The prolonged lull in the property market is forcing real estate developers to lure buyers with discounts ranging from 5% to 10%. But if you are ready to do some research and legwork, you can possibly get a bigger discount. Properties repossessed by banks are routinely sold off through auctions at prices that are 20-30% lower than the prevailing market rate.
A bank auction can be an offbeat, albeit somewhat tedious way to steal a deal. Under the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest) Act, 2002, banks are allowed to auction off “repossessed” or “stressed” properties to recoup their losses. These properties are seized by the banks after multiple missed payments by the borrowers. As banks auction foreclosed properties primarily to recover the outstanding principal and interest amount, these are often available at attractive discounts.
But this is not as easy as it might sound. For one, purchasing a property in a bank auction can be a nerve-racking experience for a first-time home buyer who may not be fully conversant with the rules and procedures. Also, these auctions are not sparsely attended. A large crowd of investors and buyers wait for upcoming public auctions, hoping to bag the property at a low price.
Checklist for buyers
Ask these questions to assess if the proposition is worth your time and money.
Is the property registered?
Check key documents such as the original sale deed and nonencumbrance certifi cate under CERSAI. Unregistered properties without documents can lead to disputes
Have you read and understood the bid document?
Seek legal guidance if necessary in order to get a clear understanding of your liabilities post purchase.
Is the property title clear?
While the bank is entrusted with conducting the auction of a repossessed property, it is not the owner of the property. Get the title ownership investigated and legally validated.
Has the owner received a recovery certificate?
The owner should have a recovery certificate from DRT (Debt Recovery Tribunal) prior to submitting your bid.
Have you checked the indemnity certificate?
The bank must give an indemnity certificate to protect you from future claims from the owner. Ideally, get the owner to become the confirming party to the property transaction.
Have you got NOC from housing society?
Get a No Objection Certificate from housing society (if applicable) and details of statutory dues, unpaid bills, and pending litigation.
Have you deducted TDS?
Deduct TDS equal to 1% of property value, if the amount exceeds Rs 50 lakh. TDS is to be credited to PAN of the property owner.
Here is a guide to help you complete the bidding process smoothly, while leaving enough in your pocket to refurbish the property after you get possession.
Consider all applicable costs
Most auctioned properties come with legal disputes. There may be unpaid property taxes or utility bills or other outstanding dues. After the auction, these dues and expenses have to be borne by the buyer. So, factor in all such costs when you bid. The actual cost of the purchase may be higher than what you initially anticipated.
Get property appraised
While it is not possible to know the final auction value beforehand, you must figure out the market value of the property prior to the public sale. The auctioning bank typically sets the base value of the auction considering factors such as the guidance value (as provided by government regulations), the deemed market value of the property, and existing liabilities of the property.
As part of your due diligence, you should get the property appraised by a professional property evaluator. A margin of 10% over the value calculated by the appraiser is a good point to gauge the appropriate bid amount for the auction.
Arrange funds beforehand
You have to pay earnest money to the auctioning bank before the auction begins. This is 10% of the reserve price of the property being auctioned. It is refunded to you if you lose the bid. However, when you win the bid, you have to pay 25% of the bid amount on the auction day itself.
Subsequently, the entire bid amount has to be paid within a relatively short time (around 15 days) after the bid is selected. So you need to arrange for the funds ahead of time either through loans or from your savings. Also remember that if you fail to complete the payment within the deadline, the deposit amount will not be refunded.
If you plan to take a loan to fund the purchase, get an in-principle loan approval from the bank. The loan for purchase of a distressed residential property is essentially a home loan. Your credit history and repayment capacity will play a crucial role in determining whether you qualify or not.
Also, the loan will be sanctioned by the bank on the condition that you will cover the applicable property registration charges, stamp duty and other legal costs and submit the valid property registration document with the bank, prior to disbursal of the actual loan. These charges can be substantial, and have to borne by you.
A distressed property purchase should never be taken lightly. Before going for a bid, take out adequate time to research and investigate and review the auction rules, and complete due diligence to the best of your ability. If you are ready to traverse this tortuous path, the pain will lead to rich gains: you can save anywhere between Rs 20-30 lakh on a property worth Rs 1 crore.