Two terms you will encounter repeatedly in bank auctions are Reserve Price and Earnest Money Deposit. Understanding these concepts thoroughly is essential for successful auction participation. This guide explains both terms in detail and provides strategic insights for smart bidding.
What is Reserve Price?
The reserve price is the minimum acceptable bid for a property in a bank auction. It represents the floor price below which the bank will not sell the property. Any bid must be equal to or higher than the reserve price to be valid.
How Reserve Price is Determined
Banks follow a systematic process to set reserve prices. First, the bank appoints government-approved valuers to assess the property current market value. Multiple valuers may be appointed for high-value properties. Valuers consider multiple factors including property location and neighborhood, built-up area and carpet area, age and condition of construction, quality of materials and finishes, recent sale prices of similar properties, current market demand, and infrastructure and amenities nearby. The reserve price is typically set at 80-90% of the assessed market value, providing buyers with an immediate discount while ensuring the bank recovers a reasonable amount.
Reserve Price vs Market Value
Reserve price is usually 10-30% below current market value. This discount compensates for auction-specific risks. Attractive reserve prices draw more bidders, potentially pushing final price higher. Some properties may have reserve prices close to or at market value. If an auction fails to attract bidders or no bid meets the reserve price, the bank may conduct another auction at the same reserve price or reduce reserve price by 10-15% for subsequent auctions.
What is Earnest Money Deposit?
Earnest Money Deposit is a refundable security amount that bidders must pay before participating in an auction. It demonstrates serious intent and financial capability to complete the purchase. EMD filters out non-serious bidders, ensures bidders have financial capability, provides security against bidder default, and gets adjusted against final payment if you win.
Standard EMD Amount
EMD is typically 10% of the reserve price. For example, reserve price of Rs. 50 lakhs means EMD of Rs. 5 lakhs, and reserve price of Rs. 1 crore means EMD of Rs. 10 lakhs. Some banks may specify different percentages, so always check the auction notice.
EMD Payment Methods
Demand draft is most commonly accepted and should be in favor of the authorized officer or as specified. RTGS or NEFT electronic transfer goes to bank specified account with property reference number. Online payment is made through bank e-auction portal using net banking.
EMD Refund Process
For unsuccessful bidders, EMD is refunded within 15-30 days to the same account from which payment was made. No interest is paid on EMD amount, so ensure correct bank details are provided during registration. For auction winners, EMD is adjusted against the total purchase price. EMD is forfeited if the winning bidder fails to pay balance amount within deadline, withdraws from purchase after winning, provides false information or documents, or violates auction terms and conditions.
Strategic Considerations
Before bidding, evaluate whether the reserve price offers genuine value by getting independent property valuation, researching recent sales of similar properties, calculating total acquisition cost including stamp duty, registration, and repairs, and comparing with open market alternatives. Your maximum bid should not exceed 85% of your independent valuation after adding all costs.
To participate in multiple auctions simultaneously, keep sufficient liquid funds for multiple EMDs, prioritize properties by preference, track refund status from unsuccessful bids, and plan for EMD recycling across auctions.
Conclusion
Reserve price and EMD are fundamental concepts in bank auctions. Understanding how reserve prices are set helps you evaluate deals accurately, while managing EMD effectively ensures smooth participation. Always conduct independent valuation before bidding and ensure you have adequate liquid funds for EMD and subsequent payments.