How to buy a house 20% below market price

Published: Friday, Feb 18, 2011, 3:09 IST
By Abitha Deepak | Place: Mumbai | Agency: DNA 

Thinking of buying a house? Then you must be doing some research to be able to steal a deal.
But, did you know you can actually get a house at almost 20% below the current market price? Yes, even in this day and age, the sharp runup in property prices notwithstanding.
This is because several banks periodically conduct home auctions which can help you buy a house at cheaper rates.
Here’s an overview on home auctions.




How it works

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (54) of 2002 (SARFAESI Act) gives banks and financial institutions the right to recover mortgaged property in case of loan defaults without the intervention of the court.
Hence, the lenders can take quick action and bring into effect the take over of the property in question.
It is at the expense of the home loan defaulter. However, it opens doors for people who want to buy a property at an affordable price.

Why it could be a steal

Once the lender takes control of the property, an independent valuation is conducted. It is done with the help of an independent chartered surveyor who fixes two values for the property.
One is the current market value and another the distress value. Distress value is around 15-20% lower than the market value.
Given the circumstances in which the auction is conducted, the property is almost always quoted with the distress value for the minimum bidding price.
At the auction, the prices can go up according to the bids and the location of the property. This gives the prospective buyer an opportunity for a very good deal as opposed to buying a property at the existing market value.

Auctioned properties market

It is still an unorganised market, which is, however, opening up as a venue for a prospective home buyer. At present, it is possibly more of a property investor’s market than an end-user one. Also, the proportion of commercial properties auctioned could be much higher than the residential ones.

A checklist to guide you on the process

a. Scrutinise newspapers and niche websites: Many nationalised banks periodically advertise in the newspapers the auction dates, venue and properties location that will be for sale. Websites like http://foreclosureindia.com/ also offer information.

b. E-auction as an option: Some banks announce it via e-auctions as it is faster and transparent. It reaches out to a wider target audience and helps the banks sell these properties, helping them recover the costs incurred through the loan more efficiently.

c. Legality: Once the caution fee has been collected from you for participating in the auction, as a prospective bidder, you will be allowed to check the property you are planning to bid beforehand.
Do make arrangements for a legal counsel to accompany you and help you with all the legal aspects of the transaction. Though you are making a business transaction with the banks, which by itself means you will receive a legally safe and registered property, you still need to do your share of the homework.
With the help of your legal counsel, investigate the title of the documents. Do your research with the registry for a track record of the past 30 years of the property to understand who were its past owners, how many hands it changed and whether there was any legal tangle in the past that needs to sorted out before your make your winning bid.
Verify all municipal records, tax records, whether the current owner has sole ownership and if it can be transferred to you in accordance with the rules specified in the Transfer of Property Act.

d. Be prepared for additional costs: The properties auctioned are disposed in the state they were first taken over by the banks.
Hence, there might be some costs including outstanding payments due in terms of house tax, electricity, repairs and renovation that need to be incurred once you purchase the property.
Factor in all these aspects when you make the bid.

The emotional side of it

When one looks at it from the perspective of an auction for the homes of defaulters, one does feel a wave of emotion about the unconventional route to buy a home.
You may wonder about the loss of one becoming the gain of another. However, you need to treat it as nothing more than a sale transaction because you do not have to be affected over somebody else’s mismanagement of finances.
Moreover, not all houses are given up for auction by home owners unable to pay the loan. It could be a situation where the individual giving up the house to the bank considers it as a fixed asset that could be liquidated in an hour of need.
The excess funds from selling the house if any would go to the previous house owner, who gave it up to the bank. Moreover, all sale transactions happen through the bank, so you need not worry about the technical aspects of the sale.
However, you need to get your routine checks in place to see that you derive the benefits that ideally accompany such a bargain deal.