[ecis2016.org] A distressed property is one where the owner has been unable to service his home loan and the bank has seized the property, to sell it off and recover its loan amount. Are such houses a legal minefield, or can a buyer get a good bargain deal? Here’s an analysis
A distressed property is one, where the home buyer is unable to repay the loan taken to acquire the asset. When an owner defaults on EMI payments for four to five consecutive cycles, the property may be seized by the bank and sold, to recover the unpaid loan.
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Distressed properties are rare, as less than 5% of Indian borrowers default on their obligations, for periods long enough to warrant a bank auction. Property owners who have only a few cycles left to repay, would prefer to restructure the loan rather than default on payment. The base price for the auction is determined by the loan amount outstanding – the further along the owner is in the loan term, the lower the base price.
Information, regarding the auction of distressed properties, can be obtained from banks’ advertisements in leading local newspapers, the schedules/annexures in banks’ annual reports, and from property consultants with expertise in the location.
When a bank places a property for auction, one needs to read the bid document carefully. This document contains all the facts covering the legal title and responsibility for pending dues. Generally, the property is sold on a ‘as is where is’ basis and till the date of auction, dues are cleared.
[ecis2016.org] Guide to buying a property under auction
Buying through a bank auction
The bank will first release an advertisement, setting a date for the auction and invite bids. It will then collate the offers and finally decide who to sell the property to. It can be a cumbersome process, if the buyer also wants a home loan. Moreover, the bank has to conduct a due diligence search on the incoming buyer, draw up contracts to transfer the property and obtain a go-ahead from the owner.
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The bank will also obtain an NOC from the society before the auction. The society will highlight any liabilities that the new owner will have to bear and the same will be mentioned in the bid document. Many societies and their members have first right of refusal, or its members can match the highest bid to buy the property.
Buying directly from the owner
In this case, the owner and the new buyer would agree on the commercial terms, exchange a token deposit and then complete the bank process before signing the agreement and taking possession. The entire process can take two to three months. The property’s price will be higher than in a bank auction, as the seller will try to recover his/her initial investment.
Buyers must aim for a win–win for the bank and the original owner, to minimise the scope for a legal challenge. They must understand the history of the property under discussion and also get any historical papers for title due diligence.
- It is difficult to know of all the distressed assets available.
- In an auction, one has no way of knowing what the highest bid will be, so there is no guarantee of securing the property.
- The original owner may sue the bank, resulting in legal delays for the buyer.
- Properties are priced lower than existing market rates.
- Potential to secure a property in a premium location.
- Generally, there is less need for legal due diligence, as the bank would have inspected the documents before giving a loan.
(The author is chairman and country head, JLL India)
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