Bank Auctions – uncharted territory for buying properties

Under The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) lenders like Banks and Financial Institutions are empowered to recover mortgaged properties, without intervention of court, in case of default buy the borrower. The properties so recovered are subsequently sold by bank through Auction to recover their dues. The excess of sales proceeds, if any, if handed over to the Defaulter (original property owner).

How it works

Auction is one of the common methods adopted by banks to dispose-off such properties. The bank will appoint an Authorised Officer to conduct the auction. A Public Notice of auction will be given in the newspaper and on the bank’s website.

The Notice will contain information like the details of the property, Reserve Price (minimum price at which bidding will start), Earnest Money Deposit (EMD), date of inspection,  time and place of auction, time and place for collecting the ‘Tender Form’,  last date for submission of ‘Tender Form’ etc..

The auction will be conducted in the conventional way, usually at the banks premises. However, now days, online auctions (E Auctions) are also gaining popularity.

How to Participate in the Auction

Any person desirous of buying acquired property from the bank can participate in the auction. Following are the various steps involved.

1. Get information about properties being auctioned from the notice given in the newspaper or the bank’s website.
2. Identify the property you would like to bid for and inspect the same at time given in the notice.
3. Submit your bid form (tender) by the time given in the notice along with the EMD which is usually 10% of the reserve price.
4.  Participate in the auction at the time given in the notice and bid for the property.
5. If you are the highest bidder, the property will be allotted to you.
6. You will have to deposit 25% of the property price (less EMD) the same day.
7. The balance money will have to be deposited within 15 to 30 days as specified in the Notice. Thereafter, you can register the property in your name.
8. If you fail to deposit the balance money within prescribed time, you will not be entitled to get the property and the money deposited earlier will be forfeited.
9.  If you are not the highest bidder, the EMD will be refunded to you (usually immediately after the auction).

Perceptions regarding bank auctioned properties
One of the main attractions of buying a bank auctioned property is that there is a possibility of getting it at a substantial discount to the prevailing market price. This is because the banks are interested in selling of the property at the earliest and are primarily concerned with recovery of their dues which is usually lower that the value of the property.

While on paper this may look attractive, in reality it may not be so. This is because, while the reserve price may be low, there could be many bidders competing at the auction (especially in case of E auction) and the highest bid could be close to the market price.

Secondly, the original owner of the property (defaulter) is entitled to get the surplus from the sales proceeds after the settlement of bank dues. Hence, it is in his interest that the property is sold at higher price.  An aggrieved defaulter has right to approach the Debt Tribunal, challenging the action taken by the bank.

In such case, the matter could get stuck in long legal dispute which can go right up to Supreme Court. If the action taken by the bank is found to be wrong, the sale may also be cancelled. Hence the bank needs to keep the original owner (defaulters) interest also in mind while auctioning the property.

Another myth regarding bank auctioned properties is that since one is buying the property directly from the bank, the title would be absolutely clear. It should be noted that the properties are sold in auction on “AS IS WHERE IS BASIS” and “AS IS WHAT IS BASIS”.  Hence, such properties are not different from the other properties being finance by the bank and the buyer will get the same title as the original owner (defaulter).

There is general a perception that participation in auction is a cumbersome process and only people with expertise and deep pockets can participate. This is not true, especially now, with online auction, even a common man can bid for such properties. Also the ticket size for properties could be as low as ten lacs or even less.

Another point to be kept in mind is that many times due to financial constraints, the property may not have been properly maintained by the defaulter. Hence the buyer may have to incur substantial expense on repairs and restoration of such property. Also there could be outstanding dues like property taxes, electricity charges, society maintenance bills etc.

Why such auctions not very popular with property buyers
Apart from what is mentioned above, some of the other reasons why there is not much participation in such auction by home buyers are.

1. There is limited awareness among retail home buyers as to how they can participate in the auction.
2. Also, through current means of notice in the newspaper (and now on websites) banks are not able to reach out a larger target audience.
3. Generally it is seen that there are more of commercial properties/industrial properties and land being auctioned.
4. Due to legal and other hassles involved, many banks are reluctant to give loan for purchase of such auctioned properties. Also one has to deposit the balance money within short period of 15 to 30 days.

As can be seen, “Bank Auctions” could be a good avenue for acquiring a property relatively safely and at a good price. However, one needs to put in efforts in thoroughly studying and investigating the various points discussed above and take a well informed decision. After all buying a property is one of the most important decisions of your life and may involve parting with your life time savings.