Carefully check title and outstanding dues.
An auction conjures up two images — an exclusive, one-of-its-kind product going under the hammer or a family on the verge of bankruptcy being stripped of its assets. The latter can be heart-rending drama material. But for a vigilant buyer, it may be an excellent opportunity.
Banks auction properties when borrowers fail to repay their loans. This auction takes place under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act.
If a borrower defaults on repayment of his/her home loan for six months, banks give him/her a 60-day period to regularise the repayment. On his/her failure, banks declare the loan a non-performing asset and auction it to recover the debt.
Foreclosureindia.com, a portal that lists properties up for auction, has 32,066 listings. Out of this, 11,381 are on-auction properties and 20,685 attached properties or ones for which auction dates are yet to be declared. The three metros, Bangalore (6,078), Mumbai (4,352) and Delhi (1,813), have the highest number of listings.
Buyers can purchase such properties at 20-30 per cent discount, though the banks determine the reserve price, or the minimum bidding price, based on the market valuation. “Banks enlist services of professional valuers and the final reserve price is an average of the two valuations. However, valuations tend to be on the conservative side, which may be perceived as a discounted price,” says V N Hegde, AGM, credit recovery, Corporation Bank.
The bidding process
According to the Act, banks must advertise such sales in at least one English language and one local regional language newspaper 30 days prior to the auction date. Mostly, general interest and local language newspapers are used to advertise these auctions.
Those interested can submit their bids in a sealed envelope to the bank before the auction date. Along with the bid, they must also deposit a certain percentage of the reserve price as earnest money to participate in the auction. The amount may differ depending on the bank and is refundable if one withdraws from the process or do not win the bid.
On the auction date, the bank’s officials open the sealed envelopes in front of all the bidders, and the highest bid is announced. You may then get another chance to revise your bid. If you win, you have to pay an initial amount of up to 25 per cent of the price to confirm the purchase. The bank may give you an extension of 10-15 days to arrange for the remaining payment.
Verification
When banks advertise a property on auction, they state clearly that it is being sold on an ‘as is-where is’ basis. That is, the bank is not responsible for any other claim against the property.
As Rajesh Narain Gupta, managing partner, S N Gupta & Co, a law firm, explains, “There may be other litigation attached to the property. For example, if the owner has not paid income tax (I-T) and the I-T department has issued a notice to attach all his assets, including the house. Although the bank may have a greater say, the prospective buyer can get stuck in such litigation. Necessary due diligence must be done to avoid such situations.”
You must also check if there is any pending litigation between the bank and the borrower. “Also, if there exists any restraint order on the bank for selling the property,” adds Gupta.
Besides litigation, some other areas that prospective buyers must check on are:
- Is the bank auctioning the property the sole creditor? Or there is a consortium of creditors, in which case are all the creditors involved in the sale?
- Are there any outstanding costs like society dues or workmen dues on the property
- Is the title of the property clear?
“Banks will give you an opportunity to inspect the property prior to the bidding. Depending on its physical condition, buyers can determine the cost of repair and restoration. Also, they can decide their bid after factoring in these costs,” says Naveen Kumar, co-founder, foreclosureindia.com.
Buying a house up for auction does not always guarantee a good deal. In a rising real estate prices’ market, properties may even fetch a premium. Hidden charges, if any, could also make the property more expensive than the acquisition cost.
