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Some pros and cons of buying an auctioned property in India

Some pros and cons of buying an auctioned property in India

If you’re considering buying a property at an auction, this article is for you.

From ready-to-occupy properties to open plots, you get a wide variety of housing units to choose from. But buying a property from an auction is a two-edged sword. While a property auction might be a boon to potential homeowners in some ways, it also has its set of cons. Let’s have a look.

What is buying an auction property?

Buying an auction property refers to purchasing a property sold through a public auction, led by banks, financial institutions, or courts. The auction property process starts when the original owner defaults on repayments. Buyers can often acquire such properties at prices lower than the market value. However, buying property at an auction requires careful due diligence, including verification of legal title, outstanding dues, and possession status. This is because the sale is mostly on an “as-is-where-is” basis with limited scope for negotiation.

How to buy property at an auction in India: Step-by-step guide

Here’s the step-by-step process to buy property at an auction in India:

  1. Identify auction properties listed by banks, NBFCs, or courts.
  2. Read the auction notice carefully for the reserve price and terms.
  3. Inspect the property and assess its physical condition, if allowed.
  4. Check title, encumbrances, and dues by conducting legal due diligence.
  5. Inquire about the Earnest Money Deposit and submit before the last date.
  6. Participate in the online or physical auction and place your bid.
  7. Pay the balance amount within the stipulated time.
  8. Collect the sale certificate and register the property in your name.

Pros of buying an auctioned property

#1 The property might be priced lower than market value

Auction houses are a win-win for both banks and homebuyers. Here, you can find a sweet deal on a let-out property in a well-connected location for a relatively lucrative price. These properties are priced almost 15-20% cheaper than their original market price.

#2 Great convenience

Next in the benefits of an auctioned property is zero construction project delays. Most properties sold in auctions are usually ready-to-move-in properties. Free of delay and fraud risks, the property is ready to use once the deal is closed.

However, before making a purchase, check for outstanding municipal taxes and society dues as well. Plan the funding since you’ll pay the balance amount on short notice.

#3 Prime location

There is always a chance that the properties being auctioned can be located in prime and posh areas. These properties might not have been an option for you earlier due to high market rates or unavailability of the land, but now fit well within your budget.

Cons of buying an auctioned property

#1 Bidding

Since this is an auction, you can’t anticipate what the highest bid might be. Hence, there’s no assurance that you’ll buy the house for the desired price.

#2 Physical assessment

Auctioned properties are sold on an “as-is-where-is” basis. Before you buy it, it is essential to check the physical condition of the property and study the bidding documents well. If there are any repairs and leaks, that might add extra expenses to the deal. This will take away the added cost advantage when you buy the property at a lower than market value.

#3 Mandatory pre-bidding deposits

Before the bidding starts, bidders are supposed to shell out 10% of the property value as deposits. If you lose the auction, you’ll be reimbursed for the money you deposited. But if you win, you must pay a significant percentage of the property value to the financial institution on short notice.

Common risks in buying auction property and how to mitigate them

Buying an auction property involves certain risks that buyers should carefully manage. The common risks in buying auction property include unclear property titles, pending legal disputes, unpaid utility bills, and difficulties in obtaining physical possession. Moreover, auction properties are sold “as-is-where-is”. Thus, chances of hidden structural issues exist. 

To mitigate auction property risks, you should conduct thorough legal due diligence, verify encumbrances, check outstanding dues with local authorities, and inspect the property if possible. A property lawyer can also help avoid auction property pitfalls by explaining the auction terms to you.

Financing options for auction properties

The various ways of financing auction property are as follows:

  • Self-funding: Many buyers use personal savings, as auction timelines are strict and require quick payments.
  • Bank home loans: Some banks offer loans for auction property. However, they will need a clear title and will perform due diligence.
  • Loan Against Property (LAP): Buyers can raise funds by mortgaging an existing property they own.
  • NBFC financing: NBFCs may finance auction purchases with flexible terms but higher interest rates.
  • Short-term borrowing: Temporary funds from family or bridge loans can help meet immediate payment deadlines.

Important legal checks before buying an auctioned property

After you’ve understood how to buy property at auction, it is vital to know about the legal checks you must undertake. 

These legal checks on auction property help avoid future disputes. 

  • Check the property’s title to ensure the lender has the legal right to auction it. 
  • Verify auction property documents for existing encumbrances, pending litigation, and unpaid statutory dues, such as property tax or utility bills. 
  • Review the auction notice terms, sale certificate conditions, and compliance with the SARFAESI Act or court orders. 
  • Consult a qualified property lawyer to identify risks and ensure a legally secure purchase.

Tips for successful bidding at property auctions

If you’re wondering how to bid at a property auction, the following tips can help with successful auction bidding:

  • Research the property: Study the location, market value, and condition before bidding.
  • Set a clear budget: Decide your maximum bid, including taxes and registration costs.
  • Read auction terms carefully: Understand payment timelines, EMD rules, and penalties.
  • Complete legal due diligence: Verify title, encumbrances, and possession status in advance.
  • Arrange funds beforehand: Ensure liquidity to meet strict post-auction payment deadlines.
  • Stay disciplined while bidding: Avoid emotional or impulsive bids that exceed your budget.

To sum up

Buying an auctioned property can be a smart investment decision, considering you understand the pros and cons beforehand. Go through the bidding documents and physically assess the property before making the purchase.

If you need immediate funds to buy your dream abode, turn to Tata Capital. We extend home loans at competitive interest rates, starting at 6.70% over flexible tenures.

Moreover, you only need to submit minimal paperwork to quickly access low-cost housing loans worth Rs. 5 crore. Enjoy seamless online application facility and quick disbursals.Check out our home loan interest rates and charges, and apply now!

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FAQs

What is risk in auction property?

Buying an auctioned property comes with risks like unclear ownership titles, pending dues, legal disputes, and limited inspection opportunities. It's essential to do due diligence before bidding to avoid unexpected financial or legal troubles.

Do banks give loans for auction homes?

Yes, banks offer loans for auction properties by evaluating property legality and ownership before approval.

What is the payment method for a property auction?

Auction payments are usually made directly to the seller through demand drafts, online transfers, or bank cheques.

How property auction price is calculated?

Auction prices are determined based on recent sales of similar properties, market trends, and the property's condition. Valuers also consider pending dues, legal issues, and demand before setting a price.

What is the reserve price in auction property?

The reserve price is the minimum amount a seller is willing to accept for a property at auction. If bids don't meet this price, the property may not be sold.

What is the Earnest Money Deposit (EMD) in auctions?

 

EMD is a refundable security amount that bidders pay to participate in a property auction. It shows their serious intent to purchase. If the bidder loses the auction, the EMD is refunded. If the bidder wins but defaults, the EMD may be forfeited.

What documents do I need to verify before bidding?

 

Before bidding, verify the sale notice, title documents, possession status, encumbrance certificate, outstanding dues details, and the lender’s authority to auction the property. Reviewing these documents helps avoid legal disputes and financial risks after purchase.

What happens if I win the auction but fail to pay on time?

 

If you win the auction but fail to pay within the stipulated timeline, the auction authority can cancel the sale. In most cases, the EMD is forfeited, and the property may be re-auctioned without further notice.

Are auctioned properties always cheaper than the market price?

 

Auctioned properties are often priced lower than market value to ensure quicker recovery of dues. However, they are not always cheaper. Popular locations, high demand, or competitive bidding can take the prices close to prevailing market rates.

How to bid effectively in a property auction?

 

To effectively bid in a property auction, research the property’s market value, complete legal due diligence, and set a strict budget. Bid with patience and calmness. Evaluate each bid strategically.

Can I back out after winning a property auction?

 

You cannot back out after winning an auction. If you do, the EMD is forfeited, and legal action may also be initiated as per the auction terms.

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