Rising interest rates, high rate of inflation, instability job instability…any of these reasons could mean that a home owner/home loan customer might default on repayments forcing the lender to foreclose the loan and attach the property. The lender now auctions off these properties to recoup its investment.
The Sarfaesi Act empowers the bank to take possession of the property in event the loan borrower i.e. the owner of the property defaults.
While it is indeed distressing for the former home owners, these auctions can be a great avenue to buy property.
Buying and selling old houses in an auction is a fairly young concept in India and the market is not mature or organized. Industry insiders and some banks expect more than respectable growth in this segment; for various reasons.
For one, the price tag on an auction property is much lower than that in a regular market.
Here’s how the value of the property to be auctioned is computed. When the bank seizes the property from a defaulter, a valuation of the property is conducted by an independent chartered surveyor.
Two values are computed, a market value and a distress sale value. A minimum bidding price or what is known as a reserve price is fixed at the distress price level.
The price can go up to any extent depending on the property’s condition, maintenance, and its location. The prices are usually 10-20 per cent lower as compared to market price at that moment.
A prospective buyer, while valuing a desired auction property, should take into account expenses such as overdue payments to the municipality, tax department, co-operative society, and electricity bills.
Though an auction might limit your options as a property buyer, there are still many kinds of properties that can be bought. It could be well-maintained houses, furnished houses, vacant shops, or even warehouses.
You can have a look at your desired property with the permission of the seller/bank before the bidding. It is not a blind-bidding auction. So, you can bid in accordance with the property location, age of the building locality, and many other factors.
The bank may also demand caution money for you to be able to participate in the bidding.
If recent instances of illegal construction keep you away from buying a property, an auctioned property is probably the safest bet. Banks verify title deeds thoroughly before mortgaging property and issuing payment
What to look for in a title deed
Having said that, let’s not trust lenders blindly. Try and get a clear picture of the title chain from various registry offices for the previous 30 years and for 13 years in local courts.
Verify municipal records to assess whether there are any taxes remaining to be paid. Check to see if the names of the past owners have been changed and are on record.
Where does one look for these properties? The banks say they periodically advertise in newspapers. A United Bank official says that residential properties sold through the Sarfaesi Act is about 30 per cent of the total default property.