Five tips to bid for a bank auction property

Bank and non-bank lenders are expected to auction over 4,100 residential properties across the country within the next 30 days, according to the latest data from the Indian Banks Association (IBA). These are the properties that the lenders have repossessed from borrowers who did not repay interest and principal on their loans for various reasons. Residential properties on auctions include flats and apartments, plots and villas, farmhouses, and non-agricultural (NA) plots of land. 

In all, a little over 13,000 residential properties are available for auction by IBA. Besides, banks also plan to auction nearly 3,700 commercial and industrial properties over the coming months to recover their dues from defaulters.

A bank auction is a good way to acquire property at prices lower than the existing market price. Prospective buyers are also likely to face little competition given the sheer number of properties on offer by various lenders. 

The e-auction or online auction of properties is conducted at a regular interval by government-owned MSTC (formerly Metal Scrap Trading Corporation Ltd). A buyer has to register at the MSTC e-auction portal and submit the KYC documents. Once the registration and documents are approved by MSTC, you are ready to start bidding.

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Buying property in a bank auction, however, can be tricky given the intricacies of property selection and their pricing and financing. Here are some thumb rules you should consider before you consider participating in the bidding process.

1. Bid for the property that is closest to your current location or in a city or 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. 

All properties planned to be auctioned by banks are listed at the Indian Banks Auctions Mortgaged Properties Information (IBAPI) portal (https://ibapi.in). The portal has a search function and you can filter the property by type, state, district and the nearest city. Every property listing at IBAPI includes a photograph of the property and a PDF document with property details such as its size, exact location, base price, deposit amount for auction and total outstanding bank dues. This way you can zero in on the property that fits your preference.

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 interiors. Given advances in interior and finishing technologies, interiors can cost more than the building’s basic structure. 

Make it a point to make a thorough inspection of the property's exteriors as well as the interiors. And if you find any deficiencies or damages then try to calculate the renovation cost and add it to the auction price to arrive at the true acquisition cost of the property.

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. You can contact the branch manager of the designated banks mentioned in the bid document, and request him to show you the property.

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3. Maintain a large cash balance in a 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. 

If you win the bid, 25 percent of the total bid amount has to be deposited within 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 short notice. The balance 75 percent 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 refuses to underwrite a loan for the property acquisition there is a slim chance that other lenders will give you a loan for this property.

4. Check the property title and all its pending dues. By definition, a property under auction is a disputed asset as the original owner has defaulted on her initial promise to the banks. So do some running around and research to check all the antecedents and ownership records of the property. 

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For flats and apartments under auction, outstanding maintenance due to the housing society can alone run in lakhs. Similarly, there could be pending property taxes. So have a detailed discussion with the bank officer regarding pending dues and their liability. 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.

Also, check the property title from the registrar's office to make sure that the bank has clean possession of the property.

It could be a case where banks only have property documents but not physical possession because the owner has gone to court and could even be staying in it. The bank's liability and legal responsibility for the property ends once you have won the bid and decided to go ahead with its acquisition. As such only bid for property which is under the actual physical possession of the banks and has clear title.

5. Engage a property lawyer and a real estate broker or a 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 is best to hire a property lawyer beside a property broker who has a good knowledge of the locality. It will push the acquisition cost, 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 broker will be well versed with the property history, and its neighbourhood and may even be aware of 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 it given the trouble involved and the potential legal challenges later on. This is especially true for first-time home buyers who may not be well-versed with all the nuances of home buying.

(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).

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