Buying a distressed property? Hope you know these!

Ever heard of distressed properties while scouting for your dream home in the property market? If the answer is no, allow us to explain! A distressed property is a residential property, which is auctioned by the bank due to defaults by the original owners. A bank generally auctions a property if the borrower defaults on loan four to five consecutive cycles.

“Such properties are sold through a bank auction and can be acquired at prices which are often well below market value,” said Anuj Puri, country head of JLL India. However, distressed properties in India are negligible as rarely does an Indian retail borrower defaults on his home loan.

“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 - the further along the owner is in the loan term, the lower the base price. Property owners who have only a few cycles left to repay would prefer to restructure the loan rather than default on payment,” added Puri.

Nevertheless, if you have come across a distressed property ad (banks issue notices in all the dailies when they want to auction a particular property) and have been eyeing it for long, hold that thought for a second! Buying a property is an expensive affair and when it is a distressed property, ensure that you know the pros and cons.

Here are a few tips that could come handy to you if you are thinking of putting in your hard earned money into a distressed property.

Take a second opinion

Always take a second opinion from an expert before you plan to buy a property through bank auction. Speak to a property consultant with expertise in the field of distressed assets. “The consultant can also represent investors in discussions with the original owner, or directly with the bank,” he averred.

Not a sure shot option

Understand that a distressed property is a property, which is auctioned by a bank or any lending institution. Hence, you cannot be assured of a sure-shot property at the end of the auction. “In an auction, one has no way of knowing what the highest bid will be, so there is no guarantee of securing the property,” Puri pointed out.

Besides, auctioning a property is a lengthier process as the banks first issues a notice to invite bids on the property. Once, it receives all the bids, it collates and later sells the property to the highest bidder.

Legal disputes

Since the property is being auctioned by the bank because of defaults in payments, the original owner can go to court and get a stay order on the auction. Various legal options are available to a defaulter to stop the sale of his home and hence, the new home buyer may be left in a no-man’s land even after he is selected due to legal delays.

Read the document carefully

One must read a document carefully especially if it involves a distressed property. Puri suggested that a buyer must read the bid document carefully to understand important details such as unpaid dues or other liabilities.

“They 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. They must focus on understanding the history of the property under discussion and also get any historical papers for title due diligence,” he added.