Property auctions become transparent but with riders

Otherwise, you could be saddled with dues left unpaid by previous owner

The country’s largest bank State Bank of India (SBI) will auction around 1,000 properties online on Tuesday. These include both residential and commercial units. 

Many buyers chase such properties as there’s a good possibility of getting one at a discount to the prevailing market prices in the area. But buying a foreclosed property comes with its own set of challenges.

For example, Kapil Mahajan purchased a property in an auction conducted by a leading public-sector bank in Vasai, part of the Mumbai Metropolitan Region. He got the Rs 6.5 million property at a 10 per cent discount to the market rate. But later, he found that there were dues by the earlier owner that had to be settled as well. 

Banks clearly mention that the properties are being auctioned on ‘as is where is basis’, which means that the buyer will be responsible for all dues and repairs. 

They simply put a base price, depending on their recovery target. “An individual buying a property through the bank auction route has to do the due diligence. If a person is looking at a flat, for example, he should not only visit the flat but also make an inquiry with the society regarding outstanding dues,” said Ashutosh Limaye, head of research and real estate intelligence service, JLL India. 

But buying a property in an auction comes with its benefits. The entire process of e-auction is transparent, and the titles are clear as the lender would have done the due diligence done at the time of giving the loan. When you go for the visit, don’t just inquire about the dues on the property. Ask for how long the unit has been unoccupied and the different charges that others pay. 

The two will give you an idea of how much more you will need to shell out if you get the property and an idea of the total cost. You can also approach a real estate broker for such details. Sometimes, the property might require a lot of repair work — another drain on your finances. 

Some banks also don’t mention the details of tax deduction at source (TDS). According to income-tax laws, if an individual purchases a property that costs over Rs 5 million, he must deduct one per cent of the property value on which stamp duty is calculated and deposit it with the tax department.

Before you bid, clarify with the bank on taxation, or else you may have to shell out one per cent of the agreement value from your pocket. At least, ensure that you have a written confirmation from the bank on the withholding tax. 

Luckily for Mahajan, the lender took care of this. Before participating in the auction, ensure that you have the funds ready, as banks’ timelines are tight in auctions. 

“The buyer needs to keep in mind the level of capital commitment that is required. Around 10 per cent of the base price is taken as earnest money, and the buyer has to pay around 15 per cent as soon as he wins the bid,” said Aashish Agarwal, senior director-valuation and advisory services, Colliers International India. Make sure that you either have a pre-approved loan or start the process immediately because banks have a tight schedule for payment of the balance amount.
 

Benefits of buying in auction

• The property will have clear title
• Buyer has a chance of getting a property at a cheaper price
• The auction process is transparent
• Buyer saves on brokerage and legal due diligence
• Banks also offer loans to winning bidders
• An individual can bid for multiple properties as the process is online