Due to their low prices compared to the market price, distressed properties repossessed by financial institutions/banks can be a compelling investment option. Banks lend money to borrowers in exchange for mortgages. When the borrowers cannot pay back, the banks become the owners of properties and can entitle them to sell or auction. A mortgaged property of a defaulter is considered distressed for banks as it holds the key to capital retrieval from the market. However, there may be disadvantages linked to such properties with hidden liabilities in unpaid dues and legal issues that can obstruct deal closure.
Source: Distressed investing in India: Coming of age (aima.org)
The banking sector non-performing assets (NPAs) in India are currently estimated at over 10% of assets i.e. ~US$135 billion.
Non-bank finance companies (NBFCs) in India — especially those focused on wholesale credit — have also been impacted by rising corporate stress –mostly in sectors like real estate. NPAs for non-banks in India are currently estimated at ~7% of assets i.e. ~US$25 billion. Thus, overall stressed assets in the Indian financial system are estimated to be upwards of $160 billion, providing a large market opportunity for investors.
Pros and cons of buying distressed properties
A property auction by the bank occurs when the estimated value of capital stuck in those non-performing assets (NPAs) increases considerably. Banks then conduct auctions to retrieve the amount attached by attracting interested buyers.
Here is the list of pros of buying such properties from banks.
1. Price is generally lower than the market
The estimated price of distressed properties is usually lower than the market price. It is an attractive option to invest in real estate properties for investors. Sellers like banks look for quick resolution and often sell properties at a low cost to recover deficit cash.
2. Higher potential for profit
Another good reason for investing in such properties is a better return on investment from the market. Holding on to those properties will bring exceptional returns in the long run. Investors foresee the future and understand the value of those properties better.
3. Authentic properties
The properties are authentic and validated by public sector banks. Hence, a property auction by bank is a self-certification of the authenticity of those properties.
Now that we know the pros of distressed properties let us define the cons.
1. Might attract renovation cost
Renovation costs can be higher for such properties. A bank might be holding a distressed property for a decade or more. It may have suffered weather damage. Hence, assess the investment calculation before going ahead in purchasing a property.
2. Location matters a lot
Investing in distressed properties without judging their locations can be a blunder for investors. Savvy investors use online portals to check property locations and even hire professional assistance for smooth transactions.
How to find distressed properties?
If you are an interested investor, look for the popular online portals that provide information and carry out auctions of distressed properties. Gathering information related to such properties becomes much more accessible.
Online auction portals share information on properties that public and private sector banks will auction. Understanding the bidding process will be clear too. Start scouting for the properties available for auction in your preferred locations.
You can also seek professional assistance from the service provider's representatives and participate in the bids. A property auction by the bank is a transparent process where a bidder can see the property bids of other contenders.
Verdict
Weighing the pros and cons of purchasing distressed properties from banks can be an excellent decision in terms of investment. Make sure you have checked the location and condition of a real estate property under auction and then decide. Search for such properties in online auction portals like Auction Bazaar to get authentic information covering almost all the major cities.
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