The RBI has allowed banks to sell stressed properties to individual buyers through public auctions. Those who are looking for investment opportunities or for a house where they can live in, often attend these auctions by the lending institutions and they can help save up to 30% or more on the market value. Banks mostly tend to sell foreclosed properties and while they can prove to be a lucrative deal, it is important to keep an eye out towards some factors.
One has to understand that a stressed property is a repossessed property as a result of a default mortgage. So an erstwhile buyer had failed to repay his loan to the bank and the bank forecloses the property and resells it to obtain their returns. According to the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act 2002, a lender shall be legally able to repossess and auction any mortgaged property in case he fails to make multiple payments. The primary purpose of the auction to recover the outstanding amount and so these properties are often sold at discounted values. However, some of these properties might already have possession disputes and could be embroiled in legal battles over ownerships, and there could be long overdue of bills or could also need extensive repairs. It would mean that an additional amount of money could be required to fix all those lose ends and so the deal could end up not being as lucrative as it looks. It is also important to conduct a property search because less than 5% borrowers in India default on loans that have collateral. Most also opt for refinancing so it is quite impossible to know about the nuances of the property beforehand before all the documents are in your possession, and that does not usually happen till the bank has handed them over to you, until after the purchase.
Some other tips to keep in mind
It is also important to assess one’s budget while making such a purchase. Usually, the buyer would be asked to pay about 10% of the reserve price as Earnest Money Deposit or EMD prior to the auction. If the bid is lost, the EMD is refunded but if one ends up winning the auction, then one would have to pay at least 25% of the bid amount of the day of the auction itself. Since these deals close on very short notice, in about a fortnight or so, one would have to deposit the rest of the amount from one’s own funds, or loans. If one fails to do so, then the initial deposit is lost as well. You have to make sure that you have that kind of reserves to go ahead with such a huge transaction in a short span of time, because even if the price of the home is discounted, it could still come to a lot, depending on the property.
In case one has to arrange funds and have to opt for home loan, then it is a good idea to contact the auctioneering bank before the auction takes place and opt for an in- principal loan approval. Since the auction would reduce the bank’s liability, the application would be considered simply based on the credit history and the repayment capacity of the buyer. The banks usually sanction the loan based on the condition that it would need a Property Registration Document prior to the loan disbursal. The property registration could also take about 10 to 15 days and so one has to arrange for the full amount entirely on their own. The lender will only consider the loan after the registry documents have been verified. One could of course consider refinancing later to reduce the interests.
What about the loan aspects and documentation?
One should also note that the loan to buy a stressed property is also a home loan and the bank sanction the loan amount for the purchase of the property only so other dues resulting from the transactions will have to be settled separately. It is also a good idea to obtain a property appraisal. Banks have to adhere to government norms and market conditions to fix the base price of the property but it is always better to get a second opinion, especially from someone who is familiar with the foreclosures. However, the final bid amount can never be pre- assessed and it is a good idea to have 10% safety margin.
It is also important to go through the documents as much as possible like the bid document, form where one can learn about the legal title and responsibility or payment of dues. One should also consult the CERSAI records to confirm that the property is free from other bank liabilities. The lender should have also obtained a Recovery Certificate for the Debt Recovery Tribunal. The bank must also issue and Indemnity Certificate to protect the buyer from future risks of claim by the owner. The lender should also procure a NOC from the relevant housing society where the apartment is based. Also, when a property is purchased whose worth is over Rs 50 lakhs, the buyer has to pay 1% TDS to the PAN of the original owner and the bank should be requested to treat the TDS as part of the purchase.
Be careful and cautious while investing in a stressed property and if all goes well, you can end up with a very good deal, with a property being accessed at a much lower price than the market value.