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Auctioned properties: an alternative for home seekers

LiveMint logoLiveMint 12-06-2014 Binaifer Jehani

Paintings by renowned artists, pieces of antique furniture, collectibles such as rare stamps, coins or cars, vintage wine bottles...these are bought at auctions after much ado and at a premium. But in a “real estate auction”, the numbers could benefit you. Properties auctioned by banks are an attractive alternative and, at times, sport a price tag that is about 10% lower than the market value. While this sounds lucrative, it does involve a great degree of preparedness, scrutiny and prudence. Homebuyers looking at auctioned properties must also take note of price fluctuations possible during the bid, the tight deadlines involved and the groundwork necessary before signing on the dotted line. What else does it take to turn an auction into a dream deal? Read on.

Keep an eye on daily classifieds, online auction portals and feature good deals: A property gets auctioned if a home loan borrower defaults on three consecutive equated monthly instalments. The borrower gets a 60-day window to raise objections. If none are forthcoming, the bank takes over the property under the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act and issues advertisements in one English daily and one regional daily. The auction date is set a month after the 60-day window expires. The auction notice usually specifies details such as location, the amount due from the defaulter, the time of the auction, the payment schedule, and others.

The final value of the property is usually based on the “reserve price” set by the bank, which is based on the outstanding loan amount and the property’s market value.

While keeping an eye on the usually ignored classifieds in newspapers may help you spot property auctions, online auction portals may also present some good deals. Online portals have also given rise to the trend of “e-auctions”. In an e-auction, while all else remains the same, time and agility are critical.

Ensure adequate funds. Do not lose the “25” for want of the “75”: Once you zero in on your choice, place a bid application and fees with the concerned bank. It is essential that you inspect the property (banks usually arrange site visits). You will also have to initially pay 10% of the reserve price as earnest money deposit (EMD). If the borrower repays the loan within the 30-day period before the auction, the auction is cancelled and the EMD is refunded. But if the auction takes place, bidding begins at the reserve price set by the bank and then climbs higher depending on the number of bids and the property’s attractiveness.

Once you win the bid, the conditions tighten a bit. Assuming that the reserve price does not fluctuate much during the auction, you will have to pay 25% of the reserve price (this is effectively 15%, excluding the EMD paid earlier) on the same day. However, if the bid price is volatile, you may have to shell out a higher instalment on the auction day. The balance amount has to be paid to the bank within the next 30 days.

If you are unable to pay the balance 75% within the stipulated period, you also forfeit the 25% amount paid earlier. Thus, it is better that you set aside a personal kitty to meet any contingencies. You could also seek a bank loan; either from the auctioning bank itself or your own bank. A loan will ensure a second layer of verification of all the paperwork related to the property. Besides the title deed and the conveyance deed, you will also need a no-objection certificate from the society and the defaulter’s bank, in case you opt for a loan.

Look out for unpaid dues: Usually, auctioned properties are sold on an “as-is-where-is”, “as-is-what-is” basis. The brighter side of this clause is that you get all the fittings and props that the auctioned apartment has. On the flipside, you must also check with the society for any unpaid dues, utility bills or municipal taxes. You will have to factor in these charges while computing the total cost you will incur.

Avoid legal tangles; ensure complete paperwork: No real estate deal comes without lengthy paperwork and rightly so. In case of auctioned properties, one may safely assume that since the deal is originating from a bank, the titles and other documents will be clean. However, oversights are always possible. Hence, a prudent option is to purchase the property through your own bank or appoint a lawyer to verify all documents.

In the absence of a clear title, the borrower may come up with multiple claimants, leading to unnecessary legal hassles. Last but not the least, check the living conditions. A personal visit to the property site will apprise you of the surroundings, facilities available and whether a society is functioning well or not.

Finally, auctioned properties are definitely an attractive bet, but it is better to play safe.

Binaifer Jehani is director, Crisil Research.

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