Buying Auctioned Homes

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Repossessed properties sold by banks can appear to be a steal for bargain hunters, but they come with their own set of risks. 

Buyers should remember that a bank's claim on a property put up for auction is restricted to the outstanding loans against it. Thus, the base price is determined by the outstanding amount. 

This explains why auctioned properties usually go at a discount to the prevailing market price, and this discount can be as high as 30% in some cases. 

However, retail investors find it difficult to bid for such properties as high networth real estate investors usually corner them with the help of bank managers, agents, etc. Though the introduction of online auction platforms has made the process more transparent now, the risks involved with these properties remain. The properties are auctioned on an "as is, where is" basis. This means the bank in question will not take any responsibility should any issues arise with the property in future. 

This is the opposite of a normal house purchase deed, where the buyer can put a clause asking the seller to indemnify the buyer from any encumbrance on the property prior to the date of registration. "Since these auctioned properties are coming with an 'as is, where is' clause, the banks don't take any responsibility. Prospective buyers need to make sure that the risk is commensurate with the discount they are getting 

This is the opposite of a normal house purchase deed, where the buyer can put a clause asking the seller to indemnify the buyer from any encumbrance on the property prior to the date of registration. "Since these auctioned properties are coming with an 'as is, where is' clause, the banks don't take any responsibility. Prospective buyers need to make sure that the risk is commensurate with the discount they are getting 

1. Loans from other lenders 
The bank that auctions the property will cover all its dues, but there is no guarantee that the same property is not mortgaged with other lenders. This problem is more acute on land parcels than constructed residential flats or on commercial properties. 

This is because most lenders insist on original sale agreement, share certificates and no objection certificates from the housing societies, etc and therefore, you get a fair idea by getting details from there. However, you have to independently verify, in addition to the documents given to you by the bank, with other agencies like municipalities, tax authorities, etc for land being sold. "Since India doesn't have a unique property id, it will be difficult to locate all mortgages linked to that  

Also make sure that if it is a joint property, all owners are also co-borrowers for the loan and thus bound by the auction process by the bank. Else, other owners can create trouble later. 

2. Other outstanding dues 
Though a bank will recover its dues fully from the bid amount, the bid winner has to bear all the related liabilities on that property like pending society dues, electricity bills, property tax, etc. Sometimes, these dues can be substantial, warns Kapoor of Liases Foras. This is because people default on housing loan EMIs last. There is high probability that the borrower might have defaulted on other expenses before that. 

Meeting the society members and asking them about pending dues is one way of going about it. However, you have to verify other dues like electricity bills, gas bills, etc yourself. Pending stamp duty claims, if the previous owner has shown less value at the time of registration and the department has raised any claim on that, can be another issue. This can be verified by comparing the value shown with the prevailing rates in that area. For under-construction properties, some dues may be pending

3. Property titles 
Generally, it is assumed that the property titles are clear because banks have already lent against it. However, this may not be true. With competition picking up, there are several instances of banks lending against properties with not so clear titles. For instance, for buildings that don't even have occupation certificates. Even if the banks might have taken full precaution at the time of giving loans, illegality might have happened later. 

4. Tenants in the house 
The chance of earlier owners staying in the house is less because banks usually ask them to vacate before auctioning the property. However, if it is already let out, the tenants may be still staying in the house and it becomes your responsibility to evict them. Freeing a house of its tenant is difficult in India, especially if the tenant has been staying there for long. The best strategy is to avoid a house which is already occupied 

5. Physical condition 
The existing owners will stop paying towards the upkeep of a property once they realise they are going to lose it. Even before the property is auctioned, the existing owners might stop maintening it due to financial stress. While this is not a very big issue, you do need to visit the house and also the locality to assess the situation. 

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