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With India recovering from Covid-19-related economic impact, the real estate sector is seeing developers as well as lenders tabling attractive offers, replete with discounts, interest rate concessions and processing fee waivers. For an even greater value-for-money proposition, one could purchase property at a bank auction. Such a property is termed a stressed property and though buying a property at a bank auction is by no means a cakewalk but it surely is worth a shot if you have the patience and tenacity.
A stressed property purchase can help you get an opportunity to buy a property at up to 30% off the prevailing market value. Here’s what you need to know about stressed property purchases and the rules you should abide by.
What to Expect at a Stressed Property Auction?
Bank auctions are public sales of mortgaged properties to recoup unpaid amounts against long overdue home loans. Under the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, popularly known as the SARFAESI Act, banks are allowed to legally auction “repossessed” or “stressed” properties to recover the outstanding on secured loans. Thus, bank auctions offer a good chance for cracking a real estate deal at a discounted price.
As an end-user, you need to be crystal clear about your requirements in terms of size, locality, surroundings and these preferences cannot be materially altered or recast. Therefore, when scrutinizing auction lists, you may get the feeling of looking for the proverbial needle in the haystack. Don’t despair: it’s a marathon, not a sprint.
Also, repossessed properties can have ongoing legal disputes and/or underlying expenses attached. For instance, there could be a series of pending repairs, overdue bills, title issues and so forth. Also, it could be intimidating for an individual buyer to co-bid with investors and speculators who often throng these auctions in search of lucrative opportunities.
Nonetheless, you should be clear-eyed about your objective and conduct a comprehensive assessment of the viability of your targeted acquisition. To assist in your journey, here’s a list of do’s and don’ts to follow.
Do’s To Follow When Buying A Stressed Property
1. Research
Around 3% to 5% of mortgage borrowers default on home loan repayments i.e., most stressed borrowers prefer to opt for refinancing or restructuring of their loans at a lower rate. Accordingly, in terms of choice and availability, the resultant limited supply of units is indeed a challenge for the individual buyer. Whereas brokers and speculators are not circumscribed by self-use parameters and are in the race for any available discounted deal.
- It will require thorough research and dollops of patience to mark out a preferred list of auction homes.
- It is advisable to register for online alerts for auction related news and updates.
- Keep an eye on newspaper classifieds and bank websites where lenders announce upcoming public sales.
- Maintain your efforts, it can take several attempts before you lock an appropriate bargain.
- However, if you are in a rush to purchase your dream home, bank auctions may not be the best option.
2. Property visit
Once you have locked onto a tentative target, it is advisable to pay a personal visit to the location. Auction documents will not contain all relevant information. If possible, talk to neighbors and obtain a first-hand account of the quality of life in that area. Since local research is the most significant aspect of the transaction, diligence is essential.
3. Pricing
Generally, the banks decide on a reserve price depending on the circle rates (as per government regulations), the market value, and existing payables or liabilities attached with the property.
A personal assessment of property value is paramount:
- Talk to local brokers.
- Conduct online research.
- Investigate and evaluate registration of recent transactions in the neighborhood.
You would then get a reasonable sense of possible pricing.
4. Appraisal
Armed with your own estimate, hire a professional property valuer and double down on a valuation report (will also come in handy for a loan application). Frequently, there is a high differential between the reserve price and the final bid.
With a valuation report, you are in control of the outer limits during the bidding process.
5. Statutory safeguards
Check for pendency in power, water, maintenance bills and any other dues, and insist on citing original invoices. Strongly advised is a personal visit or through a property lawyer to the relevant municipality – a deep dive in the trail of municipal taxes is necessary, as there could be a history of unpaid dues. A default can be either by the current occupier, or a much earlier occupant. Fore-warned is fore-armed.
If it is a group housing unit, do explore the possibility of acquiring a no-objection certificate (NOC) from the concerned society. A visit to the society office can evince pertinent information on any connected charges and operational bi-laws.
6. Establish a budget
After assessing the initial bid as above, you must calculate and include repair and renovation expenses in the projected total cost of acquisition, thereby ensuring that you do not over-extend your finances or calculations. It may not be possible to exactly forecast the renovation budget but you must have an approximate number in mind.
The total landed cost of property purchase is the maximum bid plus the renovation and allied costs. Prior to the auction, you must have perfect clarity about the outer limit of your bid.
7. Rationalize finances
Property deals in bank auctions are closed very quickly, within 15-20 days. Thus you should arrange the requisite funds or have an adequate back-up before attending the auction proceedings.
- 10% of the reserve price is to be deposited prior to the auction as earnest money deposit (EMD). It is of course refundable on losing the bid.
- On success, 25% of the bid amount needs to be paid on the same day i.e., a further 15% is to be necessarily deposited. Within the next two to three weeks, the balance 75% needs to be paid and the deal is closed.
- On failure of payment, the initial deposit of 25% is not refundable.
- It’s also important to note for purchase of a stressed property at a bank auction, it is not possible to secure a pre-approved loan sanction. Accordingly, you may need to arrange alternate short term funding, either against any existing property or from any other personal sources.
- Subsequently, once the registration process (15-20 days) is completed, you will be eligible for loan funds even against your newly acquired auctioned property.
8. Follow a checklist
- Carefully examine the bid document for title, disputes and pending dues, if any.
- Hire a lawyer and investigate title ownership.
- Make sure the recovery certificate issued by debt recovery tribunal (DRT) is attached with the bid document.
- The contract will be a tripartite agreement between the owner, the lender and yourself. Insist on an indemnity certificate from the bank. It will provide protection against future litigation by the owner.
- Request for the owner to become the confirming party for the transaction. You may also consider including a penalty clause in the agreement.
- For transactions over INR 50 lakh, 1% TDS is mandatory. It is your responsibility to deduct and deposit.
9. Auction day
Keep your emotions in check i.e., the property could be your dream proposition, and it could very easily be your 3rd auction in two years. So close, yet so far and you may become a victim of your own hubris and bid beyond budget. Always attend the auction with a confidant; going solo is not recommended.
“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.”
Franklin D. Roosevelt
Don’ts To Follow When Buying A Stressed Property
1. Do not be overwhelmed by the presence of investors
Property brokers and professional speculators are regular attendees at bank auctions. There is absolutely no need to be intimidated by their presence. They are only doing their job and, as an individual consumer, you are well within your rights to pursue your own objectives i.e., purchase property at bargain pricing.
2. Do not be nervous about the bidding on D-day
As an individual and a first timer, it is normal to get anxious about the actual bidding on the day of the auction. You can rather plan to visit another auction (in which you have no interest) prior to your own event. A rehearsal will relax your mind and you will be more confident and better prepared for final day.
3. Do not be disheartened by repair and renovation work
Often, auction properties require exhaustive cleaning, repairs and renovations. You should not get discouraged by the tediousness of the chores, but keep in mind the sizable savings emanating from the auction process. In fact, look upon the refurbishment not as a hurdle, but as an opportunity to customize your dwelling unit in line with your own specifications.
4. Do not be anxious about delays
There may well be several time consuming unsuccessful attempts, which can and will indeed sap morale. Once you’ve decided to factor substantial gains by going down the auction path, mentally prepare yourself for tiresome delays. Rather than being nervous about the time-consuming dreariness, you should focus on the security of the process.
