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The dos and don’ts of buying property in an e-auction by banks 

State Bank of India has put around 1,000 assets on sale at an e-auction  of commercial, residential and industrial properties whose owners failed to pay back loans taken to purchase the assets. Should you buy properties at an e-auction?. Moneycontrol explains the pros and cons a potential buyer needs to negotiate  

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The properties offered by SBI in the auction, which started on Monday, October 25, are spread across Aurangabad, Delhi, Indore, Bengaluru, Ranchi, Ludhiana, Allahabad, andSouth Bengal. Ranchi, Ludhiana, Ernakulam, Siliguri, Patna, Bulundshahr, Jaipur, Kolkata, Nagpur, Cuttack, Guwahati, Mumbai, Ahmedabad, Bhavnagar and  Chennai, among others.

Here’s a checklist on what homebuyers should keep in mind before bidding for such properties:

Banks auction such properties in a final attempt to recover whatever value is left in these assets. Most of the properties that are being auctioned are owned by borrowers against whom the bank has initiated recovery proceedings. 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 on the loan. Given the troubled past of such properties, they are usually available at a discount to market price.

There is a possibility that some of these properties are in litigation.  Potential buyers would be well advised to do sufficient due diligence and verify the details of the property before bidding for it.

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But buyers 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 percent to 10 percent 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.

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.

Check for liabilities associated with the property being auctioned

In case of residential properties that are auctioned, buyers should check if there are any 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 percent," said a valuer.

Since those bidding for the property in an e-auction are allowed to inspect the premises, they should check from the society if any dues are pending against the asset 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.

While most of these properties are available at a lower rate than the market price, one should not be carried away by this. A buyer should be aware of the risks involved in purchasing a property in an auction. The first and most important task is to check if the property has dues on it such as maintenance charges or house taxes; if a person buys that property, he would be liable to pay those charges.

It is often assumed that properties that banks auction come with a clear title; many times, an auction notice carries a clause -- no encumbrances exist on the property and the bank won’t be responsible for any unknown encumbrances or third-party claims, rights or dues.

“It may be concluded that while buying properties through auction processes provides some degree of comfort, it does not provide any automatic clean-up of all past title or possession issues and claims relating to the property. The bidders must also be cognizant of the processes being followed by the bank in auction processes, as there are precedents where the owners have challenged auction sales on various grounds and deficiencies in the rights of the banks or process followed for auction, such as valuations,” said Sachit Mathur, partner at Saraf and Partners Law Offices.

Banks will usually auction properties on “as is where is” basis and also specifically mention that the bidder must conduct independent review and verifications. Despite such caveats, there may be reasonable comfort relating to title of properties available in such auctions because banks may have conducted their own due diligence prior to creating charge on the properties. Banks are also under a legal obligation under Rule 8 (6) of Security Interest (Enforcement) Rules, 2002 to disclose any known material defects relating to the properties and also defects in owner’s title that a bidder cannot with ordinary care discover.

“Some judicial precedents have also provided protection to successful bidders where the banks did not disclose a material liability relating to the property, such as a large sum of outstanding electricity dues, irrespective of it being an ‘as is, where is’ auction,” he said.

Burden on buyer

Buyers should also ask for the Title Search Report or due diligence report before bidding for a property, said Mittal Shroff, principal associate at law firm MV Kini

A bank merely auctions the property and is not the seller. The transaction is conducted on a “no claim or no action clause” basis, whose intent is to shift the burden onto the buyer.

“In case of a dispute, it is often seen that aggrieved buyers approach the courts complaining about the arbitrary actions of the bank /asking for payment of money. In both the scenarios, the bank tries to take the defence in the various clause of the auction notice which point towards the buyer’s duty of ensuring complete diligence. It is rarely seen that either party resorts to pre-litigation mediation to settle their claims, which is the most cost-effective manner for both parties and has a certain persuasive value,” explained Nitish Sharma, counsel at AnantLaw.

Agrees Amit Goenka, CEO and managing director, Nisus  Finance Services Company Pvt Ltd: “While bidding for such properties, buyers should take into account the condition of the property and the liabilities attached to it. It should be noted that after two waves of COVID-19 home loan defaults have increased from 0.5 percent to 3 percent for some housing finance companies. This has largely been on account of the general economic situation and loss of jobs,” he said.

Who should buy such properties?

While anyone with the financial wherewithal can buy such properties, it is advisable that one should not buy into it only because of a price advantage it offers, but because one resides in the neighborhood and there is a certain comfort level associated with the micro market where the property is located, says Somy Thomas, head of valuations and advisory and co-head of the capital markets business at consulting firm Cushman & Wakefield.

Buyers should preferably bid for a ready-to-move-in property as due diligence requirements for an under=construction property are very high.

Also, if a buyer plans to take a loan for purchasing the property, he should try and get 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 to the bank before the disbursal of the actual loan.

Do banks make a profit by selling property in an e-auction?

Not necessarily. They cannot retain anything more than the principal and interest amount. 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 to 25 percent profit earlier but now we are not even able to recover auction and valuation costs,” said an official who didn't want to be named.

 
Vandana Ramnani
first published: Oct 26, 2021 07:55 am

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