Mohanlal Mistry, a 50-year-old Hyderabad-based businessman, is a regular investor in real estate. But he doesn’t take the usual route. “I buy properties (commercial and residential) that are put up for auction by banks. Till date, I have bought four residential properties through this route and got two of my friends to take the same route as well,” says Mistry.
So isn’t it a problem to identify properties on auction? Mistry looks at properties that are acquired by banks due to non-payment of loans by borrowers and are then auctioned. Such properties usually come at a cheaper price than the market rate since banks just look at recovering their cost.
When does a property get auctioned?
Why is a property auctioned? If a borrower fails to pay three consecutive instalments, the bank sends a notice to the borrower; a period of 60 days is given to the borrower to raise an objection.
When does it happen? Usually the auction date is around 30 days after the 60-day notice gets over but the date can be altered or the auction cancelled. “Sometimes the borrowers arrange money and pay off within 30 days. The auction is then cancelled,” says Y. Bhargav, director, ForeclosureIndia.com, a website that lists properties on auction.
Valuation: After 60 days the bank decides on a base price depending upon the loan outstanding and the current market price of the property . “Generally the reserve price is 10-20% below the market price as the bank wants to sell off the property and recover the loan amount as soon as possible,” says Bhargav.
So for a property that is worth Rs.20 lakh, of which Rs.10 lakh is repaid, the bank may put a price of about Rs.18 lakh. “The valuation is done by an authorized person appointed by the bank,” says a private bank official who heads the asset recovery cell but is not authorized to speak to the media. The valuation is done with the consent of the borrower as the amount exceeding the outstanding amount is given back to the borrower. In rare cases, where the price of the property is below the loan outstanding, the borrower is asked to pay the remaining amount.
How do you identify such properties?
Going through newspapers limits your chance of identifying properties since these are advertised only in local and regional newspapers. There are at least three websites—ForeclosureIndia.com, BankDRT.com and NPAsource.com—which list such properties across the country.
NPAsource.com has at least 1,000 registered paid users comprising of banks, companies, chartered accountant firms, lawyers, tax consultants and real estate brokers. Properties worth Rs.500 crore listed on this site have been sold already and another Rs.1,500 crore is in the pipeline. Similarly, ForeclosureIndia.com in 2011 had 11,000 properties listed on its site.
Auction notices: These portals have tie-ups with various banks. “At present, we have tie-ups with 25 banks, including Punjab National Bank, State Bank of India, State Bank of Hyderabad and Andhra Bank,” says Bhargav.
Once a property is forfeited by the borrower, the lender puts out an auction notice in local English and regional language newspapers and banks’ own websites. These websites, too, are notified about the auction. “We also track newspaper advertisements,” says Bhargav.
Property details: These sites offer details such as the price and size of the property, the bank auctioning the property and the date of auction. You just have to mention the location you are looking for and the site will throw up a list.
Buyers: Buyers range between investors, banks, borrowers, and facilitators looking to invest in non-performing assets. “We make the right people meet and create opportunities,” says Devendra Jain, chairman and managing director, NPAsource.com.
The maximum defaulters are from the textile industry, followed by aviation, steel and metal and infrastructure, according to Jain. “So it makes a case for investors looking for a business opportunity,” he says.
The cost: The price that you pay to these portals varies. For instance, ForeclosureIndia.com has no charges but BankDRT.com has only a few properties, especially posted by banks, which can be browsed for free and the rest can be accessed by paying Rs.1,050 for 30 days.
NPAsource.com provides various levels of services at various price points. For instance, though the bank name can be accessed for free, the branch name and address is only available if you have a paid account. NPAsource.com charges Rs.2,500 a month for viewing 100 notices.
The portals need some work to provide a smooth experience to buyers. As of now, the sites are not regularly updated.
The auction process
Once you have identified a property, you need to go to the particular bank branch and fill up a bid form (mentioning the bidding amount) and submit it before the auction date. Also, you need to pay 10% of the property value before the auction as earnest money deposit through a bank demand draft. This acts as a security and to weed out non-serious bidders.
On the designated date, all the bid forms are opened at the bank branch in front of all the bidders and the person with the highest bid is awarded the property. If the borrower feels that the highest bid is not enough, the bidders may be allowed to increase their bids. However, the bank has the discretion to go with the highest bidder.
If you win the bid, you would have to pay 25% of the bid amount (including the 10% earnest money) to the bank the same day. The bidder is then given 15-30 days to pay the remainder 75%. The bank issues you a certificate of sale only after the entire amount is paid.
Should you buy?
Title of these properties is usually clear as banks do their due diligence before financing any property. “Once a bank takes possession of the property, the bank becomes the owner of the property. So a bidder actually buys the property from the bank,” says the private bank official quoted earlier in the story.
The fact that the property is usually priced lower than the market price is a huge incentive, but enquire about its market price. “I go for properties auctioned by public banks as they are usually priced lower and often below the market price,” says Mistry.
It’s better to inspect the property before buying to find out whether it’s in good condition. Remember, it’s a bid, so just because you have narrowed down on a property doesn’t mean you will get it.