Arun planned to invest in a good property for some time and it was only when a friend suggested considering properties being auctioned by the banks, he decided to find out more about them. As he researched, he was surprised to note that most of these properties were valued at a price much lower than their current market value.
With the price of properties soaring incessantly, this seemed like the perfect way of owning one at a good price.
How it works: The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act of 2002 allows banks and financial institutions to recover their dues from defaulting borrowers by auctioning the property pledged by them.
This does not require the intervention of the court, which implies that banks can take over the property at the earliest.
Fixing the Reserve Price: After the property has been taken over, an independent market surveyor conducts a valuation exercise and ascertains two values of the property. The first value is the current market price while the other is the reserve price or the distress value.
The reserve price is the minimum bid price at which a bank is willing to auction the property. This price includes the principal loan amount along with the interest and is usually lower than the ongoing market price.
The reserve price is finalised by an authorised officer along with the independent surveyor. It is this price of the property that is quoted during an auction and at which the bidding process begins. As the auction progresses, the price would increase depending upon the bids as well as the location of the property. This gives buyers an opportunity to buy a property at a price lower than its market value.
The Auction Process: After taking possession of the property, the bank issues a public notice in local newspapers with details and information about the auction and invites bids.
Participating in an Auction: Potential bidders need to submit an application for bidding to the respective bank. This application must mention the proposed bid price, which should not be lower than the fixed reserve price of the property. Along with the application, the earnest money deposit (EMD) amount needs to be deposited, which is usually fixed at 10 per cent of the reserve price.
The auction is usually held 30 days after the issuance of the public notice. During this period, it is possible for the defaulting loan borrower to repay the loan amount to the bank. In case, the borrower clears the dues, the auction will be cancelled and the bank will return the EMD to the bidders.
If the auction goes through, the winning bidder needs to deposit approximately 25 per cent of the bid amount on the same day. The balance needs to be paid within a stipulated time frame, which is usually the next 15 days or an extended date mutually agreed to by the buyer and the bank.
If a person does not pay the remaining amount within the specified period, they would lose the sum paid earlier. Some banks do offer loans for buying auctioned properties; however, as there are stringent time limits, one needs to ensure that they have the necessary funds available before participating in a property auction.
Points to Consider: Though beneficial in terms of property value, buying a property in an auction is not feasible for everyone.
In case of aggressive bidding, the price could go much higher, eliminating the cost advantage. Therefore, a careful assessment of the property is critical along with wise bidding.
Check the property documents thoroughly through a lawyer, if necessary.
A bank auctions a property ‘as-is-where-is’ which makes the buyer liable for any renovation cost or unpaid taxes on the property. Hence, a proper inspection is critical to assess the property’s true value.
Buying a property at an auction is a relatively new concept in India and while it might seem to be a lucrative option, it requires the buyer to have really deep pockets to acquire one. Moreover, there are certain safeguards one needs to practice to enjoy the advantages that an auctioned property offers.
— The author is CEO, BankBazaar.com