Is it prudent to buy property in an auction?

Is it prudent to buy property in an auction?


Owning real estate property has always been an important goal for every Indian. However, with prices of real estate soaring to new highs, it becomes exceedingly difficult for the common man to purchase a property. Apart from the traditional mode of purchasing a house from a builder or an investor, there is yet another way of purchasing real estate property. This is by buying property at bank auctions. 

So why do banks auction property? 

When borrowers pledge their property as collateral against any form of loan and are unable to repay the loan, the bank has the right to sell the property and use the proceeds towards repayment of the loan. It must be noted here that the borrowing can be any loan, although home loans are the most common form of loans. The sale of the property is in the form of an auction, wherein prospective buyers can bid for the property and the highest bidder will have the right to purchase the property. 

How does the auction take place? 

Banks can auction property either in an offline mode or in the online mode. The traditional offline mode is more popular in India, when banks announce the auction of the property in newspapers. Sometimes, big real estate agents also have this information. In this case, prospective buyers assemble at the auction venue and do the bidding. In the online mode, banks announce the existence of an auction on websites. The recently announced e-Auction by SBI is an example of this. When banks auction the property online, the prospective buyers will need to place online bids for the property. However, this mode is not yet popular in India. 

So what is the advantage for a buyer to purchase a property in an auction? 

Usually prices of houses in an auction are lower than the market prices. This could be due to various reasons. Also, banks fix a minimum price below which the bidding does not take place. That is, the prospective buyers should start their bids above this minimum price fixed by the bank. This price is generally lower than the market price. Also, as the auction is conducted by the bank, it is usually perceived that title deeds are likely to be clear. 

But should one blindly go ahead and purchase property in such auctions? 

The answer is a resounding ‘no’. Although property documents are likely to be bereft of issues, it is the duty of the buyer to check the documents thoroughly as if he is buying from any other third party. It is recommended to take the help of a professional lawyer to verify the property documents. The buyer should also verify the property and ensure that everything is in order. This level of due diligence should never be compromised just because the property is being bought in an auction. Another point worth investigating is the total cost involved in buying the property. Although one may think that the bid amount is the cost to be paid for the property, it must be remembered that there could be hidden costs involved. Any repair and maintenance expenses, dues to the society, unpaid taxes and other legal dues in relation to the property will need to be paid by the new buyer. Therefore, one should account for all these costs while calculating the purchase price. Further, if the interest in the property is high, the highest bid price itself will be elevated, thus not giving much cost advantage to the buyer. 

Is it prudent to buy property in an auction? 

As mentioned earlier, buying a property in an auction requires care to be exercised regarding the costs and property deeds, as in any other purchase. However, the auction and purchase process works on tight deadlines, and one needs to have sufficient funds in place at the time of auction. If not, the deposit amount paid will be lost. Therefore one should buy the property in an auction only if the purchase price can be arranged on time. Further, if the price offered at the auction is not very different from the market price, there may not be any substantial benefits in choosing such a property. Alternatively, the cost including all other expenses may end up being higher than market price. Hence, buying a property in an auction only makes sense if these aspects are taken care of.

Account for costs such as legal dues, taxes not paid, dues to housing society while bidding for a property in auction

Happy Investing

Source:Moneycontrol.com