Bidder shall always keep in mind that borrowers have certain rights in a property that is being auctioned, especially when the property is being auctioned due to loan default or mortgage foreclosure
When you buy a property with home loan, the bank reserves the right to sell the property to recover their dues in case you do not repay the loan on time. In such a situation, after reminders and due process, the lender puts the property in question up for auction, following which it fixes a base price and then people participating in the auction are allowed to place bids that are higher than the base price. The person bidding the highest gets the property.
These properties are priced almost 15-20% cheaper than their original market price and most properties sold in auctions are usually ready-to-move-in properties.
There are several circumstances which may lead to auction of the property such as loan default, tax default, bankruptcy, execution of court decree, Seizures and Confiscations, regulatory violation, government surplus (government properties which are no longer required for public use), etc. But is it a good idea to buy such a property? We decode
What is an auctioned property
Banks usually auction the properties under the provisions of and the procedure prescribed under the SARFAESI Act and the rules made thereunder. Under these provisions a property is auctioned when the borrower, who has mortgaged its properties to the bank, fails to pay back to the bank.
Why is it auctioned?
Usually a bank auction process is initiated when borrower defaults on three consecutive Home Loan EMI’s. A notice is served to the customer to respond within 60 days that why the bank should not initiate a auction of property due to default in payment. Borrower can pay the installments and this notice is withdrawn.
Otherwise a borrower has the right to submit his objection within 60 days with justification for non-payment of EMI. In case, no reply is received from borrower or bank is not satisfied with the reply then bank can initiate bank auction process. After the expiry of this 60 days, the bank can auction the property after 30 days.
Many banks publish lists of their auctioned properties on their websites or in newspapers. You can also contact the bank directly to inquire about any properties that are currently being auctioned. The IBAPI portal by the Indian Banks Association (IBA) to list bank auction properties can also be checked.
Several real estate auction website and online classified website also advertise properties available for auction, however, bidders are strictly advised to conduct proper due diligence before bidding in properties listed on such websites.
You must first identify the property and the bank that is carrying out the auction. “Often all details are mentioned in the notification of the auction along with the process. Auction dates are mentioned by each bank on their respective websites and the same is also published in the newspapers,” said Adhil Shetty of BankBazaar.
Earnest Money Deposit
The bank generally charge 10% of the property’s value as Earnest Money Deposit (EMD) before the auction. “This serves as a safeguard and eliminates amateur bids. Thereafter, if the person wins the bid then they are supposed to pay 15% of the amount same day of winning and rest 75% payment is required to be made as per the terms of auction authority, which may differ from case to case,” said Sachdeva.
If you are unable to pay the said amount within the stipulated time you will lose the property along with the EMD amount paid to the bank earlier.
What is the pre-payment and taxation angle?
” Buyers at bank auction are required to pay a TDS of 1% of the total property value at the time of payment. The deduction is only available if the property is worth at least Rs 50 lakh,” said Ravi Prakash, Head, Legal, Hero Realty.
If you are considering buying a bank auction property, it is important to do your due diligence and to be aware of the risks involved.
What documents should a bidder ask for?
– Ankur Mahindro, Managing Partner, Kred Jure – Advocates & Legal Consultants lists down the nexxesary checklist after winning the bid
x. Photographs and Video
What if there are structural changes to property that haven’t been approved?
If there are structural changes to a property that haven’t been approved by the relevant local authority, it can lead to legal and regulatory issues. However, the bidder should assess the nature and extent of the unapproved structural changes.”
“Determine if these changes are significant, affect the property’s safety, or violate local regulations. If the structural change does not violate any local regulation, then the bidder should not be concerned about such change, however, the bidder still can use such unapproved structural change to further negotiate with the seller/auction authority. Further, in cases where such changes are violating any local regulation then there are chances that local authorities may provide process for regularizing unapproved changes by paying fines, obtaining retroactive permits, and ensuring that the changes meet current building codes,” said Sachedeva.
“It is best to consult a lawyer or structural engineer to understand your rights and obligations in this situation. Often the properties which are approved by the banks for loans are the properties which are legally approved and likely have less chances of having approval related issues. It is recommended to get these clarifications from the bank itself,” said Shetty.
The Security Interest (Enforcement) Rules, 2002 place a responsibility on the bank to deliver the property to the buyer free from encumbrances upon receiving payment.
Symbolic possession means the bank is in the process of obtaining physical possession from the borrower.
Title: Buyers must complete a title check and verify ownership of the property.
“There is an inherent risk of title while purchasing in auction as the bank transfers the title on as is where is basis so in the event of any pending litigation on the property or any dues or any lacuna in title, the same shall pass onto the purchaser,” said Sadhav Mishra, Partner, SNG & Partners, Advocates & Solicitors.
Rights of the borrower: Courts have attached prime importance to the right of the Borrower to reclaim its title of the property/ an opportunity to the Borrower, before sale of auctioned property is executed.
“The bidder shall always keep in mind that borrowers do have certain rights in a property that is being auctioned, especially when the property is being auctioned due to loan default or mortgage foreclosure. For instance borrower have right to participate in the auction, the borrower also have ‘Right of redemption’ i.e. to cure the default by paying the outstanding dues, including the loan amount, interest, penalties, and any other associated costs, before the auction takes place, which may result in nullifying the whole auction process. Further, the borrower always have legal remedies specially in cases where the foreclosure process was conducted improperly and that may result in prolonging the auction process,” said Sachedva.