Banks keep coming up with property auctions to recover loan dues when borrowers default

Should you buy a property when a bank auctions it?
Real-estate experts say that auctions can sometimes offer heavy discounts, which is not available anywhere else

Banks keep coming up with property auctions to recover loan dues when borrowers default.

For instance, State Bank of India (SBI) is organizing a mega e-auction starting from December 30, which would last for a month. The auction would offer more than 3,000 residential, commercial and other properties whose owners defaulted on loans. Similarly, Punjab National Bank (PNB) is also auctioning thousands of properties over the next month, bought from loans taken from the bank.

Initially, banks send recovery notices. These properties are then put for auction under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (Sarfaesi Act), 2002.

When these properties are put up for auction, any Indian citizen in any part of the country is welcome to buy by placing a bid.

Is buying via an auction better than doing so in the open market?

Real-estate sector experts say that auctions can sometimes offer heavy discounts you won’t find anywhere else. “It is often 10-20 percent lower than the prevailing market rate,” says Sudhir Pai, CEO, Magicbricks.

“The discounts can be as high as 20 to 30 percent, which make it lucrative specifically for investors,” says Shalin Raina, MD- Residential Services, Cushman & Wakefield.

Location also plays an important role while deciding which property to buy. “There is also a possibility of such assets being in prime locations in cities,” says Raina. For instance, Air India being a state-owned entity has properties in prime locations across India and many of these are generally well-maintained and spaced-out housing colonies. Among the properties it has put up for sale is its holiday home in Lonavala and four marque properties in Mumbai.

Ready-to-move-in properties

Most properties on auctions are ready-to-move-in properties, eliminating the risk of project delays and cost escalation. Even if you plan to buy a commercial property, you can get a ready-to-occupy or let-out property.  This helps the buyer to save time, energy and money as compared to buying an under-construction property.

As much as it is tempting to buy a property at an auction, it is important to keep the few points in mind.

Physical condition of the property

Here’s the flipside. Auctions of the properties are generally done in their existing conditions, physically and legally. “It is better to visit the property, analyse the condition, map the additional cost it will be incurring post-possession,” says Mani Rangarajan, Group COO, Housing.com, Makaan.com and Proptiger.com.

“The bidder needs to have ample time to review the bid document in detail so that there are no surprise elements in the cost of acquisition of the property. Since the main driver for the acquisition of these properties is discounted pricing, any additional costs can make it less lucrative. Since most of these properties get sold on an “as-is where-is” basis, a physical inspection would help in analysing additional costs,” says Raina.

Title due-diligence

Usually, if a bank auctions a property, the title is usually proper. However, an auction notice typically mentions a clause where the bank absolves itself of any surprises it may not be aware of. This could be an unexpected third-party claim or any dues of the owner.

There may be disputes related to the property and if you land into trouble, the bank does not take any responsibility for the same. “The title and mortgage documents must be thoroughly checked, as any defect in them would be creating obstacles in claiming the ownership,” says Rangarajan. It is advised to make enquiries regarding the disturbances, the claims and the rights of the previous owner or any other entity, and any finance liabilities before bidding. “Buyers should also avail the services of a lawyer to get the due diligence done,” says Pai.

Possession of the property

A very important factor to consider before buying the property at the auction is to check who has the possession of the property.

In many cases, while auctioning an immovable property such as a plot, house or apartment, banks have only legal documents or say symbolic possession of the property. The bank doesn’t evict the occupants and it becomes the responsibility of the new buyers to evict the tenants and claim the possession. It can be very difficult to get property vacated from its current occupants. It is better to ensure that there are no pre-occupied properties before bidding. “In the case of independent plots, it is crucial to take physical possession and not rely completely on symbolic possession issued by banks,” says Rangarajan.

And since a bank auctioning a property is not considered a supplier of goods or services, you cannot take the bank to the court, if things go wrong. In contrast, you can file a case against a property developer if that’s where you buy a new home.

Keep you funds ready

Before leaping forward to buy a property in an auction, get your finances together. Banks usually ask for 10 percent of the price as deposit money before allowing participation in the bidding process.

If the bid is unsuccessful, the money is reimbursed to you. However, if the bid is won, the payments have to be done within strictly stipulated deadlines. For SBI, 25 percent of the sale price has to be deposited by the winner by the next working day.

Remember, the earnest money is adjusted during the payment of the 25 percent amount. The remaining 75 percent amount is to be paid within 15 days of the auction being won. “Having placed a successful bid, you would get a small window to deposit the bid amount, else your earnest money would be forfeited. So, it is always advisable to keep the bid amount ready and pay within the deadline,” says Pai.

Home loans can easily take a few weeks to be sanctioned. So, make sure you have enough funds ready if you wish to bid. If you plan to apply for a home loan, a pre-sanctioned loan letter will do the job and save time.

Article: Should you buy a property when a bank auctions it?