Properties auctioned by banks: Good discounts possible, but other factors can add to costs

Raj Khosla

The real estate sector is in a flux and transactions are down. Yet, builders have not reduced prices. They are offering freebies and discounts, but property prices are still very high.

Even so, you can buy property at a steep discount of 25-30 per cent if you are willing to do some research and legwork. Properties seized by lenders under the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest) Act, 2002 are routinely auctioned. These “repossessed” or “stressed” properties are typically sold at rates that are 20-30 per cent lower than the prevailing market prices.

Banks seize properties when they are convinced that the borrower will not be able to repay a loan. After the borrower misses multiple payments, the lender auctions the property to recover the outstanding principal and interest amount. Given the troubled past of such properties, they are usually available at a discount to the market price.

But participating in a bank auction is not an easy affair, especially if you are not conversant with the rules and procedures. There is a crowd of deep-pocketed investors and seasoned brokers wanting to bag the property at a low price. Here are some tips to help you participate in the bidding process and bag a property in an auction.

Know what you are buying

Banks give out details of the properties they are auctioning. Checking the websites of individual banks is a tedious process, but a portal launched by the Indian Banks Association (IBA) provides a common platform. The Indian Banks Auction Properties Information provides details of residential, commercial, industrial and agricultural properties to be auctioned online across the country. Prospective buyers can log on to ibapi.in, register themselves, view details of properties and even participate in the auction process.

Calculate the real costs

Auctioned properties are usually embroiled in legal disputes. There may be possession disputes with ongoing legal battles on ownership, long overdue bills, and could require substantial repairs. You will discover the actual price of the property could be more than the final bid. After it is bought in an auction, the buyer will have to bear these expenses and settle the outstanding dues. Therefore, add all such costs to the price when you submit your bid.

Hire a professional to  assess value

Thorough due diligence is very important when buying a stressed property. Get the property appraised by a professional property evaluator to figure out the market value of the property before the auction. The auctioning bank typically sets the base value of the auction considering factors such as the guidance value (as provided by government regulations), the deemed market value of the property, and existing liabilities of the property. To be on the safer side, set a margin of 10 per cent over the value calculated by the appraiser as an appropriate bid amount.

Get funding in place

In an auction, bidders have to deposit 10 per cent of the reserve price as earnest money before the process begins. This money is refunded to the bidder if he loses the bid. But if you win the bid, 25 per cent of the bid amount has to be paid on the auction day itself. The balance amount too has to be paid within a very short time (usually around 15 days) after the bid is selected. So, a bidder must arrange for the funds beforehand either by taking a loan or by liquidating his/her savings. This is critical, because if you are unable to make the payment within the stipulated deadline, the deposit amount will be forfeited.

If you are planning to take a loan for purchasing the property, get an in-principle home loan approval from the lender. Banks give such loan approvals solely on the basis of the credit history and repayment capacity of the bidder. The loan is sanctioned by the bank on the condition that the bidder will cover the applicable property registration charges, stamp duty and other legal costs and submit the valid property registration document with the bank, before the disbursal of the actual loan. These charges are substantial, so be ready with some surplus cash.

Things to check before submitting a bid

Registration details of the property: Check the key property documents of the property, including the original sale deed and non-encumbrance certificate under CERSAI (Central Registry of Securitisation Asset Reconstruction and Security Interest). Unregistered properties don’t have proper documentation, which can lead to disputes with claimants later.

Bid document and title deed: Take help of a property lawyer to understand your liabilities after the purchase. While the bank conducts the auction of a repossessed property, it is not the owner of the property. Get your lawyer to check the title ownership and get it legally validated.

Recovery certificate from debt tribunal and indemnity certificate: The owner must have a recovery certificate from DRT (Debt Recovery Tribunal) prior to submitting your bid. The auctioning bank must also give an indemnity certificate to protect you from future claims from the owner or his/her legal heirs. Ideally, the owner should be the confirming party to the property transaction.

NOC from housing society: You must have a NOC (No Objection Certificate) from the housing society (if applicable) and maintain detailed records of statutory dues, unpaid utility bills, and pending litigation.

Deduct TDS: In the end, do not forget to deduct TDS equal to 1 per cent of property value, if the amount exceeds Rs 50 lakh. The TDS should be credited to the PAN of the property owner.

(Writer is Managing Director, MyMoneyMantra.com)