Banks in India oftentimes announce property auctions as a means to recover defaulted loan dues of borrowers. The property in question here is the property pledged by the borrower to the bank as collateral or guarantee against the loan.
Even in December of 2020, just a couple of months ago, the State Bank of India (SBI) organized a mega e-auction wherein more than 3,000 residential and commercial properties, the owners of which defaulted loan amounts, were auctioned off to the general public.
As the rules and the process outlines, banks need to first send recovery notices to the defaulters in the form of a legal process to repossess the property pledged as collateral. Only the defaulter’s failure to still repay the loan EMI results in auctioning of the property under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (Sarfaesi Act), 2002.
Bank auction properties in India are open for all Indian citizens, in any part of the country, to place a bid on.
How is Buying a Bank Auctioned Property Different From An Open Market Property?
Bank auctioned properties come with multiple monetary advantages that an open-market property seller cannot. The biggest benefit, for example, is that bank auctioned properties are sold at a rate much lower than the market rate; typically at least 10%-20% lower than the prevailing market rate.
It should be noted here that property being auctioned by a bank is nothing but the consequences of bad debts or bad loans. As a result, banks find ways to get rid of such properties as soon as possible, even if that means having to sell the property at a much lower price than the open market price.
If you are planning to participate in a property auction, though there are multiple advantages, one should be wary of a couple of disadvantages as well. Let us discuss the pros and cons of purchasing an auctioned property in detail!
Why Should You Buy a Bank Auctioned Property?
Great prices: As mentioned, properties auctioned by banks are typically at least 15-20% cheaper than the open market price which makes investing in great real estate so much cheaper and affordable, at a discount.
Great Locations: There usually exists a possibility of such auctioned properties being located in posh and prime city locations. A great example would be how Air India’s premium properties like the home in Lonavala and four marque properties in Bombay were out for sale.
Great Convenience: Most properties offered in auctions are ready-to-move-in properties, free of cost-escalation, delay, or fraud risks. One needs to pay for the property and it is good to use as soon as the deal is closed. This, hence, offers a lot of conveniences and helps the buyer save time and energy.
On The Flipside, However, Here Are Some Disadvantages Of Purchasing Auctioned Properties
May become difficult to physically assess the property: Since auctioned properties are pre-existing and standing properties, sold on an “as-is-where-is” basis, the buyer will need to physically visit the location in order to assess the property in detail. One will not only need to check the operational capacity and for damages but also review the bid documents microscopically. If the said property happens to require multiple repairs upon assessment, that basically translates to extra cost and this just takes the basic advantage of auctioned properties: lower-than-market-rate.
Title due diligence: The auction notice of any property being auctioned by a bank typically highlights a clause where the bank absolves itself ‘of any surprise it may not be aware of.’ This puts the buyer in a risky situation since the entire responsibility of diligent buying lies on them. It is recommended to use a lawyer for an in-depth analysis of the property terms and to save oneself from trouble. One should also not shy from making inquiries about disturbances, claims, and the rights of the previous owner or any other entity, and financial liabilities (if any), before bidding.
Possession claim of the property: Banks, when auctioning a property, only take the responsibility of handing over the legal documents of the house. The responsibility of evicting the pre-auction tenants or residents of the property lies on the buyer. If the said current occupants refuse to move out, the buyer cannot even take the bank to the court as a bank, technically, is not a supplier of goods or services. This can put a buyer in a fixed spot and hence, it should be made sure, before the purchase of an auction property, to take physical possession and not rely on the symbolic possession issued by a bank.
Mandatory pre-bidding deposits: Even before one can be a part of the auction bidding, banks require the hopeful bidders to deposit 10 percent of the property price as deposit money. If the participant fails to win the bid, the money is reimbursed but if you do win the bid, a huge percentage of the sale price needs to be deposited to the bank in very strict timelines; at times even as slow as 15 days. Arranging such a huge amount for a common man within 15 days may not be feasible and hence, such auctions require ready funds.
Bank Auctioned Properties: What are The Legal Checks One Should Do Before Investing in The Property?
As some final thoughts, we have some tips now that you should make sure of before investing your earnest money in an auctioned property. It is true that auctioned properties are relatively safe and trustworthy, but do not forget to make sure of the following:
- Statutory dues
- Title and mortgage documents
The point here is to check that there are no outstanding payments like municipal taxes, society dues, litigations, electricity bills, municipal dues, and other taxes attached with the property, etc. It is highly likely that the bank defaulter would not have paid such charges and since the properties are sold under ‘as it is where it is basis,’ the ball will be in your court. You will need to prepare yourself in advance for how much money, over and above the sale price, you are willing to spend for possession of the property.
In terms of the mortgagor’s title and/or mortgage documents, you should take legal help and make sure there is no scam or fault as the same documents will be then transferred in your name. When you choose to invest in such a property, the key is to be aware and to make a wise, informed decision.