30 October 2024
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Buying a house requires quite a bit of legal dexterity with relation to paperwork, and more so when it comes to a property on auction. The prize on the other end of the tightrope could be alluring, but you will need to tread cautiously, as the valley below could be ridden with jagged rocks of possession problems lender-borrower disputes, and loan issues
Ever thought of buying a property being auctioned by banks? From time to time, banks put out auction notices for properties that turn into non-performing assets (NPAs) due to non-payment of loans. These properties are usually ready-to-move-in and are typically available at a discount to the current market rates.
Though that might sound attractive, yet there seem to be few takers for these properties. In 2022-23, scheduled commercial banks (SCBs) recovered Rs 30,864 crore out of Rs 1.11 lakh crore of NPAs through the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) recovery channel. This is one of the channels, besides lok adalat, debt recovery tribunal (DRT) and insolvency and bankruptcy code (IBC) from where NPAs are recovered. The recovery in 2022-23 was 27.6 per cent compared to 22.5 per cent in the previous financial year, shows the latest data.
So why is the recovery rate poor and why are there few takers for such properties? That’s because the benefits of auction bidding are often overshadowed by the risks and uncertainty involved in the auction process. That’s why, it’s important to know the pain points should you decide to buy an auctioned property.
Lender-Borrower Dispute
One of the issues you may face is the intervention of the borrower whose property is put on auction due to non-payment of dues.
But are borrowers authorised to do so? According to experts, the individual may approach the DRT, a quasi-judicial body that handles matters with regard to the Sarfaesi Act, 2002. Says Venket Rao, founder, Intygrat Law Offices LLP, a law firm with offices in Delhi, Chandigarh and Hyderabad: “The borrower’s right to redemption is extinguished upon the lender issuing a notice for auction under Section 13(8) of the Sarfaesi Act, 2002. However, the borrower can exercise his right under Section 60 of the Transfer of Property Act, 1882 till the time the property is auctioned. In the event of contradiction between the two acts in a similar matter, the Supreme Court said that the Sarfaesi Act, 2002 is a special enactment, whereas the Transfer of Property Act, 1882 is a general enactment, and so, the former shall prevail.”
When the lender attaches the property of the borrower under Section 13(4) of the Sarfaesi Act, 2002, the borrower may file a representation to the bank to explain the objections under Section 13 (3A). If the bank doesn’t consider the representation, it has to specify the reasons of non-acceptance to the borrower.
Abhishek (43) and Vineeta Sharma (40) bought a property in auction in Moradabad. The process was long, but they are happy with the decision.
Adds Rao: “One may also file an application for DRT to halt the auction or for grant of a stay order. In cases where the person is aggrieved with the decision of the DRT, one may prefer an appeal to the Debt Recovery Appellate Tribunal (DRAT) within 30 days from the date of receipt of the order of DRT.”
In other words, the original borrower has several rights that may delay the bidding process or interrupt the successful bidder from getting timely possession of the auctioned property. However, after the auction, these rights are extinguished and even litigations are not looked at favourably by the courts. Though the Sarfaesi Act, 2002 is a special Act, there have been situations where courts have granted relief to the original borrower. According to Rao, the borrower can get a relief even after bidding, if the bidding process is found to be illegal.
Possession Problems
Usually, banks auction a property after the title is legally transferred to them, but the problem arises at the time of possession. Says Ameet Hariani, senior solicitor, arbitrator and mediator, Bombay High Court: “Buying a property auctioned under the Sarfaesi Act, 2002 can be safe, as the bank has already established its legal ownership. However, buyers must conduct due diligence on the property’s title and any outstanding dues. The key is to get free, complete and clear ownership and possession with no hidden surprises.”
However, in many cases, banks do not have the physical possession of the property even after the title transfer. Thus, knowing that the title is in the bank’s name is not enough.
Says Rao: “It is the primary duty of the bank to give physical possession and title of the property after the auction proceedings have ended.” But if that doesn’t happen, and the bank passes the title and not the possession, the successful bidder may have to take another route. “It may so happen that the bank and/or mortgagee may auction the property without having physical possession over it. If the successful bidder has already purchased the said property, but does not get physical possession of the property, the purchaser may file a complaint against the bank or mortgagee under the Consumer Protection Act, 2019.”
Banks may hold the possession even in other cases. Says Rao, “The bank or mortgagee shall give possession of the property to the winning bidder or purchaser within six months of the auction, subject to terms of the payment between the purchaser and the bank. Only if the above is not fulfilled can the successful bidder have the right to get the refund of the bid amount along with interest and charges.” However, in some cases, the bidders have to run from pillar to post to get their money back from the bank, according to some cases reported in the media.
In one instance, Bengaluru resident P. Balaji Babu got entangled in a legal battle involving a property auction by the then State Bank of Mysore in 2010 and received relief after 12 years when the High Court Of Karnataka ordered State Bank of India to return the earnest money deposit (EMD) along with interest to Babu, according to a media report.
Loan Issues
It is not easy to get a loan to buy an auction property. Before providing a regular home loan, the bank conducts thorough due diligence, including gathering factual information, legal opinion and financial valuation.
Considering the risks associated with such auctioned properties, banks may run extra checks and balances, which means getting a pre-approved loan is difficult in these cases.
Says, Adhil Shetty, CEO, BankBazaar.com, an online aggregator: “Properties sold at auctions are typically those that are being sold by banks as distressed assets to recover unpaid loans. Many lenders are hesitant to finance such properties because they may not meet certain criteria required for loan approval. Sometimes, the legal histories of such properties are uncertain, or, the documentation is incomplete. If the legal status of a property is ambiguous, or if there are pending disputes, then the loan approval process can get a lot more complicated. Moreover, buyers at auctions have a very short window to settle payments after winning the bid. Most lenders may not be willing to speed up loan processing and disbursement, as they consider loans on such properties a high risk.”
After successful bidding, if the bank rejects the bidder’s loan application and there is a delay in payment of the remaining bid amount, it may put the bidder at risk of losing the EMD.
Other Impediments
There could be hidden surprises, such as pending tax and utility bills, maintenance and other charges, or regulatory issues.
It is also important to check the condition of the house. Properties are typically auctioned on an “as is where is” basis. The mortgagee or bank hardly makes any enhancement or improvement with regards to the restoration of the said property. Hariani explains the context of “as is where is”, which is frequently used in the auction process. “The property is sold in its current condition and the buyer accepts all faults, without any warranties from the seller,” he says.
Also, don’t forget to add stamp duty and registration fee to the cost of the property to get the real estimate.
What Should You Do?
Despite the risks, there could be lucrative offers that you may find. However, do your due diligence.
Says Samantak Das, chief economist and head of research and REIS, India JLL: “Before making a final decision about the purchase of an NPA property, it is essential to conduct thorough due diligence. It is necessary to visit the site and understand the reasons for the discount, if any. Also, the buyer must determine the market value of the property and explore the feasibility of a loan. Another aspect that the buyer must consider is ownership records. The government records, including municipal clearances and taxation, should be referred to ensure there are no encumbrances or disputes.”
One should also check if there have been previous legal disputes and whether they have been settled, and if there are outstanding taxes, dues, and charges payable on the property.
Even if all goes well, it is a lengthy process. Abhishek Sharma, 43, a businessman from Moradabad, and his wife, Vineeta, 40, an HR consultant, won a property auction in Moradabad in 2023, but faced many challenges during the process.
“The bank took a long time to communicate after we made the initial deposit. We got the auction details after sending multiple emails. After winning the bid, there was no channel or coordinator for us to know like who would be authorised for the registry, who was handling the original registry documents, the date of registry, and so on. Overall, the process was very time-consuming,” says Abhishek.
However, at the end, the couple was satisfied because they got the property at a discount and at a good location.
Arranging funds in advance is important, but remember that the price may overshoot your estimate, depending on the bids that come in during the auction process. For Abhishek and Vineeta, the discount was not as high as they had expected.
If you are aware of the pain points and have a plan to overcome them, buying a property in a bank auctions may turn out to be beneficial for you. However, tread with care.
The author is an independent Financial Journalist
