A Closer Look at Distressed Property Auctions
by Mr. Shobhit Agarwal, MD & CEO - ANAROCK Capital
We
often hear of banks auctioning off seized distressed properties, and
how such properties can be lucrative investments as they come at very
attractive prices.
Studying the market of distressed properties is not very easy, but
there are some areas of predictability. The 'supply' of distressed
properties is usually closely linked to the prevailing economic
situation. Severe market setbacks or stock market crashes
can result in an unusually large infusion of distressed properties on
the market.
In
a normal or vibrant economic situation, the availability of such assets
is much lower. Less than 8% of Indians who have borrowed from a bank to
acquire a residential
property will default on their home loans unless there are exceptional
circumstances involved.
How do properties become distressed and go to the auction block?
A
homeowner is considered to be in default when he or she is behind on
the agreed-upon EMIs for three consecutive months or more. When a home
loan is in default,
banks do not seize the assets of the borrowers immediately. They send a
notice to the borrower highlighting the missed EMI repayments, and that
they will take strict action if the situation is not remedied.
Banks
do understand the various reasons why a borrower may have defaulted on
EMI payments, which include financial crisis, serious health setback,
loss of job, a
family crisis, etc. These are facts of life, and banks do not make
themselves unapproachable to defaulting borrowers who state such
reasons. Once the buyer has explained the reasons or they are otherwise
evident to the bank, an offer to restructure the EMI
and extend the tenure of the loan is made.
A
borrower may ask for a grace period on the basis of a good repayment
record for loan repayments and that interest rates have increased beyond
affordability. The
borrower can ask the bank to refinance the loan, resulting in reduced
EMIs over and increased tenure period. The defaulting borrower may offer
to liquidate other assets such as fixed deposits, insurance policies or
mutual fund investments in order to repay
the debt. He or she may even sell the property themselves to pay back
the amount instead of letting the bank take over and auction it.
If
these measures help the borrower to catch up on the outstanding EMIs,
the property will not come up for auction. Auctions happen only in
extreme cases - and even
then, the borrower may not incur a total loss. If the property is sold within three years
of its purchase, the borrower is entitled to a profit on the sale after
the bank has recovered its dues. If three years have elapsed since the
property's acquisition,
the owner is still entitled to tax exemption benefits.
If
the borrower is still unable to pay back the principal amount and
interest on a home loan after 90 days, the bank will classify a home
loan as a Non-Performing
Asset (NPA) and will seek to recover the complete home loan amount. To
do so, they will seize the borrower's assets and/or the mortgaged
property. They are authorized to do this under the SARFAESI
(Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interests) Act to protect their interests.
Even
at this stage, the banks may not go as far as auctioning off the
property, preferring to resolve the borrower's issues by further easing
the repayment process
and burden for the borrower. Only when all these measures fail will the
bank proceed with selling the property.
The Process of Property Auctions
At this stage, the bank will take
the defaulting borrower's property into its possession and seek
to dispose of it under the guiding factors of the SARFAESI Act. The
process begins when a borrower's home loan account is classified as a
'chronic' NPA - one where no other form of resolution
is possible. The bank will issue the borrower a 60-day notice, which is
technically a reminder to the defaulter stating the issue and the
factors that have led them to this point in full detail.
If
the defaulter does not respond during this notice period, the bank
proceeds with the auction of the property. Even in this period, the
borrower has the option
of resolving the issue or raising an objection to the notice. For
instance, the bank will specify the property's fair value and the
borrower can
object if the property is perceived to be undervalued or if he or
she has an alternative to pay off the pending dues to the bank.
The
banks must then serve a fresh 30-day notice period to auction the
property, and the subsequent notice will include all the relevant
details of the sale. Finally,
the property is auctioned and the outstanding amount is recovered.
The
process of bank-auctioning itself is, however, quite cumbersome and
lengthy. The bank will first advertise the upcoming property auction on a
given date, assimilate
the various offers and then determine the final buyer. The process can
get prolonged even further if the buyer intends to acquire the property
via a loan, either from the same or a different bank or financial
institution. Also, all intending buyers need to
be fully vetted and the final transfer of ownership is subject to a NOC
by the pertinent housing society.
Are distressed property auctions a good investment bet?
It
is true that properties on sale via bank auctions can be bought at
prices which are significantly lower than the prevailing market rates in
that particular area
and for that particular property size and type. However, it should also
be borne in mind that the base price for a property on auction is a
function of the outstanding loan amount in question. In other words, the
longer the current owner has been servicing
the home loan, the lower will be the base price of the property. If the
current owner is only a few EMI cycles short of complete repayment, he
or she will seek to restructure the loan on the property instead of
allowing it to be auctioned off.
Getting
to know of such opportunities is not hard. The public will be informed
quite efficiently when an auction for single or multiple seized
properties is to take
place, as the bank will advertise the fact along with all pertinent
details online and in leading dailies. Distressed properties and their
scheduled auctioning will also be mentioned in a bank’s annual report
under the category of bad debts. Interested buyers
may also turn to trusted property consultants who will apprise them of
distressed assets on the market, and what the expected price range will
be.
The
primary potential advantage to buying a distressed property being
auctioned by a bank is obviously the possibility of getting an asset at a
potentially lower
price than the prevailing market rates for such a property in that
particular location. Another plus could be the potential for securing a
property in a prime location. Also noteworthy is the reduced burden of
due diligence since the auctioning bank will already
have established that the property is legally sound in all aspects.
Notably, the property would come up for auction only after the previous
owner has exhausted all available avenues to stay the proceedings, and
no longer has any legal recourse.
Challenges
There
are some potential challenges to investing in properties being
auctioned by banks. In the first place, there is no single database of
such properties to consult.
Secondly, it is impossible to anticipate what the highest bid for any
given property will be, so there is no assurance of acquiring a
particular property one is interested in.
In
any case, buyers need to be very familiar with the exact process
involved before, during and after buying a distressed property. The
process of buying distressed
property on auction is only complete when it has met with the
expectations of both the auctioning bank as well as the property's
previous owner. If it hasn’t, there could be legal problems even after
the property is legally purchased by its new owner. 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.
This is important in case the new owner seeks to sell the property again
at some stage.
Arun Chitnis
Media Relations
ANAROCK Property Consultants Pvt. Ltd.
Office No. 901A 9th Floor, ONYX,
Next to Westin Hotel, Koregaon Park,
Pune – 411001
M: +91 9657129999
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