In the event where a home owner defaults on the loan taken, the lender is entitled to legally repossess the property. Such repossessed properties are ultimately sold through physical or electronic versions of auctions. Before you decide to buy such an auctioned property, here are the precautions you need to take.
Outstanding municipal tax and society dues
Generally, default in payments of EMIs for a home loan, is a person’s last resort. So, it is very likely that the home owner must have defaulted in paying local taxes and society charges. Since the properties are sold under ‘as it is where it is basis’, it is the responsibility of the prospective buyer to discharge such outstanding dues. Always ascertain outstanding amounts in respect of society charges and municipal taxes in case these payments are to be made by the property owner itself. Bidding for a property without knowing the liability of such dues may enhance your cost.
Legal due diligence
In the case of a property auctioned by a bank, the legal titles are not with the bank. Also, the bank does not take responsibility for the title as it does not become the owner of the property simply because it has taken over possession of the property. So, when buying a property, under auction or otherwise, it is always advisable to get the ownership of the title to the property duly investigated by a lawyer. This may increase your cost a little, but it is better to spend more early on, than go through hassles later.
Arrangement of funds
In case of an under-construction property or even for a ready flat, the payment schedule is generally convenient or is decided on the basis of mutual discussion. However, in the event of an auction, if your bid for the property is successful, you have to pay the balance amount at a relatively shorter notice. Should you default, you may lose your earnest money deposit. Hence, it is very important to plan the funding of such purchases well in advance, with adequate provision for contingency.
You can also get a home loan for such property, but you have to arrange for the full auction amount first from your own sources and then the home loan lender can issue the cheque. In case you intend to take a home loan for such a property, you should acquire an in-principle approval for the loan amount based on your income.
TDS on purchase consideration
As per the provisions of income tax laws, the home buyer has to deduct tax at source at 1% from the purchase consideration, in case the value of the property exceeds Rs 50 lakhs. This applies to properties purchased through auction as well. Though you are buying the property from the bank (which is not the owner of the property), the TDS has to be deducted and credited to the account of the original owner. So, you need to obtain the PAN details/copy of the original owner of the property as you need to credit the TDS to PAN . In case you do not get the PAN details of the owner, you will have to deduct the tax at 20% instead of the stipulated rate of 1%.
Moreover, you need to arrive at an agreement with the bank about the amount of the TDS to be treated as part of the purchase consideration. In case the auctioning bank does not agree, your cost of purchase will go up by this 1% TDS which you are supposed to deduct as it will be almost impossible for you to recover the amount of TDS from the original owner of the property.
With such small precautions, you may be able to purchase property under auction successfully and sometimes cheaper as well.
(The author is a taxation and home finance expert, with 30 years’ experience.)