How to buy property in a bank auction?

Unlike unsecured loans, home loans are secured loans, which means the property is used as collateral or security against the loan amount. When a borrower defaults on the loan repayment, the bank has the right to seize the property and sell it through auction. Purchasing a property through a bank auction is one of the options available to home buyers. Through bank auctions, it is possible to buy an attractive property in a prime location in a city like Delhi at a competitive price. However, it is important to understand if there are any risks associated with it and whether it is beneficial to invest in such properties. We will also explain the process of buying a property in a bank auction.

What is a bank auction?

A bank auction is the sale of a property seized by a bank or a financial institution through loan default by the previous owners and auctioning it to the public. The bank auctions the property to recover the outstanding loan dues. Bank auction properties, also referred to as foreclosure properties or distressed assets, are real estate assets that have undergone a repossession process initiated by the lender (bank). Banks auction properties under the provisions of the SARFAESI Act and procedure prescribed under this act.

What are the benefits of buying a bank auction property?

Typically, a bank auction property is sold at a discounted price compared to the property’s market value. Investing in a bank auction property, like other properties, can fetch high returns, especially if the property is located in a fast-developing or a bustling neighbourhood. This can be an excellent choice for property investors to diversify their portfolio.

Risks of buying a bank auction property

While purchasing a property through a bank auction comes with its set of advantages, there are some risks associated with it that buyers must be know. One of the main risks is the unclear history of the property. A buyer may find it challenging to verify the property’s history, such as any legal issues like disputed titles or outstanding liens. Besides, they may get it in distressed condition.

Process of buying property in a bank auction

#1. Finding a bank auction property

The Indian Banks Auctions Mortgaged Properties Information (IBAPI) portal is a central portal provided by the Indian Banks Association (IBA) under the policy of the Department of Financial Services (DFS), Ministry of Finance, which lists the mortgaged properties to be auctioned online by banks. The portal allows property buyers to view these properties and participate in the auction process. Prospective buyers can conduct their research on the banks that are conducting property auctions. They can shortlist the properties based on their budget preference, location, etc. They can also carry out market research in the area to find the property prices.

#2. Attending pre-auction inspection                         

Banks have a pre-auction inspection period for properties to be auctioned to inspect the property’s physical condition and verify its legal status. One can approach the bank and get a date when they can visit the property. It is important to ensure there are no bank notices posted on the property’s doors or the society noticeboards.

#3. Arranging finances

Like purchasing any other property, prospective buyers should ensure adequate funds or a pre-approval loan before participating in the auction. Banks typically charge a deposit of 10-15% of the property’s value. Proof of funds is an important aspect of participating in a bank auction. Some auctions require a deposit at the time of bidding and a full payment within a specified period.

The payment plan of the auctioned properties may vary based on the auctioning authority, property type, terms and conditions, etc. Typically, it includes the Earnest Money Deposit (EMD), complete upfront payment, partial upfront payment, remaining amount payable within the stipulated period, etc.  Interested participants should carefully read the payment plans. Further, Goods and Services Tax (GST), property taxes, stamp duty and registration, Tax Deducted at Source (TDS) if the property value is above Rs 50 lakh, etc. are some of the costs incurred by the buyer.

Prospective buyers must know that they can also avail a home loan to purchased an auctioned property. They must check if banks offer home loans for properties purchased in an auction and proceed accordingly.

#4. Register for auction

After preparing the finances, prospective buyers must register for the auction as per the specified procedures. For this, one must provide information such as personal details, proof of funds, etc. and agree to the auction terms and conditions. The registration requirements and process may differ and must be checked.

An earnest money deposit (EMD) must be submitted before the auction. Banks usually charge 10% of the property’s value as EMD, which serves as a cover and eliminates amateur bids. In case a person is unable to pay the amount within the specified period, they will lose the property along with the EMD amount paid to the bank earlier.

#5. Participating in the bank auction

One should note the date of auction (online or offline), which is fixed by banks. Prospective buyers can participate by placing bids in person, online or through sealed bids, depending on the format. Participants must set the budget and adhere to it while considering the potential costs associated with the purchase.

#6. Bidding and winning the auction

After the registration for the auction, prospective buyers will get complete details in the notification of the auction along with the process to be followed. Auction dates are fixed by the bank and displayed on their official websites. These details are also published in the newspapers. The bidding takes place on the specified date and if the bid is the highest, the individual becomes the owner of the property. They are required to pay 15% of the amount on the same day of winning and the remaining amount within a specified period like 15 to 30 days.

#7. Executing legal formalities

At this stage, the buyers can hire a lawyer to conduct thorough due diligence and verify the property documents, including:

• Ownership documents (title deed, sale or conveyance deed)
• Property tax bills
• Utility bills
• Encumbrance certificate
• Approved building plan and layout plan
• NOC from the relevant local authorities, as applicable
• Completion certificate/ occupation certificate

After this, they must complete the property registration process by following the legal process and pay the required stamp duty and registration fee.

#8. Taking possession of the property

After the completion of the legal formalities, the buyer can take possession of the property. They may also go for any necessary repairs or renovations on the property before selling or renting it out to tenants.

Tips on buying a bank auction property

• Conduct thorough research on the property: Before participating in a bank auction, prospective buyers should conduct proper research of the property they plan to purchase in order to make an informed decision.
• Inspect the property thoroughly: Prospective buyers should utilise the pre-auction inspection time to insect the property and assess its condition. During the inspection, they should look for any major structural damages or repairs required so that they can plan their finances accordingly.
• Estimate the expenses to cover damages: If the property being auctioned by the bank has legal issues, the buyer may have to bear the costs. Similarly, buyers should estimate the expenses related to the repair and renovation before participating in the bank auction.
• Ensure there are no pending dues: During the property due diligence, the buyer should check all the relevant property documents, including the sale deed, property tax receipts, title documents, etc. to check if there are no pending dues. Otherwise, the buyer who will be the new owner of the property, will be liable to settle the unpaid fees like property taxes, utility bills, society charges, etc.
• Evaluate potential returns: This is an important step in real estate investment. Potential buyers must calculate the rental yield or resale value of the property, depending on the market trends. This help them decide whether the investment is profitable or not.

Housing.com News Viewpoint

Property buyers interested in purchasing a bank auction property must weigh the pros and cons and make an informed decision. The process of participating in a bank auction online is much easier. There are websites such as MSTC (Metal Scrap Trade Corporation) e-auction platform, financialservices.gov.in, ibapi.in, e-auctions.gov.in, etc. where properties to be auctioned by various government departments and organisations are displayed. One can also check the official websites of banks and financial institutions that offer properties through auction. Prospective buyers can approach a legal professional or a banking expert to understand the process.

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