Bank auctions: check the offer document, unpaid contributions and debts

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Distressed properties are those where the owner took out a loan against a property to acquire the asset and was unable to repay debts. Due to the owner’s delay in EMI payments for 4-5 consecutive cycles, the property has been foreclosed by the bank as collateral and will be sold to collect interest and principal owed to the bank. These properties are sold at bank auctions and can be purchased for prices often well below market value.

Distressed properties are rare, as less than 5 percent of Indian borrowers default for periods long enough to warrant a bank auction. The possibilities of obtaining these properties at disposable prices are also limited, as the base auction price is determined by the amount of the loan outstanding – the further the owner is in the loan term, the higher the base price. is low. Homeowners who only have a few cycles left to repay would rather restructure the loan than be in default.

Banks will invariably run an ad in all major local newspapers when they intend to auction a property or set of properties, so this is the best source of information. A bank’s annual report will always mention an allowance for bad debt, and schedules / schedules will indicate if and when distressed properties will be auctioned.

One can also contact a real estate consultant with expertise in the location and inquire specifically about the opportunities of distressed assets. The consultant can also represent investors in discussions with the original owner, or directly with the bank.

When a bank puts property up for auction, one should read the offering document carefully to understand the status of unpaid dues. The offering document is like an IPO prospectus, where all the facts covering legal title and liability for pending contributions are indicated. On the basis of the tender documents, we can form an opinion on the status of unpaid contributions. Most of the time, the property is sold as is and until the date of the auction, contributions are paid.
Bank auction

Of the two possible processes, this one is longer, the bank publishes an advertisement, sets a date for the auction, launches a tender, gathers the bids and finally decides who to sell the property to. It can be even more tedious if the buyer himself wants a loan to purchase the property through the same bank or a different bank. The process also takes longer as the bank has to do a thorough due diligence research on the incoming buyer and then establish contracts to transfer the property with the go ahead from the owner and an NOC company.

The bank will obtain a notice of compliance from the company or condominium before proceeding with the auction. Many companies and their members have a right of first refusal, or their members can match the highest bid to buy the property. Upon obtaining AC, the company will highlight any liability that the new owner will have to bear, and whether a neighbor has been impacted. Banks and their legal advisers will capture these aspects in the tender documents, and the tenderer can refer to them to assess liability.

Direct from the current owner

In this case, the owner and the new buyer would agree on the business terms, exchange a token deposit, and then complete the banking process to continue the purchase before signing the agreement and therefore taking possession. The entire banking process of releasing the property, granting the NOC and acquiring the NOC company, as well as repaying the bank loan, can take up to 2-3 months. The price available here is usually higher than it would be in a bank auction, since the seller will try to recoup as much of their initial investment as possible.

Precautions buyers should take to avoid risk:

Buyers should read the offering document carefully to understand the status of unpaid dues or other liabilities, and should be aware of what they are getting into, and aim for a win-win situation for the bank and the owner. original so that there is limited scope for a legal challenge. They should focus on understanding the history of the property being discussed and also getting all the historical documents for the title due diligence.

Risks and Opportunities

RISK

# It is difficult to know all of the distressed assets available, which alone represent a smaller portion of all the properties on the market

# In an auction, there is no way of knowing what the highest bid will be, so there is no guarantee of securing the property

# The original owner can sue the bank, resulting in legal delays for the buyer

OPPORTUNITIES

# Properties offered at lower cost than existing market prices

# Potential to secure a property in a prime location

# Usually there is less need for legal due diligence, as the bank will have inspected the documents before granting a loan

# No risk of non-delivery by the manufacturer

The author is President and Country Head, JLL India


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