 "home loans, property, loans, banks, credit")
When you buy a property with a home loan, the bank reserves the right to sell the property to recover their dues in case you do not repay the loan on time. In such a situation, after reminders and due process, the lender puts the property in question up for auction, following which it fixes a base price and then people participating in the auction are allowed to place bids that are higher than the base price. The person bidding the highest gets the property.
These properties are priced almost 15-20% cheaper than their original market price and most properties sold in auctions are usually ready-to-move-in properties.
There are several circumstances that may lead to the auction of the property such as loan default, tax default, bankruptcy, execution of court decree, Seizures and Confiscations, regulatory violation, government surplus (government properties which are no longer required for public use), etc. But is it a good idea to buy such a property? We decode
What is an auctioned property?
Banks usually auction the properties under the provisions of and the procedure prescribed under the SARFAESI Act and the rules made thereunder. Under these provisions, a property is auctioned when the borrower, who has mortgaged its properties to the bank, fails to pay back to the bank.
Why is it auctioned?
Usually, a bank auction process is initiated when a borrower defaults on three consecutive Home Loan EMIs. A notice is served to the customer to respond within 60 days as to why the bank should not initiate an auction of property due to default in payment. Borrower can pay the installments and this notice is withdrawn.
Otherwise, a borrower has the right to submit his objection within 60 days with justification for non-payment of EMI. In case, no reply is received from the borrower or the bank is not satisfied with the reply then the bank can initiate the bank auction process. After the expiry of these 60 days, the bank can auction the property after 30 days.
How to find such properties
Many banks publish lists of their auctioned properties on their websites or in newspapers. You can also contact the bank directly to inquire about any properties that are currently being auctioned. The IBAPI portal by the Indian Banks Association (IBA) to list bank auction properties can also be checked.
"Websites like ibapi.in, financialservices.gov.in, e-auctions.gov.in, MSTC (Metal Scrap Trade Corporation) e-auction platform, etc., list properties being auctioned by various government departments and organizations. Apart from government websites, public sector banks and financial institutions often auction off properties due to loan defaults. You can check the respective bank websites for auction notices," said Himanshu Sachdeva, Senior Associate, TAS Law.
Several real estate auction websites and online classified websites also advertise properties available for auction, however, bidders are strictly advised to conduct proper due diligence before bidding on properties listed on such websites.
Inspect the Physical Condition of the Property
To inspect the property’s physical condition, you should talk to the bank and get a date fixed to visit the property. When doing that, you must ascertain that there are no bank notices pasted on the doors of the property or the society noticeboard regarding the property you are considering. Check the condition of the house thoroughly before bidding for it.
How to bid?
You must first identify the property and the bank that is carrying out the auction. "Often all details are mentioned in the notification of the auction along with the process. Auction dates are mentioned by each bank on their respective websites and the same is also published in the newspapers," said Adhil Shetty of BankBazaar.
How to register
Registration at MSTC portal -> Authorization of documents from MSTC -> Attach interested properties -> Pay Pre-Bid EMD required against property -> Participate in auction (bidding) -> Bid reject/accept by bank -> decision email to H1 bidder. At present there is no registration fee.
"To bid a tender form along with earnest money deposit (DD/banker’s cheque) needs to be submitted before the tender closing date. It is important that while submitting the tender form, detailed KYC document also is submitted as non-submission of KYC document may lead to rejection of tender form," said Sadhav Mishra, Partner, SNG & Partners, Advocates & Solicitors.
Earnest Money Deposit
The bank generally charges 10% of the property's value as Earnest Money Deposit (EMD) before the auction. "This serves as a safeguard and eliminates amateur bids. Thereafter, if the person wins the bid then they are supposed to pay 15% of the amount the same day of winning and the remaining 75% payment is required to be made as per the terms of the auction authority, which may differ from case to case," said Sachdeva.
If you are unable to pay the said amount within the stipulated time you will lose the property along with the EMD amount paid to the bank earlier.
What is the pre-payment and taxation angle?
"Payment plan of auctioned properties can vary depending on auctioning authority, the type of property, and the specific terms and conditions of the auction which may include Earnest Money Deposit (EMD), complete upfront payment, partial upfront payment and remaining within the stipulated period, instalment plan, Escrow account, etc. It is important to carefully read and decide the payment plan associated with the auctioned property, failing which the payments made by the bidder may get forfeited and property may get re-auctioned in the market," said Sachdeva.
GST, stamp duty & registration, TDS (where the value of the property is above 50 Lakh), Property Tax, etc will be applicable while purchasing the auctioned property.
" Buyers at bank auction are required to pay a TDS of 1% of the total property value at the time of payment. The deduction is only available if the property is worth at least Rs 50 lakh," said Ravi Prakash, Head, of Legal, Hero Realty.
Pending dues
The buyer is also responsible for paying any unpaid fees associated with the Bank's Auction property. These contributions include municipal taxes, society charges, statutory dues, electricity bills, and more.
How to ensure there are no pending dues
If you are considering buying a bank auction property, it is important to do your due diligence and to be aware of the risks involved.
"The bidder should ask for all the relevant property documents which include sale deed, title documents, property tax receipts, electricity, water and other utility bills, etc. The bidder shall also conduct a proper title search from the concerned authority/registry, before bidding on immovable property, before bidding. Apart from conducting due diligence, it is also necessary to obtain NOC from the local authority (L&DO if property is situated in Delhi). Apart from conducting a title search, it is also important for a bidder to check that there is no other pending loan/mortgage or legal case pending against the property," said Sachdeva.
"The buyer can also hire a qualified attorney with experience in property matters to review the documents and make sure there are no hidden issues," said Prakash.
What documents should a bidder ask for?
- Ankur Mahindro, Managing Partner, Kred Jure - Advocates & Legal Consultants lists down the necessary checklist after winning the bid
1. Verifying the antecedent title deeds and checking the original documents with the bank like loan agreement and/or mortgage deed;
2 Whether the bank is in lawful possession of the property being auctioned
3 Whether there is any litigation concerning the property;
4 Whether there are any past dues of any society or government authority such as property taxes, etc;
5 If the owner of the property is a company, then check with ROC if any other financial institute has charge/ mortgage over the property;
6 Check in the office of the Sub-Registrar of Assurances to be sure if there are any adverse title claims;
7 If the property is in a society, the NOC of the society is for sale of the property. If the property is land, then revenue records should be seen to ascertain whether the name of the owner is mutated therein as owner.
Following are a few relevant documents a bidder may ask before bidding in any property:
i. Title Deed and Ownership Documents which includes sale or conveyance deed, previous title document to establish ownership history, etc
ii. Property Tax and Utility Bills
iii. Encumbrance Certificate
iv. Approved Building Plan and Layout Plan
v. NOC from Local Authorities
vi. Completion and Occupation Certificate
vii. Auction Catalog provided by the auctioning authority, which should include terms, conditions, and any obligations of the buyer.
viii. Auction Invitation or Notice
ix. Property Inspection Report
x. Photographs and Video
What if there are structural changes to property that haven't been approved?
If there are structural changes to a property that haven't been approved by the relevant local authority, it can lead to legal and regulatory issues. However, the bidder should assess the nature and extent of the unapproved structural changes."
"Determine if these changes are significant, affect the property's safety, or violate local regulations. If the structural change does not violate any local regulation, then the bidder should not be concerned about such change, however, the bidder still can use such unapproved structural change to further negotiate with the seller/auction authority. Further, in cases where such changes are violating any local regulation then there are chances that local authorities may provide process for regularizing unapproved changes by paying fines, obtaining retroactive permits, and ensuring that the changes meet current building codes," said Sachedeva.
"It is best to consult a lawyer or structural engineer to understand your rights and obligations in this situation. Often the properties which are approved by the banks for loans are the properties which are legally approved and likely have less chances of having approval related issues. It is recommended to get these clarifications from the bank itself," said Shetty.
The Security Interest (Enforcement) Rules, 2002 place a responsibility on the bank to deliver the property to the buyer free from encumbrances upon receiving payment.
How long will it take for the bank to give possession of the property to a person who has won the bid?
In cases of the auction of distressed assets, the courts in several judgments have observed that banks should ensure that after winning the auction bid, the bidder shall get the peaceful possession of property within 6 months from auction, subject to the payment terms agreed between the bidder and bank.
In case if the auction authority fails to deliver the possession of property within a stipulated time period (generally six months), the person have right to get a refund of the bid amount deposited with the Bank along with interest and damages.
"You may get the possession immediately after the completion of the sale and registration of the property in your name. However, it may vary depending on the property, location, final payment from the buyer and legal procedures involved," said Shetty.
Symboliic vs physical possesion
Buyers must know that there are two types of possessions. One is symbolic possession and the second is physical possession.
Physical possession means the bank already has direct physical possession of the property.
Symbolic possession means the bank is in the process of obtaining physical possession from the borrower.
What are the risks associated with purchase of auctioned properties ?
Title: Buyers must complete a title check and verify ownership of the property.
"There is an inherent risk of title while purchasing in the auction as the bank transfers the title on as is where is basis so in the event of any pending litigation on the property or any dues or any lacuna in the title, the same shall pass onto the purchaser," said Sadhav Mishra, Partner, SNG & Partners, Advocates & Solicitors.
Pre-Auction Deposits: When buying property at a bank auction, the buyer must deposit 10-15% of the total property value as a deposit before the auction and if they win the auction and don't pay the balance, they also lose their deposit.
Rights of the borrower: Courts have attached prime importance to the right of the Borrower to reclaim its title of the property/ an opportunity to the Borrower, before sale of auctioned property is executed.
"The bidder shall always keep in mind that borrowers do have certain rights in a property that is being auctioned, especially when the property is being auctioned due to loan default or mortgage foreclosure. For instance borrower have the right to participate in the auction, the borrower also have the ‘Right of redemption’ i.e. to cure the default by paying the outstanding dues, including the loan amount, interest, penalties, and any other associated costs, before the auction takes place, which may result in nullifying the whole auction process. Further, the borrower always has legal remedies especially in cases where the foreclosure process was conducted improperly and that may result in prolonging the auction process," said Sachedva.
