The country’s largest bank, State Bank of India, is auctioning online nearly 1,000 residential and commercial properties beginning September 30 through October. The properties are spread across the country though the bulk of them are in north, western and southern India. These are the properties that the bank has repossessed from its borrowers who defaulted on loans for various reasons.
On the face of it, bank auctions are a good way to acquire property at prices lower than the existing market price. Reserve price for auction is most often 22-30 percent lower than the prevailing market price. Prospective buyers are also likely to face little competition given the sheer number of properties on offer.
The auction is being hosted by MSTC and the entire process is pretty straightforward. Register at the MSTC portal, then submit KYC (know your customer) documents and you are ready to go. Buying property in bank auctions is however not as straightforward as it may seem. Here are five thumb rules to keep in mind if you plan to bid for such a property:
1. Bid for a property that is closest to your current location or is in the same city or is at least in a district you are familiar with. From the bid documents available online it’s tough to make out the property’s exact location and its immediate surroundings. But a property is as good as the neighbourhood in which it is located. So it’s best to go for a property at a location you are familiar with.
2. Make a physical inspection of the property before you bid for it. Unless it’s a vacant piece of land the physical condition of a property has a big influence on its market price. This includes the property’s interiors. Given advances in interior and finishing technologies, interior work can cost as much as erecting the basic structure.
So make it a point to make a thorough inspection of both the property exteriors as well as the interiors.
It may be a case that the additional cost of repair, renovation, painting and furnishing may make the auctioned property expensive or at par with a new property or an older property in that neighbourhood.
All auctioned properties are attached to the bank’s specific branch. Contact the branch manager at the SBI branch mentioned in the bid document and request him to show you the property.
3. Keep a substantial amount of cash ready in your bank account. According to the rules, you need to deposit 10 percent of the bid amount as earnest money deposit (EMD) with the bank before you can make a bid. The amount is refunded if you lose the bid. And if you win the bid a quarter or 25 percent of the total bid amount has to be deposited within the 24 hours of the bid closure. In other words if you are planning to buy a property worth Rs 1 crore, have Rs 25 lakh ready in your banks to be withdrawn at a short notice. The balance 75 per cent of the bid amount has to be paid in the next 15 days which means all the documents needed to get a home loan should be ready in hand.
More often than not the banks auctioning the property will provide you the loan to acquire the property. So enter into a verbal agreement with the specific branch manager regarding the loans before you bid for the property. If for some reason the auctioning bank, SBI in this case, refuses to underwrite a loan for this property’s acquisition, there is a slim chance that other lenders will give you a loan for it. Be mindful of this.
4. Check the property title and all its pending dues. By its very nature, a property under auction is a disputed one as the original owner has reneged on the initial promise to the banks. So do some running around and research to check all the antecedents and ownership records of the property. This is to make sure that other individuals or lenders don’t have any claim on the property. Also check the property title from the registrar office to make sure that the bank has a clean possession over the property.
It could be a case where banks only have property documents under its possession but not its physical possession either because the owner has gone to court and could even be staying in it.
As such only bid for property which is under the actual physical possession of the bank and has clear title. If the property is part of a housing society, visit the society office and get an update on any maintenance or other dues pending against the property.
5. Engage a property lawyer and estate consultant from the neighbourhood. By now it should be clear to you that there are a lot of nuances and details involved in getting a clean deal from auctioned property and it’s not possible for home buyers to keep track of all these. So it’s best to hire property lawyers and an estate consultant with operations in the area where the property is located.
I understand that it will push the acquisition cost of the property but they will help you avoid costly mistakes. While the lawyer will ensure that all the property paperwork is up to date and clean, the estate consultant will be well versed with the property history, its neighbourhood and may even be aware with the previous owner’s history and antecedents.
Lastly calculate your overall savings from the auctioned property compared to buying a similar property through regular means, If the savings are not sufficient, including all expenses, then it’s not worth the trouble involved and any potential legal problems later on. This is especially true for first time home buyers who may not be well versed with all the nuances of home buying. So consider well before jumping on the auction bandwagon.
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).