Risks in buying property through auction


We examine the risks involved in the purchase of distressed realty assets through auctions and the precautions that buyers must take

Amid the possibility of large-scale defaults by home owners and builders, in the backdrop of the Coronavirus crisis, financial institutions could be forced to repossess properties and sell them in the open market, to recover costs. This provides an opportunity for buyers who are looking for homes at affordable rates. While this proposition may seem lucrative and tempting, it is fraught with various risks too. That is why buyers considering property purchase from an auction must be mindful of some legal and financial implications of the purchase decision.

 

Risks in buying property through auction

 

See also: Guide to buying a property under auction

 

How to finance a home bought at auction

A buyer has to submit 10%-15% of the property’s value as the earnest deposit, at the time of bidding for an auction property. In case the bid is in his favour, he would be given only a couple of days to arrange a similar amount – i.e., another 15% of the overall cost. The bank would then provide him about a month or so to arrange the remaining 70% money. Failure to make the payment, because of any problem, will result in losing all the earnest deposit made so far. People planning to buy an auction property through bank finance might find this idea particularly worrisome.

 

Income tax and TDS on buying auctioned property

Under Indian laws, buyers have to deduct 1% of the property’s value as tax deducted at source (TDS) at the time of payment, if the cost is Rs 50 lakhs or more and pay this money to the income tax (IT) authorities. Since a bank is involved in the transaction in the assumed capacity of a seller, buyers tend to think that the bank is the actual owner of the property and may take care of this aspect. However, the property still belongs to the original owner and the buyer you will have to get in touch with them, to obtain their PAN card number and other details, to deduct the TDS. In case you fail to do so during the purchase process, the liability to pay the money to the IT department will eventually fall on you.

See also: Can reforms in property auctions help real estate during COVID-19?

 

Precautions for buying stressed properties in auctions

As mentioned already, although the bank auctions the property, it may not be the owner. This means that the property might still be occupied by the previous owners. Before making up your mind about the bidding, physically inspect the property, to rule out the presence of any squatters. In case there are squatters, you are advised to avoid such properties, as the responsibility to evict the squatter from your future property will fall on you. This has to do with the fact that auctioned properties are sold on an ‘as is where is’ basis. Consequently, the buyer inherits everything, including encumbrances.

 

FAQ

Are bank auction properties safe to buy?

Buying a property that is auctioned by a bank requires significantly greater due diligence. Buyers should note that the bank's claim on the auctioned property is only limited to the outstanding loan due on the property.

Is the bank the owner of an auctioned property?

In case of a bank-auctioned property, the legal title rests with the original owner and not with the bank. The bank does not become the owner of the property merely because it has taken possession of the property to recover its dues.

Where to find properties auctioned by banks in India?

You can find out about properties on auction from advertisements by banks and notices posted on properties.

 

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