By Mr. Anuj Puri, JLL India
Distressed properties are those where the owner has taken a home loan
or loan against property to acquire the asset & been unable to service his
/ her debt obligations.
Property seized by bank..!
Due to the owner’s falling behind on the EMI (Equated
Monthly Installment) payments for 4 to 5 consecutive cycles, the property has
been seized by the bank as collateral, and will be sold to recover the interest
& unpaid principal amount due to the bank.
Distressed properties ..!
Such properties are sold through a bank auction & 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 - 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,
Banks will invariably release an advertisement in all leading
local newspapers when they intend to auction off a property or set of
properties, so this is the best source of information.
A bank’s annual report will always mention a provision for bad
debts, and the schedules / or annexures would reflect if and when any
distressed properties will be coming up for auction.
One may also reach out to a property consultant with expertise in
the location & specifically inquire
about distressed asset opportunities.
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| Mr. Anuj Puri, JLL India |
The consultant can also represent investors in discussions with
the original owner, or / directly with the bank.
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 Initial public offering (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.
Risks & Opportunities..!
RISK
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OPPORTUNITIES
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It is difficult to know of all the distressed assets available,
which by themselves are a smaller portion of all properties in the market.
In an auction, one has no way of knowing what the highest bid will
be, so there is no guarantee of securing the property.
The original owner may sue the bank, resulting in legal delays for
the buyer.
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Properties offered at lower cost than existing market prices.
Potential to secure a property in a premium location.
Generally, there is less need for legal due diligence, as the
bank will have inspected documents before giving a loan.
No risk of non-delivery by the builder.
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Bank Auction..!
Of both possible processes, this is lengthier one, with the
bank releasing an advertisement, setting a date for the auction, inviting bids,
collating the offers 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 & then draw up
contracts to transfer the property along with a go-ahead from the owner, and a
society No Objection Certificate (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, and if if any neighbour has
been impacted. The banks & 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, exchange a token deposit & then complete the bank process
to continue with purchase before signing the agreement and accordingly taking
possession.
The entire bank process of releasing the property, granting the
NOC and acquiring the society NOC, as well as repaying the bank loan, can take
as long as 2 to 3 months.
The price available 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 & 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.
About the author..
Mr. Anuj Puri is Chairman & Country Head at JLL India
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