Buying auction properties: A smart investment idea?
Auction properties are a great way to invest in real estate properties at prices which are much lower than the prevalent market rates.
At a time when rising property prices plague the Indian real estate market, investors and buyers still keen on the sector are looking at different avenues to procure cheap properties to invest in. Buying properties at auctions is one such option. While seasoned investors find auction properties quite lucrative, it is not completely risk-free either. Let’s consider both the sides of buying properties through auctions:
Advantages of buying auction properties
- Lower prices: The biggest benefit of buying a property in an auction is that these properties are generally available at rates which are often 15-20 per cent cheaper than the market rates. The main purpose of banks auctioning properties is to recover the money it is owed and hence, the base price is set at the minimum amount that the bank intends to recover.
- Less competition: Auction properties constitute only a small percentage of the real estate market as very few people default on their payments long enough to cause an auction says Anuj Puri, Chairman & Country Head, JLL India. Additionally, since auction properties have some risk attached, most people prefer to stay away from such deals. This gives an advantage to the ones willing to participate.
- Potential to invest in established localities: According to Anuj Puri, bank auctions present an excellent opportunity to acquire properties in established residential localities that would offer very little supply otherwise.
Disadvantages of buying auction properties
- Maintenance issues: It is safe to assume that since the owner was not financially strong enough to repay the loan, he might not have been capable of maintaining the property. Banks auction properties at ‘as is what is’ basis and are not concerned with the upkeep of the same. Hence, potential buyers need to consider that such properties might not be in the best of state and will, more often than not. require some kind of renovation.
- Outstanding expenses: Auction properties often involve incidental costs which can include outstanding taxes, utility bills, society fees and disconnected services.
- Ready cash required: Interested parties compulsorily need to deposit a certain amount, called Earnest Money Deposit (EMD) in order to be eligible to participate in the auction. Winners must have ready funds available as they have to pay about 25 per cent of the winning bid immediately while the rest has to be paid within 15-30 days. Most people might not have such huge funds at their disposal.
- Research required: Though properties auctioned by banks have a sense of safety attached with them as banks check all documents before granting loans against property, prospective buyers must still carry out their own enquiries regarding the property and any associated claims and disputes.
- Legal delays: If any associated party decides to challenge the auction, the ensuing legal process might cause delays in taking possession of the property.
Although auctions enable investors to access excellent deals, it is equally important to carry out due diligence while participating in them. Anuj Puri warns interested parties to read the bid document very carefully as it would contain all the requisite details of the property. He adds that since auctions involve bidding, there is no guarantee about the final price of the property. Prospective buyers should ideally seek the help of competent property lawyers to guide them through the procedure so as to save them from any legal issues later on.
Before buying an auction property, investors must calculate all the additional costs expected. Auction properties make great financial sense if the total cost of the property after including maintenance and incidental expenses is less than the prevalent market price.
As per a recent announcement, the central government plans to launch its own online real estate portal which will have encumbrance-free properties available for auction. Prospective buyers can expect the properties listed on the portal to be free from any disputes, and hence, they can be considered safe investment options. The government portal will provide important information of the properties including floor area and pictures. Participants will be able to bid online from the comfort of their homes after electronic payment of the EMD.
Currently, people interested in buying auction properties have to search for such properties through newspaper advertisements and several websites as individual banks hold their own auctions at different times. The government portal will take the banks out of the picture and contain properties available with different banks at one place, enabling public to choose among all the options.