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There are several hurdles in the process of transfer of a distressed property under the present auction process. Due to the Coronavirus pandemic, there is a broad consensus among real estate experts and stakeholders that soon, a large number of home loan borrowers may default on their loan repayment. There are reports by several realty organisations like CREDAI and NAREDCO that indicate a looming problem of EMI defaults, by a large number of home buyers in the big cities. It means that after the moratorium is over, the defaults may start surfacing. This could lead to a chain reaction, leading to defaults in the entire realty sector and spilling over to other sectors, as well. With Indians faced with the prospect of job losses and reduced income, are there ways to help home buyers and the realty sector to escape from this crisis?
Reforms that are needed in the property auction process
The government should evolve a mechanism to smoothen the process of property auctions. Under the present system, the participants in an auction have to face several challenges.
The property is sold on an ‘as it is’ or ‘as is where is’ basis. Banks do not declare the property as free from other encumbrances. Why would anyone buy a property in an auction, when there are chances of hidden liabilities attached to it? The government should come up with a system that authorises the banks to declare all the liabilities and encumbrances on the auctioned property.
- There should be no registration and stamp duty on property transactions through bank auction.
- Buyers of auctioned properties often face challenges like defective title and difficulty in getting possession. For this, the government could frame a law to complete the auction process in a time-bound manner. For example, after successful bidding and depositing the bid amount, the buyer should get the possession and title of the property within a time-bound manner, say, within 30 days. If the bidders do not get possession and title of the property in the stipulated time, then, he should get a refund along with a penalty as decided by the government.
- There should be a quick home loan facility on easy terms, for the successful bidder.
- The buyer of the auctioned property should get exclusive income tax benefits.
- The distressed owner (and developers) who are not sure about timely payment of loan EMIs, should get a chance to put their property on voluntary auction through banks, to protect their credit history and to keep their borrowing capacity intact. After the property is put on voluntary auction, the EMI should stop immediately and it should not impact the credit history of the distressed owner.
Buyers of auctioned properties should get immunity from the legal action taken by the distressed seller. The buyer usually fears such legal action, especially when they have not committed any mistake.
- In the auction, the earnest money deposit (EMD) should be lowered to 15% from 25% of the bid amount. Banks usually allow loans up to 90% of the property value. So, the remaining amount can be arranged by the bidder through the bank.
- A pre-eligibility check by banks, to ascertain and to allow bidding limits to a person as per their borrowing capacity, can help in quick loan sanction, once that person wins the bid.
- There is also a pressing need for transparent data, pertaining to the availability of properties on auction, with complete details. A common national portal for property auction should be launched, which could consist of properties from all the banks and financing institutions, along with voluntary auctions.
Advantages of real estate auctions for buyers, sellers and banks
The financial capacity of home buyers, investors and developers, is expected to degrade following the COVID-19 pandemic. For example, if a property buyer had the capacity to afford a loan of up to Rs 1 crore, he may now be able to afford a property with much lower value, say, Rs 50 lakhs. Similarly, one who had the capacity to take a loan of Rs 50 lakhs, may now be able afford a loan of only up to Rs 25 lakhs and so on.
Real estate auctions will allow people to bid for the property, as per their updated financial capacity. The financial institutions will be able to replace distressed borrowers, with a new sound borrower. The builder will start getting the payments on time, while the buyer will get a chance to buy a property at realistic valuations and as per the current market situation.
While changes in the auction process may not solve all the problems of the real estate sector, lenders and home buyers, it could, nevertheless, provide a big relief during this difficult time.
What is the risk in buying auctioned property?
When a property is auctioned by a bank, the legal title of the property is not with the bank. As the bank has merely taken over possession of the property, it does not become the owner of the property and hence, does not take responsibility for the title. So, when buying an auctioned property, it is advisable to get the title to the property duly investigated by a lawyer.
Can I get a home loan for auction properties?
You can get a home loan for an auctioned property but you have to arrange for the earnest money deposit (EMD) first from your own sources and then, the home loan lender can issue the cheque.