Bank Auction: Be aware while buying a property
Buying a property in a Bank action? Banks sell off properties of those who have defaulted on loan payments. This includes both residential and commercial. The best thing about these auctions is that the properties are sold off at prices that are much below the market prices. However, there are many risks involved in buying properties in these auctions.
For instance, there are several cases where people who bought properties in a Bank auction did not get possession from the previous owner (the borrower who defaulted). So, here are the details regarding the risks of buying properties in an Bank auction.
Why the discount?
You must understand that the bank’s claim over the auctioned property will be restricted to the outstanding loan amount against it. These are properties that have been pledged as collateral for housing and business loans and taken over by the banks under the Security and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act if there is non-payment of dues by the borrowers. So, the base price of the property will be fixed based on the outstanding loan amount. This is the reason auctioned properties are sold at discounts that can be as high as 30%.
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The bank will not be responsible.
The properties are auctioned on an “as is, where is” basis. In legal terms, this implies that the property is being sold in its present form physically and legally, including encumbrances (if any).
So, the bank will not take any responsibility if there are any issues with the property once it is sold. This is not the case with a normal house purchase deed. In case you are buying a property on your own, you can put a clause asking the seller to indemnify you from any encumbrance on the property much before the date of registration.
Now, what are the possible issues that could arise with an auctioned property?
No repairs on the property
Since the properties are usually auctioned in their present condition, the bank will not provide any money for repairing the property. The existing owners might have stopped paying towards the upkeep of a property once they realize that the bank has taken over. They might even stop maintaining it due to financial stress. So, before taking part in an Bank auction, visit the property, evaluate its structural condition, the quality of construction, and assess the repair or renovation it may require.
Take the help of a good civil engineer to assess the building. If the building is not maintained properly, it has to be renovated and as a new owner, you will have to do the repairs that might require a substantial amount of money. Remember this if you want to buy a property in an Bank auction.
No title clearance
Buyers of properties assume that the properties being auctioned by banks will have a clear title. Generally, the auction notice will have a clause that states ‘the authorized officer shall not be responsible for any unknown existing and future encumbrances or for any third-party claims, rights or dues over the property.’ So, if there are any disputes over the property, you may have to handle those disputes.
Note that banks sometimes lend against properties with not so clear titles. For instance, the building may not have the occupation certificate or the builder may have constructed more than allowed numbers of floors. You must ensure that the project is fully approved and the developer has built it exactly according to the approved plan.
To avoid encumbrance problems, you will need to check historical documents with the help of a lawyer or the registrar of properties. RERA may have made life easy for new house buyers. However, all properties coming up for auction now are mostly non- RERA ones. So, take the help of a professional to understand the titles.
Whether you are buying a plot, a house or an apartment, you will need to have full possession of the property once you have bought it. However, in the case of auctioned properties, this might be a problem. The bank only has symbolic possession of the property, that is, it will have only the required paperwork for the property. It does not occupy it or have physical possession of the property. The previous owner of the property or other persons might continue to have physical possession of the property.
Even though the chance of earlier owners staying in the house is less because banks usually ask them to vacate, there might be tenants if the house has been let out. It is important to check if the tenants have left or else it may become your responsibility to evict them. Evicting tenants from a house is difficult in India especially if the tenant has been staying there for long.
Also read: How Safe Is Your Bank Fixed Deposit?
No consumer rights
When you buy a property on your own and find that the quality of construction is not what was supposed to be, you can file a case against the builder in the consumer court and the court will award compensation. This remedy is not available if you buy a house in an auction. Why? Because there will be no ‘sale’ of goods and services. So, you do not qualify as a ‘consumer’.
Loans from other lender
The property that you purchase in an auction might have more than one loan on it. This means that the owner might have mortgaged it with other banks if he/she was in need of money. So, in addition to the documents given to you by the bank, you have to independently verify with other agencies such as municipalities, tax authorities, etc for other loan details. Note that India does not have a unique property id. So, it will be difficult to locate all mortgages linked to a property, especially for land documents.
Another point that you need to note is if the auctioned property is a joint property. If it is a joint property, all owners being co-borrowers of the loan will be bound by the auction process of the bank. However, some owners might cause trouble. So, ensure that all owners have signed the property documents.
Other outstanding dues
Once you buy the auctioned property, you will need to bear all the related liabilities on that property. This will include pending society dues, maintenance fees, electricity bills, property taxes, etc. Sometimes, these dues can be substantial as people who default on housing loan EMIs might default on these too.
So, meet the society members and ask them about pending dues before purchasing the property in the auction. You might need to verify other dues such as electricity bills on your own. Another problem is that of any pending stamp duty claims. If the previous owner has shown less value for the property at the time of registration, the tax department will raise claims. To verify this, you need to compare the value shown with the prevailing rates in that area.
Understand that even though auctioned properties are attractive because they are available at a discount, they are not risk-free. Due diligence is needed by the buyer before they bid for the property in an auction.