The risks of buying a house in an auction!

While you can land a very good bargain in an auction at times, you might need to deal with illegal occupants and dues on the property

Many buyers chase properties that banks auction to recover the loan dues from borrowers who fail to repay. Reason: These come at a 10-25 per cent discount to prevailing property prices in the area. While auctioning, the bank that has foreclosed sets a reserve price. This is usually based on the price at which the property was bought and the loan dues. If there’s a house costing Rs 1 crore that’s put on the block, the reserve price can be between Rs 75 and Rs 90 lakh.

The process for most banks is done online in a transparent manner. Banks give an advertisement of such houses in the newspaper and you can get to visit it, with the bank officials.

Buying a foreclosed house, however, comes with its own challenges. Customers eyeing these should tread carefully, as many of these properties are not inspected before they are sold in an auction and the person needs at least 25 per cent of the funds readily available.

To buy a foreclosed property, a buyer needs to be prepared for inherent risks and thoroughly evaluate the deal, prior to signing the documents, since it is different from a resale property.

Without analysing the potential pitfalls and repercussions, buyer might end up with the short end of  a stick.

Illegal occupants are buyer’s responsibility

Be aware of whether the property you are signing for is pre-occupied or not. If it is, a successful bidder will be responsible for removing the occupants, who might or might not be the previous owners. Whoever the occupants are, and that includes squatters, you will have to take the pain of evicting them.

There might be some legal disputes attached or any other claim on the property. The financier will not indemnify the buyer from these. More, there might be risk of retaliation by the tenants who have been sued for eviction.

Price you are willing to pay

A buyer must inspect the property beforehand and find its age, the quality of construction, layout, etc. One can also approach real estate agents in the area to know more. Decide on the amount you would be willing to pay before participating in the auction, based on the details gathered.

Many owners of homes that go into foreclosure have been struggling financially for almost a year before they give up, which usually means the house has not received needed repairs or general maintenance for a while. Take such costs into account before deciding the final amount you are willing to pay.

Auctioning of a foreclosed property is based on the price at which was bought and the loan dues. It is the minimum amount the bank will accept as a winning bid during an auction. This amount is decided by the lender, based on the dues of the property owner, which can be far more than it is actually worth.

There are times when the auction does not generate bids. In such cases, a buyer can follow up with the bank and make a post-auction offer to buy the home. The lender needs to dispose the property to recover its  dues and might accept your offer.

Keep cash in your pockets

To participate in the auction, banks ask interested parties to deposit earnest money, which can be 5-10 per cent of the reserve price. If the bidder wins the property but fails to pay, he needs to usually forgo the deposit.

Banks also need the winner to pay an additional 15 per cent of the reserve price within two working days. The needs to be paid between within 15-30 days. Before participating, check if you can arrange the required money in the timeline provided.

Banks don’t provide details

In some cases, banks are unaware of the frauds or pending dues on the property to be auctioned. Do not assume that paperwork will be clear only because it’s a bank’s property. Banks always de-risk themselves by stating the buyer has done the required research and they will not be held liable for any dues or frauds. Hence, before getting involved in such property, it’s advisable to check on these aspects, so that there are no surprises.

In cooperative housing societies, you can approach them to know if there’s pending maintenance dues. They can also tell you about pending property tax. Alternatively, you can approach the municipal office to know the property and water dues. As banks take time to foreclose properties and put these on auction, the electricity provider usually disconnects the supply. So, find the pending electricity bills. You could also involve a lawyer to find if there are any pending disputes.

Pre-approved loan

If you plan to borrow, get a pre-approved loan from a bank and check with it if they will be willing to lend for a foreclosed property. Also ensure the letter will be valid 15-30 days after the auction winner is announced.

Withholding tax

Many property buyers are not aware that the income tax (I-T) department has introduced a withholding tax on property sales. According to the law, the buyer of an immovable property worth Rs 50 lakh or more needs to deduct a withholding tax of one per cent of the agreement value and deposit it with the government. The buyer is actually collecting tax from the property owner on behalf of the I-T department.

Banks don’t make profits from such sales. They retain their dues and any incremental money received from the buyer is passed on to the previous owner of the property who had defaulted. Before you bid, clarify with the bank on the taxation. Else, you will need to shell out one per cent of the agreement value from your own pocket.

Buying a foreclosed property can result in cost saving but ensure you take care of the different risks associated with it.

Manavjeet Singh is founder and chief executive officer, Rubique

Photograph: rebecca Cook/Reuters