BUYING A PROPERTY IN BANK AUCTION



The traditional channels of searching real estate listings and working with real estate agents aren't the only ways to acquire a property. Experienced real estate investors often purchase properties at auctions. But auctions aren't limited to professionals; novices have purchased their homes at auctions, too.

How Do Properties End Up at Auction?

The two main types of property auctions are foreclosure auctions and tax lien auctions. Before a property reaches this stage, several things have to happen.

First, the homeowner has to have not paid the mortgage for several months. Then, the bank files a notice of default with the county recorder. If the homeowner doesn't pay the balance owed or renegotiate the mortgage with the lender, the home can be put up for auction. The amount of time it takes from when the homeowner stops paying the mortgage to when the home ends up at auction varies, but can be anywhere from a few months to a year or more.

The other main way a home ends up at auction is when the owner doesn't pay property taxes or becomes severely delinquent on state or local income taxes. In these cases, it is the unpaid tax authority (not the bank) that seizes the property.

How Property Auctions Work

Auctions take place at local government courthouses and other locations chosen by auction companies, such as hotel conference rooms. Homes are also auctioned online. Foreclosure auctions are held by bank-hired trustees. Tax lien auctions are conducted by local sheriffs.

Winning a property at these auctions can work in two different ways. In a lender confirmation auction, the lender doesn't have to accept your offer even if you are the highest bidder. In an absolute auction, the winning bid gets the property.

The starting price of the auction may be the balance owed on the mortgage or may be a lower amount designed to spur bidding. In the case of a foreclosure auction, the lender is not allowed to profit from the auction. Often, these properties are sold at a loss, but if there is a profit, it is supposed to go the foreclosed homeowner after the mortgage and any other liens are paid.

What is e-Auction? When should Forward and Reverse Auction be used?

e-Auctions are negotiations conducted via an online platform where Suppliers get the possibility of improving their proposals based on market feedback (e.g. rank in negotiation) and are considered to be the most transparent way of conducting negotiations. Basically, there are two types of Auctions.

1. Forward Auction
2. Reverse Auction

Forward Auction - Forward Auctions are sales oriented auctions, where Auctioneers are trying to sell their products or services. In a forward auction, the buyer bids on the seller's item and the prices of the item increases by a fixed increment amount during the auction and in a forward Auction the highest bid price during the Auction is the one which wins.

For example, when a Bank or a Debt Recovery Tribunal (DRT) hold an auction to sell a property or an asset - it will use Forward Auction mechanism.

Reverse Auction - Reverse Auctions are Purchase oriented auctions, where Auctioneers are trying to purchase products or services. In a reverse auction, the seller bids on the Buyer's item and the prices of the item decreases by a fixed decrement amount during the auction. In a Reverse Auction the lowest bid price during the Auction is the one which wins.

For example, if a bank (or any organization) wants to buy computer systems or even transportation services, it can hold a reverse auction to procure goods and services at the best possible price.

Who is a Bidder?

Anyone be an executive of a company or an individual wishing to bid or participate in an online Auction event is a Bidder. On Bank or DRT Auctions, a Bidder will be bidding in the Auctions he has been qualified for. By responding in an Auction, the Bidder commits to buy or sell items at prices submitted by him during Auction.
 
What can potential bidders learn about auction properties before bidding?

Some auction companies have open houses so potential bidders can walk through the properties ahead of time. Listings describing the properties to be auctioned are also available. Other times it is only possible to drive by and see the outside. To discover properties that will be auctioned off, potential buyers can check county recorder websites and foreclosure listing services.

As for payment, bidders should bring to the auction a cashier's check for the amount of money required by the auction holder. Winning bidders will pay any auction fees and/or bidding fees and put down an earnest money deposit on the property they are purchasing before leaving the auction site. The winners then go through escrow and closing just like with any other home purchase. Bidders at property auctions are often real estate investors who can afford to pay cash, but for auctions that allow financed purchases, it is best to get prequalified ahead of time.

Some auction houses prefer that you work with their affiliated lenders and will have those lenders on site at the auction. However, do your research beforehand to determine the interest rates available from competing lenders. This information may give you some leverage when working with a bidder's lenders.

Benefits

Why would anyone be interested in buying a property at auction? For one thing, an auction offers a first chance to snap up a property you might not otherwise be able to afford. Because of the extra risk involved and because fewer people may be interested in the property than if it were available through traditional channels, prices can be lower. Auction properties aren't always great deals – the auctioneer could set a hidden reserve price on it, the minimum you must bid – but the potential to get a residence at a fire sale price is such a big draw that, for many people, it compensates for the numerous potential drawbacks.



Drawbacks

Properties being auctioned off aren't necessarily hidden gems. If a property winds up at auction, it means the owner was having financial trouble, so the house may have deferred maintenance problems. It might even be completely trashed. Also, there may be claims against the home – not just the aforementioned tax liens, but contractor liens or a second mortgage. Bidders should check with the auction house to ensure that the property has clear titles.

Buying a property at auction often requires a lot of cash. Each auction company and county government has its own requirements for payment, but you will probably need some amount of ready money just to secure your bid. Down payment amounts and methods of purchasing often depend on the property and the auction house. More flexible financing options may be available by purchasing a bank-owned property the traditional way, instead of at an auction.

Auction properties sometimes do not allow for a home inspection or even provide a view of the inside before the auction. If you can't afford the risk of buying a property in poor condition, stick with auctions that allow you to inspect the property before bidding. Without this information, it can be hard to know what you're getting into, what a property's repair costs will be, or the true value of property until you've become the owner.

Also, in some cases, the (former) owner or a squatter will be occupying the property, meaning you will have to evict them – a process that can be unpleasant at best, and lengthy and expensive at worst.

Finally, if you're an ordinary person trying to buy a home at auction, be prepared to face stiff competition from investors looking to snap up properties to flip or turn into rentals.

The Bottom Line

If you're interested in trying to pick up a bargain property at an auction, there's a lot to learn. Auctions can be a riskier way to purchase a property than buying a property through a real estate agent, so it's important to be extremely well-educated about the process and about the properties you are interested in bidding on.

Foreclosed homes may be financially appealing, but there are many obstacles to consider before buying. Also, just because a home is for sale at auction doesn't mean that you'll be able to get it at a good price (or that the home is a good deal at any price – it could be a money pit!). But for savvy, intelligent and motivated individuals, property auctions are worth exploring as a way to pick up a home or an investment property on the cheap.

Properties sold under Bank Auctions can be bought for as cheap as 30% from Current Market Rate. The price of properties sold under Bank Auctions is fixed according to Government Guidance Value whereas Current Market Price is normally 3-4 times in upcoming areas and 2 times in developed areas. There are only few bidders in bank Auctions as these properties are usually bought by investors or people who have ready funds available for purchase but in bank auctions property cannot be bought on loan.

Whenever bank auctions these properties, there will be 2 terms in Auction Notice:

(a) Reserve Price: Reserve Price is Minimum Bid Price i.e. Starting Bid Price of Auction or Lowest Price at which Bank is willing to Sell the Property through Bank Auctions.

(b) Earnest Money Deposit (EMD): It is actually Good Faith Deposit i.e. Amount to be deposited before Auction Process by Potential Bidder showing that he is a serious buyer. Only after depositing EMD, a person is eligible to participate in Auction Process. EMD is refundable for unsuccessful bidders.

After Auction process, successful bidder need to deposit 25% of total Sale Amount (including EMD) on the day of Auction itself and rest amount needs to be deposited within 15 days from Auction. It’s quite clear that only person with ready funds can fulfill these stringent payment condition.

For example..Suppose Bank has put up Property A for Auction with reserve price of 50 Crores therefore EMD will be 5 Crores. Potential Bidders need to pay 5 Crores upfront in order to eligible for participating in Auction Process.

Assuming Person B bought property for 60 Crores during Auction process. On same day, he needs to pay 15 Crores i.e. 25% of Sale Amount. As he has already paid 5 Crores as EMD therefore rest 10 Crores should be deposited on the Day of Auction after Auction is over so that he fulfill condition of payment of 25% of Sale Amount i.e. 15 Crores to be paid by Auction Date…Rest 45 Crores i.e. 75% of Sale Amount should be deposited within 15 days from Date of Auction.

Usually Notices for Bank Auctions are published in B Range Newspapers and not in most popular ones.

Lastly those buyers who would like to take cost advantage of Auctioned Properties through Loan route, can opt for Loan against Property. Only catch is, first you need to arrange for 100% funds from own sources or through Short term borrowing of 1 Month or so from Mortgage institution or from friends & relatives….After buying property through Auction, you can take Loan against Property and can repay the borrowed amount. Secondly, Interest Rate under Loan against Property option will be slightly higher compared to Normal Home Loan Rate & there is no income tax benefit available to salaried class in this case.

Note of Caution: Properties under Bank Auctions are sold on “As is Where is & What is There is Basis” which implies Bank does not take any responsibility regarding Title of the property i.e. on encumbrance front, No liability of Bank. In the event of any legal dispute or any other claim on property, Bank does not indemnify the buyer from same. The complete responsibility of encumbrance rests with Buyer for auctioned properties.

Whereas in normal sale deeds, buyer can put a clause where the seller indemnify the buyer legally from any encumbrance on property prior to date of property registration therefore buyer is safe from all encumbrances prior to purchase.

Most important point is to insist the bank that Original Borrower of the Property, whose property is being auctioned by bank should become the “Confirming Party” in your Sale Deed / Registration with the bank so that in future he should not file case in court to cancel the auction.

It is always advisable to take help of Chartered Accountants / Local Competent Professional Property Lawyer before participating in Bank Auctions as he can help you in understanding the rules and regulations. He can also help you to check Property Title and encumbrance on property (If any).


Steps to Buy Property through Bank Auction

Step 1: Search for Bank Auction Property

This is one of the most painful step as there is no organized data in India. You may find some sites providing information on Bank Auction Property. This information is normally available on chargeable basis. These sites are not updated regularly. The other sources of information are Newspapers, Notice posted in Bank Branch or Notice posted in the Society. You can also check auction notice on website of Asset Reconstruction Company like ARCIL. It is advisable to narrow down your search so that it will be easy to search the property.

Step 2: Check Property Details

Once you shortlist bank auction property, carry out preliminary check on our own. Check market price of the property, obviously reason for bank auction is payment default but check out any legal dispute, bank auction related details and how can you participate in bank auction.

The biggest problem with Bank Auction is that you will not have get access to property papers before purchase for title search. Banks are not willing to share much information. Sole objective of bank is to dispose off the property. If you are seriously interested in buying the property then it is advisable to hire a chartered accountant or lawyer or expert for this process. One important point to check is Balance outstanding of the defaulter. In many cases balance outstanding is much higher compared to Reserve Price. Please check if the property is auctioned at amount below balance outstanding amount then how bank will recover the balance amount. In such scenarios, defaulter has to pay the balance amount but better to clarify. If final bid amount is more than outstanding amount then balance amount is paid to the defaulter by the bank.

Step 3: Physically Inspect the Property

It is advisable to physically inspect the property. Now a day’s banks have started mentioning the inspection date and time in auction notice. You can visit the site at designated time to inspect the property. In e-auction notice you will find the contact details of concerned officer. It is advisable to contact him and get all the details. Now one good thing is that if bank is organizing physical inspection then it means bank has physical possession of the property. It is always advisable to buy property where bank has physical possession. In case of notional or symbolic possession, winner of bank auction process will struggle to get the possession. After auction bank will be totally non-cooperative. In some cases, it may take years to get physical possession or you may need to file a court case to get physical possession.

Step 4: Submit Tender Form

In this step, you can collect Tender Form and you should deposit EMD (Earnest Money Deposit) along with Tender form. EMD is normally deposited through Banker’s Cheque or Demand Draft. Please check all details in tender form and submit your tender before the Tender Closing Date. Along with Tender form, bank also demand KYC documents. As the time is very short therefore you should arrange all documents well in advance. One of the most common reason for rejection of tender form is incomplete tender form i.e. either KYC documents are not available or Tender form is not filled properly.

Step 5: Bidding

There are multiple ways of submitting your bid. You can submit your bid through bidding form. In most of the cases Tender form and Bid form are one and same thing. In short, you can submit bid through tender form. You have to submit separate Tender form / bid form if you wish to submit multiple bids in “multiple of increase in bid amount”. In some cases, Tender form is submitted physically and bid is submitted online through separate Bid form. Competitive bidding is allowed by bank in certain cases among the bidders to increase the final bid amount. In e-auction, you can bid multiple times during the window of e-auction. There is no standard bidding process except for e-auction. It is at the sole discretion of the bank.

Step 6: Auction Date

On auction date, visit the site / bank / auction venue to check whether you won the bank auction or not. If bids are submitted through tender form / bid form then bank will open all the eligible bids in front of all bidders. Highest bidder is declared winner of bank auction. If you win auction then you need to deposit 25% of the bid amount within 24 hours including EMD deposited with tender form. Balance 75% of bid amount should be deposited within 15 to 30 days from the date of bank auction. If you are planning to avail Home Loan then it is advisable to apply for Home Loan from the bank which has auctioned the property. Normally home loan is risky proportion and most of bank auctions are closed without Home Loan. Banks are not willing to lend on foreclosed properties. I will not suggest to depend on Home Loan for such properties because of tight timelines.

Step 7: Sale Certificate

After the balance 75% payment is made. You will receive Sale Certificate from Bank but title transfer is incomplete till you register sale certificate in sub-registrar office

Step 8: Register Sale Certificate in Sub-Registrar office

You can register Sale Certificate and should insist on inclusion of defaulter as confirming party. The sale certificate should be signed by the authorized bank executive at the time of property registration.


Important Points related to Bank Auction Process

1. Bank Auction is scheduled after 30 days from the date of Auction notice. If defaulter pay the money to bank in between then bank auction process is cancelled.

2. If you win the bank auction and do not pay balance amount within specified period then your entire paid amount will be forfeited by the bank.

3. Properties auctioned by PSU banks are cheaper compared to properties auctioned by Private banks.

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