Ramesh Luhani had been house-hunting for over a year. He had met over a dozen brokers and negotiated with several builders but was not able to strike a good deal until he chanced upon an advertisement by a bank inviting bids for an e-auction. He won the bid and even managed to get a 10% to 15% discount on the property, but there were crucial details that he had overlooked. A month after moving in, he was horrified to find that the previous owner owed the housing society Rs. 5 lakh in dues and that the house had been sub-let, which meant he could not resell the property.
Luhani’s case cleary proves that properties bought in e-auctions are sold at an ‘as is where is basis’ and most of them are offered at a discounted price of 10% to 15%. Banks are most likely to offer a discount because of the problems associated with non-performing assets (NPA). Though they do their own due-diligence, often the property might have some liabilities which have gone unnoticed.
At a recent e-auction, the State Bank of India (SBI) was able to sell 124 (out of a total of 350) properties seized in 26 cities worth Rs. 90 to Rs. 100 crore, says Parveen Kumar Malhotra, deputy managing director, Stressed Asset Management Group, SBI. Most of these properties were residential and were bought for end use. The total value of the 350 residential and commercial assets up for sale ranged between Rs. 1,000 and Rs. 1,200 crore.
These properties were pledged as collateral for housing and other business loans and were taken over by the bank under the Security and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act due to non-payment of pending dues by the borrowers, he explains. The defaulters were given a notice period of 60 days under the Sarfaesi Act, after which the properties were seized and auctioned.
But do banks make a profit from e-auctions? The intention of organising an e-auction is to recover the amount due from the borrower and in case the bid amount is more than the outstanding amount, the margin is returned to the borrower.
Buyers can even avail of a loan for such properties. “While no loan can be availed for the initial deposit, the remaining amount can be taken as a loan from a bank and is like any other housing loan,” he adds.
“The recent e-auction only goes to prove that there are enough buyers in the market who are waiting to buy ready-to-move-in properties available at the right price. Most of these units have minimal development and approval risks associated with them. Banks generally do the due-diligence for these properties themselves through their asset reconstruction departments or sell the ‘bad loans’ to asset reconstruction companies who derive monetary value out of these ‘dead’ assets. However, they do not give any warranty and the buyer has to bear any unknown risks associated with it,” says Anckur Srivasttava of GenReal Advisers.
What explains the discounts that are offered in e-auction? Discount is a function of problems associated with such assets. There could be some liabilities associated with the property that is being auctioned. These could include society dues and other liabilities unknown to the lenders. There is always a deficit in information and the discount on offer is due to that. On an average such properties sell at a discount of 15%, says Siby Anthony (CEO- ARC) Edelweiss Financial Services.
Banks get the premises vacated before they are auctioned and have to get possession of the house through a collector or a district magistrate to avoid any law and order issues.
Sources - Hindu
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