Buying property in an e-auction by banks ?

Should you buy properties at an e-auction? Here’s a checklist on what homebuyers should keep in mind before bidding for such properties from banks.

Banks auction such properties in a final attempt to recover whatever value is outstanding to them. Most of the properties that are being auctioned are owned by borrowers against whom the bank has initiated recovery proceedings. Banks seize properties when they are convinced that the borrower will not be able to repay a loan. After the borrower misses multiple payments, the lender auctions the property to recover the outstanding principal and interest amount on the loan. Given the troubled past of such properties, they are usually available at a discount to market price.

There is a possibility that some of these properties are in litigation.  Potential buyers would be well advised to do sufficient due diligence and verify the details of the property before bidding for it. But buyers should not have the misconception that these properties always have legal issues attached to them. Banks are in a position to auction properties only if they have a clear legal title. Also, prices of such properties are at least 5-10% less than the market value, so it’s worth signing up for the auction. Also, it is a direct deal between the buyer and the bank as there are no agents or brokers involved.

Banks get the premises vacated before they are auctioned and have to get possession of the house through a collector or a district magistrate to avoid any law and order issues.

In case of residential properties that are auctioned, buyers should check if there are any liabilities associated with the property that is being auctioned.These could include society dues and other liabilities unknown to the lenders. Since those bidding for the property in an e-auction are allowed to inspect the premises, they should check from the society if any dues are pending against the asset in question. There could be cases of subletting that may not be known to the bank. If that is the case, the buyer who purchases such a property will not be in a position to sell without the tenant’s approval. Sub-tenancy can create its own share of problems.

It is often assumed that properties that banks auction come with a clear title; many times, an auction notice carries a clause — no encumbrances exist on the property and the bank won’t be responsible for any unknown encumbrances or third-party claims, rights or dues. Buyers should also ask for the Title Search Report or due diligence report before bidding for a property. A bank merely auctions the property and is not the seller. The transaction is conducted on a “no claim or no action clause” basis, whose intent is to shift the burden onto the buyer.

In case of a dispute, it is often seen that aggrieved buyers approach the courts complaining about the arbitrary actions of the bank /asking for payment of money. In both the scenarios, the bank tries to take the defence in the various clause of the auction notice which point towards the buyer’s duty of ensuring complete diligence. It is rarely seen that either party resorts to pre-litigation mediation to settle their claims, which is the most cost-effective manner for both parties and has a certain persuasive value. Thus one should also have a dialogue with the owner to get clarity that he will not resort to any such follow up action which could delay the process.

While bidding for such properties, buyers should take into account the condition of the property and the liabilities attached to it. It should be noted that after two waves of COVID-19 home loan defaults have increased from 0.5- 3% for some housing finance companies. This has largely been on account of the general economic situation and loss of jobs and nothing to do with the property.

While anyone with the financial wherewithal can buy such properties, it is advisable that one should not buy into it only because of a price advantage it offers, but because there is a certain comfort level associated with the micro market where the property is located. Buyers should preferably bid for a ready-to-move-in property as due diligence requirements for an under construction property are very high.

Also, if a buyer plans to take a loan for purchasing the property, he should try and get in-principle home loan approval from the lender. Banks give such loan approvals solely on the basis of the credit history and repayment capacity of the bidder. The loan is sanctioned by the bank 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 to the bank before the disbursal of the actual loan.

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Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 14 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.