Asset quality has been a big worry for banks nowadays. The gross Non-Performing Assets (NPAs) of 40 listed Indian banks have jumped to Rs1,79,000 crore in December 2012 from about Rs 1,25,000 crore a year ago. Due to deteriorating economic conditions and overall lull in the industry, borrowers are having tough time while repaying their home loan dues (and yes there are some willful defaulters too). Typically, an account is said to be a Non-performing Asset when the borrower defaults on his Equated Monthly Installments (EMIs) for consecutive 6 months upon which bank follows its set processes, in accordance with RBI guidelines to recover amount due. This begins with sending notices to the defaulter asking him to pay dues. As a last alternative, the bank has a right to sell-off mortgaged properties to recover outstanding amount of loan. Here comes the opportunity for potential home buyers to get a good deal. However, what initially may appear to be a good bargain may actually turnout to be a nightmare, if one doesn’t exercise due diligence while buying these distressed assets.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, allows banks to auction properties against which they have lent in the past, without any intervention of Court or tribunal. In principle, banks cannot profit out of such auctions of mortgaged properties. They only have a right to recover dues and profit, if any, made on such deals have to be passed on the borrower. You may have a question as to why people buy distressed properties. Here’s why.

The bank advertises in newspapers and on some portals to dispose-off these properties. It takes help from a Government appointed valuator to discover fair price. Banks cannot sell below the price ascertained by the valuator. This acts as a floor for requesting bids to auction. However, in practice, this amount is more often than not, lower than the prevailing market rate for similar properties in the same locality. This gives potential buyer a chance to benefit from the arbitrage. The aspired bidder, along with his bid, has to deposit margin money worth about 5%-10% of the total value of property with the bank. This is a refundable deposit, i.e. in case you lose in the process of bidding, the amount you paid as margin will be refunded to you. Usually, the bids of highest value are awarded the property. PersonalFN believes that bidding for distressed assets of banks may offer you excellent deals but it would be the biggest mistake to be complacent and get carried away with such opportunities. Bank being a party to trade, doesn’t ensure any safety. PersonalFN here gives you a checklist, as to what you should into while buying such a property in auction, however, it is important to note that the list is not exhaustive.
 

• Don’t take anything for granted. Personally visit and inspect the property. To avoid any hassles in future, ask for original sales deeds and share certificates
   
• Ensure that the tittle of the property is clear and to ascertain the same vide the conveyance / sale deed before bidding process starts. This will help you understand how many times the property has been bought and sold. Property with unclear title cannot be sold. Bank doesn’t indemnify borrowers against disputes to title. Knowing the history of the original owner would always be helpful.
   
• Before bidding for property, one must check municipal records for dues/ unpaid taxes, if any. You would be liable to pay off dues if they remain unpaid at the time of transfer of property in your name.
   
• No bank would give you a loan to bid for distressed property. This means you, on your own, would have to arrange funds. Successful bidder has to make at least 25% of payment upfront or within a day’s time. The balance amount has to be paid within specified time which ranges from 7 to 15 days in most cases. You must do your math right. Don’t forget, you will also have to pay registration and stamp duty charges.
   

End Note

Although you may get really good bargains in auctions of distressed properties by banks, you must be cautious while bidding for these properties. It is always better to consult a legal expert before toying with an idea of buying properties auctioned by banks. PersonalFN is of the view that one should always exercise due diligence while dealing and shouldn’t get distracted with the bargain on offer and repent later.

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