Despite the perennial rent versus buy conundrum, owning a roof over one’s head is by far the principal dream of all individuals. Given the upward trajectory of housing prices in India, a bank auction of distressed properties provides a unique window to purchase a property at a discount of up to 30% from the prevailing market rates.
Auction of properties by scheduled commercial banks and housing financiers is a sure-fire mechanism that provides a path to acquire property at bargain prices. Auction of repossessed, or distressed properties is a legal practice by lenders to recover outstanding dues on account of unpaid EMIs.
All such auctions (advertised in national dailies and posted on bank websites) and resales are governed under the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act of 2002.
Purchasing a property from an auction requires patience and enhanced due diligence. Here are some items that require attention when attempting to buy a distressed property at a bank-supervised auction.
Prepare a budget
You have to fix a maximum threshold that fits your pocket, as property prices can jump beyond your estimates during the auctioning process, especially if there is interest from multiple parties. Since the auctioneer will demand the entire bid amount within 2 to 3 weeks of locking the deal, you are perforce required to set aside adequate funds for the auction purchase. Generally, loan funds will be hard to come by at the time of purchase; however, a loan against the property (LAP) can be availed once the transfer of property in your name is duly concluded.
Failure to pay the entire purchase price may lead to a substantial forfeiture i.e. 25% of the value, being 10% Earnest Money Deposit (EMD), along with a further 15% required to be paid on bidding day.
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Conduct first-hand research
Getting a bargain deal in your first-ever auction is almost impossible. Your patience will be tested for sure. Distressed property auctions are not for you if you’re in a hurry, or if there is an immediate requirement for a habitat.
For a listed distressed property, it is absolutely essential to cross-verify the owner details, investigate the locality and surroundings, accessibility to essential services, etc. A know-how of recent real estate transactions in the neighbourhood and prevailing circle rates can provide you a start-point for a realistic value of the property.
Property visit and appraisal
Visiting the designated property, and talking to the local dwellers is another important exercise as it will help ascertain the quality of life, availability of services, proportion of residential units in that particular neighbourhood. Also, if there is a school, place of worship, or hospital in close proximity to the unit under consideration.
For a listed distressed property, it is absolutely essential to cross-verify the owner details, investigate the locality and surroundings, accessibility to essential services
You may consider hiring a property evaluator who can adjudge optimal pricing for the property, which can further help develop a rough estimation if you have to apply for a loan at any subsequent point in time. Onboarding a real estate expert will protect you from your own hubris during the auction process since the bidding often surpasses the ideal price once emotions take charge of end-bidding.
Regulatory check
Hire a property lawyer and investigate any pending dues with the local municipality. With a distressed property, it becomes quite evident to check for any pending taxes, challans or disputed bills, since such outstandings can jeopardise your intending purchase.
Scrutinizing the title ownership, obtaining indemnity certificate from the bank, a recovery certificate issued by the debt recovery tribunal (DRT) and a no-objection certificate (NOC) in case of a group housing unit are some other must-do items.
Conclusion
It is important not to get overwhelmed by factors like multiple property brokers at an auction trying to outbid each other, the cost of exhaustive renovation and repairs that may be required at the property, or even delays in the process of completing the acquisition formalities. All of these factors result in lowering the morale of the buyer, but the significant savings emanating from the auction process can outweigh all these troubles. Happy Hunting!
Raj Khosla is founder and managing director of MyMoneyMantra.com
Also Read: Rent, home loan, capital gains: FAQs to help you navigate property tax maze
