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How to prevent a nightmare with bank-auctioned homes

When Surabhi Kanth, a Mumbai-based professional, was looking for a home, she had three options. One, buying an under-construction property; second, buying a resale property; and third, buying a property auctioned by the banks. She chose the third option and is now regretting it.

What is repossessed property?

When people default on their monthly EMIs for a property bought with home loans, banks repossess these properties and auction them off to recoup their losses and bad loans using the Sarfaesi Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002). In the physical auction, banks set a minimum reserve price and accept bids from interested parties in sealed envelopes. The property is then sold to the highest bidder.

How to find a mortgaged property

There are websites such as NPAsource.com and ForeclosureIndia.com which provide information on flats up for auction. Says Devendra Jain, Chairman and Managing Director at NPAsource.com: "We put up all the available information regarding NPAs from the banks. Then we source investors who may be interested in purchasing these properties."Such organisations also help buyers in solving legal encumbrances on the properties.

Also banks periodically advertise in newspapers and typically price such properties slightly above the remaining loan liabilities in their books, says Anirudh Wahal, Director at property consultancy firm DTZ.

How do you bid for it

Interested bidders must submit their bids in a sealed envelope to the bank, along with which they must deposit a certain percentage of the reserve price which is refundable if one withdraws from the process or does not win. If you do win, you have to pay up to 25 percent of your bid amount to confirm the purchase. and the remaining 75 percent in 10-15 days. You can apply for a loan for the same.

How is the value of the flat calculated

  How to prevent a nightmare with bank-auctioned homes

When people default on their monthly EMIs for a property bought with home loans, banks repossess these properties and auction them off to recoup their losses and bad loans using the Sarfaesi Act. AFP

The valuation typically tends to be on the conservative side - as it is a distress sale. Once the lender takes control, an independent valuation is conducted with the help of an independent chartered surveyor .

The valuation also depends on how old the loan already is - if old, then a large amount of the original value may be already paid by the defaulter, and the bank will then aim to recover the remaining money and may also try to recover a minimal profit, but not at the cost of risking the entire sale." In such a case, the buyer can hope the price to be lower than the market price for two reasons: 1) the bank needs to recover partial value, and 2) the market price now will be higher than what the bank originally loaned at, explains Wahal.

But more often than not, bank officers sell mortgaged properties of customers who default on repayments to select real estate players below fair value. Thereafter, the property is sold by the real estate dealer in the market at a higher price, with the extra margin being distributed between the dealer and bank officials. To remove the discretion available to bank officials, the government has asked banks to conduct e-auctions.

And it is through this very route that Surabhi Kanth found her Kandivili property. Lured by the significantly cheaper rate, Kanth bid for the property and won it too. But began regretting her decision in less than six months when her CA asked her to pay property taxes. Without proper documents in place, she soon found that the original owner had pledged his property with the bank first and then sold it twice over. This is an illegal transaction which not only prevents Kanth from reselling her property but also from obtaining a loan. Kanth's main folly was to not do due diligence over pending dues or litigation involving the property.

Here are the things buyers must keep in mind if they are bidding for a distressed house sale by banks

Banks cannot book a profit for the sale

Banks are not allowed to pocket any gains from the distress sale, except to recover their dues. If the bid amount is higher than the loan default, the remaining balance shall be paid to the defaulting borrower.

Harsh Roongta, CEO, Apnapaisa.com, says, "If the borrowers owe the bank, Rs15 lakh as original amount and say Rs 2 lakh as other dues, and the bank auctions the amount for Rs20 lakh, the bank will take the Rs 17 lakhs, and pass on the Rs 3 lakh to the borrower. He, however, warns that buyers should not opt for such properties as more often than not they are hostile buys.

Check the legal aspects and do your homework

Most buyers think they will be able to secure a clear title deed as the bank would have ascertained their legitimacy. However, this may not necessarily be the case as defaulters could come up with multiple liens, making the process tedious.

As a prospective bidder you must visit the property beforehand and establish the existence of a proper society. "The original sales deed and the society share certificate are most important, since the transaction cannot proceed without them. Also, the buyer should bear in mind that in the case of a resale property, proper transfer and re-registration is necessary," says Om Ahuja, CEO - Residential Services, Jones Lang LaSalle India.

If the property is over 18-20 years old, it is possible that it was never formally registered in the first place. "Registering it at the current point in time would put the onus of paying the stamp duty in arrears on the buyer," cautions Ahuja.

Opt for the purchasing rote through your own bank or a legal counselor

In order to ensure that you do not get into any legal hassle, the buyer should opt for the purchasing route through his own bank. " The borrower should ask his own bank to assist him through the entire process and make sure all documents, especially the no-objection certificate and the title deed, is in place not just from the defaulter's lending institution but also from the co0perative society," says Wahal.

A good lawyer will also be able to take care of your home loan-related procedures. To obtain your home loan, you need to submit a certificate named NoC, or no-objection certificate.

Verify title and conveyance deed before making the payment

With the help of a legal counsel, investigate the title of the documents and do your research with the registry for a track record of the past 30 years of the property to understand who were its past owners, how many hands it changed and whether there was any legal tangle in the past that needs to be sorted out before you make your winning bid.

What happens if the title deed is not clear

If there is no clear title deed it will lead to litigation. The principle of "what is not owned cannot be sold" will apply and therefore, the claiming party who has proper title on the property will have a more favourable case, says Vinod Kothari, legal adviser at Vinod Kothari & Company.

"This is because if the title deed and the conveyance deed is unclear, banks will not give you a loan nor will you be indemnified by them. And most importantly, you cannot resell the property," argues Dilip Shah, a legal expert. He added that the only reason auctioned flats are so cheap is because of the high risk associated with them.

In Kanth's case, she did not seek the assistance of a legal counsel and paid the price for it. Even though she had written to the bank requesting all the details, "the bank will not indemnify her against any clashes with regard to the title deed. Only if the auction route is through the court can the buyer seek any kind of indemnification," says Nagalaxmi, who had bought her house through a legitimate court transaction.

"Verify all municipal records, tax records, and whether the current owner has sole ownership and if it can be transferred to you in accordance with the rules specified in the Transfer of Property Act," Shah added.

Be prepared for additional costs

Moreover, the winning bid is not the total cost of acquisition of the property. In addition to the payment to be made to the financial institution or bank, there could be some dues to be paid to the builder or the cooperative housing society. For example, if you are moving into a relatively old building where money is being collected for repairs or remodelling, you have to participate in the process. That is why it's best to find out before buying your residential property whether or not there is such an imminent possibility. Other than that, you need to check if the utility bills are all cleared by the previous owner of your home.

"Ask for a letter from the secretary stating that there are no dues outstanding. You should arrive at a final decision only after adding up the bid price as well as dues to find out your total outgo," says Pankaj Kappor, MD at property consulting firm Liases Foras.

(Bindisha Sarang also contributed to this report)

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Updated Date: Dec 20, 2014 13:57:38 IST