Rigorous due diligence key when buying property via bank e-auctions

While properties can be purchased in such auctions at a discount to market value, they carry the risk of hidden liabilities

Buying a home through a bank auction can appear attractive because of lower prices, but a recent Allahabad High Court ruling highlights the hidden risks. A buyer discovered large unpaid utility bills after the purchase. As the sale was held on an “as is, where is, whatever there is” basis, the court ruled that the bank was not liable for undisclosed dues, making the buyer responsible.

 

Price advantage

 

SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) auctions offer significant pricing benefits. “They can offer properties at 20–50 per cent below market value. Prices may fall even further in subsequent auction attempts, as banks typically reduce the reserve price by 15–25 per cent,” says Mukesh Chand, senior counsel, Economic Laws Practice.

 

“In some cases, especially ready-to-move-in homes in Tier-I societies, discounts can go as high as 40–50 per cent,” says Saurabh Garg, co-founder and chief business officer, NoBroker.

 

These auctions eliminate the risk of construction delays and enable quicker possession after payment. Bank-financed properties undergo verification, reducing risks of forgery or title defects.

 

The ‘as is, where is…’ risk

 

The principal drawback is the “as is, where is, whatever there is” clause. “The status, condition and situation of the property is governed by this clause, which requires the buyer to inspect and enquire and be satisfied about the condition of the assets,” says Chand.

 

Banks are required to disclose known encumbrances. “But the law does not offer any protection where the bidder fails to make enquiries, do physical inspection, or carry out his own due diligence about the property,” says Chand.

 

Properties may need repairs. “Minor liabilities like society dues or utility arrears may exist,” says Garg.

 

Competitive bidding can, at times, drive prices up to exorbitant levels. Buyers must also arrange funds immediately: 25 per cent is due the next working day and the balance within 15 days. “Banks forfeit the deposit if payment timelines are not met,” adds Chand.

 

Typical dues

 

SARFAESI auctions extinguish only the bank’s loan, not other dues. “There could be government dues like stamp duty shortfalls. Any attachment by PMLA (Prevention of Money Laundering Act) authorities will not be cured by sale. The property could be vested in the government. The property could be occupied by tenants who will also have to be dealt with by the buyer,” says Chand.

 

Previous owners frequently challenge auctions, leading to added litigation costs and delays.

 

“Unpaid society maintenance charges, electricity or water bill arrears, and pending municipal taxes are dues that may be attached to the property,” says Garg.

 

Essential checks

 

Experts advise bidders to begin with a title search at the sub-registrar’s office and check CERSAI (Central Registry of Securitisation Asset Reconstruction and Security Interest of India) and Registrar of Companies records.

 

Check the encumbrance certificate for at least 30 years. Municipal tax dues, mutation entries and utility bills must be checked. A lawyer should run litigation searches to identify suits and attachments.

 

Bidders must confirm whether the bank has physical or merely symbolic possession. “Properties under symbolic possession carry higher risks of litigation and obstruction by the owner and are best avoided by regular buyers,” adds Chand. Buyers should also inspect the original title deeds with the bank.

 

All key documents must be examined before bidding. “These include the auction notice, title-chain papers, property tax receipts, no-dues certificates from the RWA and utility departments, and approved building plans,” says Manmeet Kaur, partner, Karanjawala & Co.

 

“Visit the property in person, preferably with a civil contractor, to check the actual physical condition, seepages, structural cracks, illegal extensions, and approximate repair cost,” says Sanjeev Govila, certified financial planner and chief executive officer, Hum Fauji Initiatives.

 

If hidden dues emerge

 

The law largely places the risk on buyers. “The buyer can still dispute a demand if the law doesn’t permit recovery from a new owner, or if the bill is wrong, inflated or time-barred. In rare cases, if the bank gave a written assurance of no dues and that proved false, the buyer may claim misrepresentation,” says Shankey Agrawal, partner, BMR Legal.

 

In reality, thorough due diligence remains the only meaningful protection for auction buyers.

 

Mistakes buyers make

 

• Bidding without checking repair costs
• Assuming bank-auctioned properties are free of all liabilities
• Skipping verifications with utilities, society and municipal office for dues
• Not reading the auction notice carefully, especially the ‘as is, where is’ clause

 

Source: Hum Fauji Initiatives 

The writer is a Delhi-based independent writer