As India recovers from the economic impact of Covid-19, the real estate industry sees developers as well as lenders tabling attractive offers, with discounts, interest rate cuts and fee waivers treatment. For an even better value for money proposition, one could buy a property at a bank auction. Such a property is called a stressed property and although buying a property at a bank auction is by no means fun, but it is certainly worth it if you have the patience and persistence. .
A stressed property purchase can help you get an opportunity to buy a property up to 30% of the going market value. Here’s what you need to know about stressed real estate buying and the rules.
What to expect at a stressed property auction
Bank auctions are public sales of mortgaged properties to collect overdue amounts against long overdue home loans. Under the Securitization and Reconstruction of Financial Assets Act 2002, known as the SARFAESI Act, banks are legally permitted to auction off repossessed properties. or “in difficulty” to recover outstanding guaranteed loans. Thus, bank auctions offer a good chance of closing a real estate deal at a reduced price.
As the end user, you must be perfectly clear about your requirements in terms of size, location, environment and these preferences cannot be materially changed or recast. Therefore, when you examine the auction listings, it may seem like you are looking for the proverbial needle in the haystack. Don’t despair: it’s a marathon, not a sprint.
In addition, repossessed properties may be the subject of ongoing legal disputes and / or underlying expenses. For example, there could be a series of pending repairs, overdue invoices, title issues, etc. Additionally, it might be intimidating for an individual buyer to co-bid with investors and speculators who often flock to these auctions for lucrative opportunities.
Still, you need to be clear about your goal and make a full assessment of the viability of your targeted acquisition. To help you on your journey, here’s a list of dos and don’ts.
To follow when buying a stressed property
About 3-5% of mortgage borrowers default on their mortgage payments, meaning most stressed borrowers prefer to refinance or restructure their loans at a lower rate. As a result, in terms of choice and availability, the resulting limited supply of units is indeed a challenge for the individual buyer. While brokers and speculators are not limited by self-use parameters and are racing for any discounted offers available.
- It will take extensive research and a lot of patience to build a preferred list of auction houses.
- You are advised to subscribe to online alerts for news and updates related to auctions.
- Keep an eye out for newspaper classifieds and bank websites where lenders advertise upcoming public sales.
- Maintain your efforts, it may take several attempts before you close a good deal.
- However, if you are in a rush to buy your dream home, bank auctions may not be the best option.
2. Property visit
Once you have locked a temporary target, it is advisable to make a personal visit to the location. The auction documents will not contain all the relevant information. If possible, talk to the neighbors and get a first-hand account of the quality of life in this neighborhood. Since local search is the most important aspect of the transaction, due diligence is essential.
Typically, banks decide on a reserve price based on circular rates (in accordance with government regulations), market value, and existing debts or debts associated with the property.
A personal assessment of the value of the property is essential:
- Talk to local brokers.
- Conduct research online.
- Investigate and assess the record of recent transactions in the neighborhood.
You would then have a reasonable idea of the possible prices.
Armed with your own estimate, hire a professional real estate expert and double the appraisal report (will also be useful for a loan application). Often there is a large gap between the reserve price and the final offer.
With an appraisal report, you control the outer limits during the tendering process.
5. Legal guarantees
Check if there are any charges for electricity, water, maintenance and any other charges, and insist on citing the original invoices. A personal visit or through a property attorney to the relevant municipality is strongly advised – a deep dive into the municipal tax trail is necessary, as there could be a history of unpaid dues. A fault can either be by the current occupant or by a much older occupant. Warned is pre-armed.
If it is collective accommodation, explore the possibility of acquiring a certificate of no objection (CNO) from the company concerned. A visit to the company’s office can provide relevant information on related charges and administrative regulations.
6. Establish a budget
After evaluating the initial offer as above, you should calculate and include the repair and renovation expenses in the total projected acquisition cost, ensuring that you do not overload your finances or calculations. It may not be possible to predict the renovation budget exactly, but you should have a rough number in mind.
The total landed cost of buying a property is the maximum bid plus renovation and related costs. Before the auction, you must have perfect clarity on the outer limit of your auction.
7. Streamline finances
Real estate transactions in bank auctions are concluded very quickly, within 15 to 20 days. Thus, you must have the necessary funds or have an adequate back-up before attending the auction procedure.
- 10% of the reserve price must be deposited prior to auction as a down payment (EMD). It is of course refundable in the event of loss of the auction.
- If successful, 25% of the auction amount must be paid on the same day, i.e. an additional 15% must be deposited. Within two to three weeks, the balance of 75% must be paid and the deal is done.
- In the absence of payment, the initial deposit of 25% is not refundable.
- It is also important to note that for the purchase of a stressed property during a bank auction, it is not possible to get a pre-approved loan sanction. As a result, you may need to arrange other short-term financing, either against an existing property or from some other personal source.
- Subsequently, once the registration process (15-20 days) is completed, you will be eligible for loan funds even against your newly acquired property at auction.
8. Follow a checklist
- Carefully review the offering document for title, disputes, and outstanding assessments, if any.
- Hire a lawyer and investigate the ownership of the title.
- Make sure that the debt collection certificate issued by the debt collection court (DRT) is attached to the tender documents.
- The contract will be a tripartite agreement between the owner, the lender and yourself. Ask for a certificate of compensation from the bank. It will provide protection against future litigation by the owner.
- Asks the owner to become the confirming party of the transaction. You can 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. Day of auction
Keep your emotions in check, that is, property could be your dream proposition, and it could very easily be your 3rd auction in two years. So close but so far away and you might fall victim to your own pride and bid over budget. Always attend the auction with a confidant; going solo is not recommended.
What not to follow when buying a stressed property
1. Don’t be overwhelmed by the presence of investors
Real estate brokers and professional speculators regularly attend bank auctions. There is absolutely no need to be intimidated by their presence. They are just doing their job and as an individual consumer you have every right to pursue your own goals of buying property cheaply.
2. Don’t be nervous about the D-Day auctions.
As an individual and a beginner, it’s okay to worry about the actual auction on auction day. Instead, you can plan to visit another auction (in which you have no interest) before your own event. A rehearsal will relax your mind and you will be more confident and better prepared for the last day.
3. Don’t be put off by repairs and renovations
Often, auction properties require extensive cleaning, repairs and renovations. Don’t be put off by the drudgery of the chores, but keep in mind the huge savings that result from the auction process. In fact, see the renovation not as an obstacle, but as an opportunity to customize your home to your own specifications.
4. Don’t worry about delays
There may well be several unsuccessful attempts that take a long time, which can and will indeed undermine morale. Once you’ve decided to factor in substantial payoffs by going the auction route, mentally prepare yourself for tedious delays. Rather than being nervous about the sadness that takes time, you should focus on the safety of the process.