in e-auctions are sold at an ‘as is where is’ basis and are mostly offered at a discount of 10-15% to market price, because of the problems associated with non-performing assets (NPA).
Radhika Shankar has been hunting for some good property deal in the market. Despite choices in the market with even some freebies thrown in, she decided to sign up for an e-auction with a bank that was inviting bids for properties seized due to installment payment default by borrower on home loan. She won the bid and also managed to get a 10-15% discount on the property.
Properties bought in e-auctions are sold at an ‘as is where is’ basis and are mostly offered at a discount of 10-15% to market price, because of the problems associated with non-performing assets (NPA). While most of them have a clear legal title, homebuyers are advised to do their own due-diligence as very often some properties may have liabilities attached that may have gone unnoticed.
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Interestingly, in the current market conditions, even e-auctions have been impacted by demonetisation in November. At a recent pan e-auction held by a nationalised bank, the majority of properties auctioned were from NCR and most of them were seized from defaulters who had stopped paying installments because there was no escalation in real estate prices, says sources.
For e-auctions too, the scenario has changed. Earlier, if there were 100 properties, the bank could sell at least 85 in an e-auction but considering the current market conditions, it can barely sell half of that.
“Since the market is not doing too well, selling these distressed assets is also a challenge. We have often to keep prices at least 25% less than the market price, but somehow we’ve managed not to take a hit at the principal amount,” say sources.
At a recent auction, a nationalised bank had auctioned 20 properties worth Rs 10 crore but was able to sell only a few properties for Rs 4-5 crore. “We are currently not aggressive on e-auctions as we are planning to hold these properties in order to get a better market value as real estate market is improving. The economy is coming out of the demonetisation phase,” say sources.
But do banks make a profit from e-auctions? “In the current market conditions we try and recover the principal amount. We were able to make 15-25% profit earlier but now we are not even able to recover auction and valuation costs. Earlier, there were at least four to five bidders for one property and the price was higher but now there are hardly one or two bidders,” says an official not wanting to be named.
What type of properties make it to the e-auction?
Most of these properties are those that have been pledged as collateral for housing and other business loans and taken over by the bank under the Security and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act due to default. The defaulters were given a notice period of 60 days under the Sarfaesi Act, after which the properties were seized and auctioned.
“If a borrower fails to honour the home loan, we start the legal process and repossess the property and later sell it at an e-auction. We have empanelled valuers who keep the construction, location and the area in mind before valuing the property. The plausible value given by them helps us to set the reserve price which is disclosed to the bidder beforehand. Those interested in the bid have to deposit an initial amount of 10-15% of the value of the property,” explains a bank official.
What should bidders keep in mind?
Bidders in the auction should not have the misconception that these properties always have legal issues attached to them. “Banks are in a position to auction properties only if they have a clear legal title. Also, prices of such properties are at least 5-10% less than the market value, so it’s worth signing up for the auction. Also, it is a direct deal between the buyer and the bank as there are no agents or brokers involved,” says a bank official.
As per the Act, those signing up for the e-auction have to pay 10% of the reserve price set for the distressed property which is returned in case the bidder is not successful. If the bidder is successful, the amount is adjusted in the final price.
But there are some valuers who are of the opinion that in a healthy market, discounts are a function of problems associated with such assets.
Banks get the premises vacated before they are auctioned and have to get possession of the house through a collector or a district magistrate to avoid any law and order issues.“There could be some liabilities associated with the property that is being auctioned. These could include society dues and other liabilities unknown to the lenders. There is always a deficit in information and the discount on offer is due to that. On an average such properties sell at a discount of 15%,” says a valuer.
Since those bidding for the property in an e-auction are allowed to inspect the property, they should check from the society if there are any dues pending against the property in question. There could be cases of subletting that may not be known to the bank. If that is the case, the buyer who purchases such a property will not be in a position to sell without the tenant’s approval. Sub-tenancy can create its own share of problems. No buyer will know that until he actually goes and resides in that property, he adds.