Buy property at discount in auctions, ensure title is unencumbered

Auctions of repossessed properties draw a lot of buyers because they can acquire property at cheaper prices than the prevailing market rate. But buyers must watch out for the risks in this route.

When borrowers default on loan repayments, the lending banks seize (or repossess) their properties. 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 sold off at prices that are typically 20-30 per cent lower than the prevailing market rates.

For banks, repossessing a property is not the ideal solution but the last resort. They seize a property after a borrower misses multiple payments. Left with no other option, the lender auctions the property to recover the outstanding principal and interest amount. According to one auctioning website, almost 4,000 properties will be auctioned off in the coming months by public sector banks alone (see table). These auctioned properties may be available at a discount to the market price.

If this sounds like a cakewalk, banish the thought. Participating in a bank auction is not an easy affair, especially for a first-time home buyer who is not conversant with the rules and procedures of an auction. He competes with a crowd of bidders comprising deep-pocketed investors and seasoned brokers who want to bag the property at a low price.

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.

Research what you are buying: To ensure greater participation, banks put out details of the properties they are auctioning. Checking the websites of individual banks is a tedious process, but a portal launched by the Indian Banks Association (IBA) provides a common platform. The Indian Banks Auction Properties Information (ibapi.in) website provides details of residential, commercial, industrial and agricultural properties to be auctioned online across the country. Prospective buyers can log on to ibapi.in, register themselves, view the features of properties, and then participate in the auction process.

Find out the real costs: Auctioned properties are usually embroiled in legal disputes. The owner may have defaulted on payment of property taxes or utility bills may have remained unpaid for years. After it is bought in an auction, the buyer will have to bear these expenses. Therefore, add all such costs into the price when you submit your bid. The real cost of the property could be significantly higher than anticipated.

Seek professional help: Get the property appraised. Take advice from a professional property evaluator to figure out the market value of the property before the auction. 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, and existing liabilities of the property. It’s a good idea to set a margin of 10 per cent over the value calculated by the appraiser as an appropriate bid amount.

Arrange funds beforehand: Bidders have to deposit earnest money with the auctioneer before the process begins. It is 10 per cent of the reserve price of the property being auctioned and is refunded to those bidders who lose the bid. But if you win the bid, 25 per cent of the bid amount has to be paid on the auction day itself. The balance amount too has to be paid within a short time (usually around 15 days) after the bid is selected. So, a bidder must arrange for the funds beforehand either by taking a loan or from his savings. Keep in mind that if you are unable to make the payment within the stipulated deadline, the deposit amount will not be refunded.

Bidders who intend to take a loan to fund the purchase should get an in-principle home loan approval from the bank. Banks are willing to give such loan approvals solely based on the credit history and repayment capacity of the bidder. The bank will sanction the loan on the condition that the bidder will cover the applicable property registration charges, stamp duty and other legal costs and submit the valid property registration document with the bank, before disbursal of the actual loan. These charges are substantial, so be ready with some surplus cash.

What to check before you bid

Registration details of property: Check the key documents of the property, including the original sale deed and non-encumbrance certificate under CERSAI (Central Registry of Securitisation Asset Reconstruction and Security Interest). Unregistered properties don’t have proper documentation, which can lead to disputes with claimants later.

Bid document and title deed: Take the help of a property lawyer to understand your liabilities after the purchase. While a bank auctions a repossessed property, it is not the owner of the property. Get your lawyer to check the title ownership and get it legally validated.

Recovery certificate from debt tribunal and indemnity certificate: The owner must have a recovery certificate from the Debt Recovery Tribunal (DRT) before you submit a bid. The auctioning bank must also give an indemnity certificate to protect you from future claims by the owner. Ideally, the owner should be the confirming party to the property transaction.

NoC from housing society: You must also have a No Objection Certificate (NOC) from the housing society (if applicable) and maintain detailed records of statutory dues, unpaid utility bills, and pending litigation.

Deduct TDS: In the end, do not forget to deduct TDS equal to 1 per cent of property value, if the amount exceeds ~50 lakh. The TDS should be credited to the PAN of the property owner.