Road to recovery
Distressed properties are those where the owner has taken a loan against property to acquire the asset and been unable to service his debt obligations. Due to the owner’s falling behind on the EMI payments for 4-5 consecutive cycles, the property has been seized by the bank as collateral, and will be sold to recover the interest and unpaid principal amount due to the bank. Such properties are sold through a bank auction and can be acquired at prices which are often well below market value.
Distressed properties are rare, since less than 5% of Indian borrowers default on their obligations for periods long enough to warrant a bank auction. There is also limited scope for getting these properties at throwaway prices, since the base price for the auction is determined by the loan amount outstanding. Property owners who have only a few cycles left to repay would prefer to restructure the loan rather than default.
Banks will invariably release an advertisement in local newspapers when they intend to auction off a property. A bank’s annual report will always mention a provision for bad debts, and the annexures would reflect if and when any distressed properties will come up for auction.
When a bank places the property for auction, one needs to read the bid document carefully to understand the status of unpaid dues. The bid document is like a prospectus of a IPO, where all the facts covering legal title and responsibility for pending dues are stated. Basis the bid document, one can form an opinion on the status of unpaid dues. Most of the time, the property is sold on a ‘as is where is’ basis and till the date of auction, dues are cleared.
Of both possible processes, this is lengthier one, with the bank releasing an advertisement, setting a date for the auction, inviting bids, and then finally deciding who to sell the property to. It can be even more cumbersome if the buyer himself wants a loan to purchase the property either through the same bank or a different bank. The process also takes longer because the bank has to conduct a thorough due diligence search on the incoming buyer and then draw up contracts to transfer the property, and a society NOC.
The bank will obtain an NOC from the society or condominium before conducting the auction. Many societies and their members have first right of refusal, or its members can match the highest bid to buy the property. At the time of obtaining NOC, the society will highlight any liabilities that the new owner will have to bear. The banks and its legal counsels will capture such aspects in the bid document, and the bidder can refer to them to assess the liability.
Directly from the actual owner: In this case, the owner and the new buyer would agree on the commercial terms and then complete the bank process to continue with purchase. The entire bank process of releasing the property and acquiring the society NOC, as well as repaying the bank loan, can take as long as 2–3 months. The price here is generally higher than it would be in a bank auction, since the seller will try to recover as much of his initial investment as possible.
Precautions buyers must exercise to avoid risks: Buyers must read the bid document carefully to understand the status of unpaid dues or other liabilities, and should be fully aware of what they are getting in to while buying a distressed property, and aim for a win-win for the bank and the original owner so that there is a limited scope for a legal challenge.