Property auctions have been a very effective way for banks to reduce the stress in their books, and for prospective buyers to own a home at discounted rates. However, some challenges remain.
Heard about SBI Mega e-Auction and many other such property auctions where hundreds and thousands of units are auctioned at regular intervals? For instance, close to 1000 pieces of property from both commercial and residential spaces were auctioned by the State Bank of India yesterday (May 29) and many other banks also keep doing it. In fact, property auctions have become a norm these days and also a craze among buyers particularly because of heavy discounts they offer.
Industry experts say that property auctions have been a very effective way for banks to reduce the stress in their books; and for prospective buyers to own a home at discounted rates. However, buyers have had mixed experiences — from euphoria over steep discounts to their remorse over unanticipated problems and liabilities.
That is because these types of property are usually those which are pledged as collateral for housing and business loans, but are taken over by the concerned banks under the Security and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act due to non-payment of dues by the borrowers. So, some problems are likely to remain.
Advantages of buying auctioned property
“The advantages to buying a piece of property being auctioned by a bank include a potentially lower price than the prevailing market rates for such a property in a particular location, the possibility of securing a prime location asset, and reduced burden of due diligence since the auctioning bank will already have confirmed the legal veracity of the property,” says Anuj Puri, Chairman, ANAROCK Property Consultants.
There are also some potential challenges to investing in property being auctioned by banks. For instance, it is impossible to anticipate what the highest bid for any given property will be. So, there is no assurance of acquiring a property one is interested in at the desired price.
“The main driver of auctioned properties is the discount to market prices. While the discount creates an excellent entry point, any surprises after submitting the winning bid are at the expense of the buyer, eroding his returns. While most banks are transparent with any external liabilities associated with the property, buyers should not overlook the ‘as-is-where-is’ clause, and other disclaimers provided in the bid documents. A physical inspection of the property and due diligence on title as well as outstanding society and municipal outgoings will go a long way to minimize the information deficit and risk of unforeseen costs – be it physical defects or statutory liabilities,” says Aashish Agarwal, Senior Director, Valuation & Advisory Services, Colliers International India.
In an auction process, buyers lose out on the choice of apartment, the opportunity to negotiate and payment flexibility offered by an across-the-table transaction. Therefore, buyers should ensure that the ‘discount’ compensates for these compromises. Buyers should also carefully assess their ability to meet the financial commitments of the bid as well as ascertain the overall transaction cost, including taxation, registration and stamp duty.
“In any case, buyers need to be very familiar with the pros and cons of buying a distressed property. A successful acquisition will depend on both the bank and the property’s original owner being satisfied with the outcome so that there is no possibility of legal setbacks later on. Also, the buyer must have a complete understanding of the ownership history of such a property and needs to ask for all the pertinent paperwork so that the property title is airtight and not open to future challenges,” says Puri.
Properties auctioned by banks, thus, can be rewarding opportunities for buyers who can dedicate the time, ability and resources to evaluate them. “An eye on the potential for future appreciation and long-term value creation would yield much better returns than trying to chase the maximum discount, based on benchmarking the reserve price to quoted market prices,” says Agarwal.
In order to make the most of this opportunity, therefore, buyers should assess the value from a holistic risk-reward perspective.