October 28, 2007

Buying a House

Many Building Companies and Entrepeneurs are coming into Tiruvannamalai and developing Housing Projects and Apartment Co-operatives. Read the below article for an exhaustive examination of Builders' and Developers' tricks. It may save you alot of heartache and alot of money!


"Everybody wants a piece of real estate. The sector has been growing at 25-30 per cent a year since 2003, fired primarily by low interest on housing loans and the rising affluence of homebuyers. Those who had bought stocks of real estate companies, whose valuations have gone through the roof, are a happy lot. However, the same cannot necessarily be said of scores of financially and emotionally bleeding homebuyers. The developers play lord and master to middle-income individuals, who often live like monks to fulfil their dream of owning a house. Most sale agreements are heavily loaded in favour of builders in the currently unregulated market.

This disillusionment is reflected in the rise in the number of complaints that has accompanied the growth of the sector. In this scenario, what chance do you have of safeguarding your interests as a buyer? In 1993, the Supreme Court ruled in favour of M.K. Gupta in his case against the Lucknow Development Authority for not delivering his flat on time. This landmark judgment brought housing construction under the purview of the Consumer Protection Act, 1986.

This, however, hasn't done much to change the unscrupulous ways of builders. Owing to the bonhomie between developers, the authorities and the contractors, projects get sanctioned easily but the quality of construction goes unquestioned. Supreme Court advocate C.M. Srikumar says: "Even in cooperative societies, the contractor, the architect and the office-bearers of the society dupe the public."

What are the most common games that developers play? Here are eight common tricks and ways in which you can guard against them.

I. When do I get my house?

Most agreements do not clearly specify the date of delivery. For instance, one says: "Completion of the building is expected to be delivered by the date mentioned in the covering letter of this allotment. The delivery of the possession is subject to force majeure." What this means is that you cannot hold the developer responsible if he does not stick to the promised delivery date.

There have been cases when the delivery has been delayed by 12 months or more. Typically, the buyer would have paid 95 per cent of the price by the time he reaches the expected delivery date. If he is living in a rented house, delays will drive his calculations awry as he would not have factored in this additional rent. A Mumbai stockbroker fought a legal battle against Property Developers for five years for the reason of delayed possession.

What to do. Don't just take the builder's word on the progress of construction. Check it out from time to time. If you feel a delay is likely, start building up pressure on the developer. The best way to do this is to form a society. Usually, builders have many projects running at the same time and they push the ones where the pressure is higher. "The more the number of buyers, the greater is the pressure."

II. Where are my papers?

A lot of builders are evasive about giving the completion certificate at the time of handing over the flat. A completion certificate is issued by municipal authorities and establishes that the building complies with the approved plan. A developer would not get the certificate if he deviates from the plan.

You cannot prove ownership over your house if you don't have the certificate as you would not be able to get the house registered. Also, you may not be able to get utility connections. You will have problems selling, mortgaging or reverse mortgaging the house as it will not be in your name. In the worst case, the unapproved parts of your house would be demolished by the municipal authorities. Not a happy state of affairs.

What to do.
Sale agreements often don't mention the completion certificate. If yours doesn't and you notice it before signing the papers, insist on the inclusion of a clause that you will be given the completion certificate when the flat is handed over to you. Ask the builder for it as soon as he announces that the house is ready for possession. If, you move into the house without it, the court will probably be your last resort.

III. What's the guarantee of quality?

Within a month of moving into his apartment the new owner got trapped inside the house as the door lock failed. In six months, the plaster started peeling off and the fans stopped working. In another few months, water started seeping in as the pipes had corroded. "I felt cheated. This wasn't worth my money," says the owner.

As of now, there is no way for a buyer to check the building materials used or the quality of construction. Says advocate Anupam Srivastava, who is with law firm Chambers of Law: "Quality is a subjective matter. Buyers should enter into an agreement on the kind of material that the builder will use."

What to do.
Don't fall for the builder's glib talk. Insist on including the sanctioned plan of the building and the specifications of the raw materials to be used for construction in the purchase agreement. If you are already facing quality problems, you can go to the consumer court. A consumer activist and lawyer says: "If you want to approach the consumer court, move it within two years from the day you take possession." Alternatively, flat owners can form a Residents' Welfare Association (RWA) and get the builder to fix the problems.

IV. What is the price really?

An engineer in BHEL, Bhopal, had booked a bungalow with a Housing and Construction Company in 2004. On a visit to the site five months later, he found that his bungalow was not being built. He asked the Company to give him a different bungalow, as construction was in full swing on that. The Company formally changed the allotment but sent the purchaser a letter eight months later asking for Rs 3.15 lakh more.

There are legal loopholes as well. The Maharashtra Ownership of Flats Act, 1963, protects buyers against malpractices in the sale and transfer of flats. It gives homebuyers the right to inspect the builder's documents such as the specifications that he has obtained from the authorities. The Delhi Apartment Ownership Act, 1986, however, is a different story. Although it was published in the Gazette of India over a decade ago, brought on the statute book by Parliament and given the President's assent, it is yet to be notified.

What to do.
The last stop is the consumer court. Says an expert, "Many malpractices are offences under the Indian Penal Code, for which the responsible party can be prosecuted." Keep checking with the builder if any changes are being made to the specifications mentioned in the agreement and the allotment letter. Also, try to get it mentioned in the contract that if a sum higher than the original price has to be paid by you, the builder would give you additional time for that. You must also ask for a copy of the sanctions that the builder has taken from the authorities to carry out the alterations.

V. What else do I pay for?
To make your house liveable, you will need electricity, water and sewage connections. You will also need electrical wiring, appliances like fans, lights and a water pump, which are unlikely to be part of the package and generally won't be mentioned in the agreement. These will be additional costs that you will have to bear. You might also have to keep some speed money aside for registration so that it gets done in a decent timeframe. In some cases, the builder may make a verbal promise to get it done for you.

What to do. Builders generally have a take-it-or-leave-it attitude with conscientious buyers while striking a deal. Even so, it pays to be scrupulous and to read the agreement and its fine print. "Get a lawyer, an architect or an evaluator to determine the correctness of the purchase." Finally, do some quick math and keep aside some funds to get your house up and running.

VI. How big is house?

A typical home purchase agreement states: "The plans, designs, and specifications are tentative and the developer reserves the right to make variations and modifications..." Simply put, in most cases, you won't know the final area of he house till you get it. The agreement will further state, "In case of change in area, the difference in cost of area shall be adjusted at the time of making final payment."

A buyer had booked a fully-furnished, air-conditioned service apartment measuring 650 sq. ft (super area). He got an allotment letter mentioning this area. However, when the builder offered possession, the super area of the flat had increased to 671 sq. ft. "Once the authorities approve of the floor space index, how can the builder change it?" he asks. After holding out for over 18 months, the choice before him now is to either accept all the terms of the builder or seek cancellation of his allotment. Further, he was informed that the maintenance charge, which was to be Rs 1.50 per sq. ft per month, has been increased to Rs 7 per sq. ft per month. The agreement shields the builder. It says "the monthly maintenance charges will be subject to revision from time to time".

What to do. Builders usually follow the same practices through all their projects. So, before buying, check out the builder's earlier projects to see if he plays fair. Start a blog or join one to share your experiences with others, though this doesn't guarantee redress. You can read about the mistakes and experiences of other people on websites like mouthshut.com

VII. What's the carpet area?

Most residential units in India are sold on the basis of the super built-up area, which includes open spaces like space for lifts, staircases and parking, among other things. But, what you really get is the carpet area, which literally means the area that you can carpet. This can be 15-35 per cent less than the super built-up area. Some developers, especially in Bangalore, sell on the basis of carpet area. In Pune, too, the builders' association has decided to increase the carpet area by 25 per cent to arrive at the saleable built-up area charged to the buyer. In both these cases, buyers are aware of the area they will get. Though there is still a long way to go, experts believe that soon properties all over India would be sold on the basis of carpet area.

What to do. Buy property on the basis of carpet area, although the builder will not like the idea. Argue with him that if the super built-up area is mentioned on the basis of the approvals and sanctions, the carpet area can be quantified. "There should be a provision for termination of the contract and resumption of the property so that builders don't have an upper hand. However, in the absence of rules, buyers should be vigilant."

VIII. Will I get a well-managed property?

The developer may promise to maintain the building or complex in the initial years. The service, however, may not be satisfactory. "The homebuyers cannot even use the Right to Information Act, 2005, to their advantage because it doesn't apply to private builders or even group cooperative housing societies."

What to do.
You are unlikely to get relief through correspondence and phone calls. You can go the e-way to attract the builder's attention. For months, a Delhi-based developer ignored the complaints of the residents of one of their premier offerings. Then, a resident shot a nine-minute video that captured the visible flaws of the project, and posted it on YouTube.com, a broadcast site. Their grievances were soon attended to. You can use websites like www.consumerhelpline.in and www.cgsiindia.org to seek further guidance.

Though the dice is clearly in favour of the builder, the buyers can still fight back and many of them are doing so. Now, the government urgently needs to put a regulator in place to ensure proper disclosures and protect the buyers.

What we need
Mostly, a home is the biggest investment of one's life. And yet, most people buy it in a hurry. In this hurry, they sign all the papers without even reading it, let alone questioning its clauses. It may all seem illogical later, but it doesn't when it actually should.

The Indian real estate market does not have a regulator. The need of the hour is to take lessons from streamlined markets abroad and introduce comprehensive disclosure norms.

Generally, reputed builders deliver on time and as per promised specifications. Small developers, however, default by stretching their projects beyond the promised delivery date. Often, this is caused by funding issues. They may also skimp on construction costs, banking on the buyer's ignorance about quality parameters. Sometimes, they submit incomplete drawings to the municipal authorities. There are also fly-by-night operators, who pocket their clients' initial payment and then disappear altogether. In bigger cities, most developers are established and experienced players with a reputation to protect. Here, the incidence of gross defaulting is less than 10 per cent. This can, however, be as high as 15-20 per cent in emerging suburban areas, where there are a lot of small developers. Many developers who respond to sudden property booms in suburban areas have no experience or technical knowledge and often do not have banks backing them. Most emerging suburbs are also defined by unclear land titles.

What buyers should do.
A buyer should check the developer's credibility, past projects, performance and delivery record. He should also ensure that the project is funded by a known bank and has all the approvals. A buyer is entitled to ask for a copy of the project's drawings, duly stamped by the municipal authorities.

Legal recourse. Buyers in Maharashtra can take recourse to Section 8 of the Maharashtra Ownership Flats Act, 1963, which makes a developer liable to refund the money obtained from a customer with 9 per cent interest if he is unable to justify non-completion of his project. Most states have similar regulations.

Reputed developers do undertake remedial action if a client is not satisfied with the final product. This is unlikely in the case of unknown one-time operators. Buyers should keep in mind that a developer is supposed to make improvements, repairs and alterations until a society is formed."

[Extract from
Urmila Rao, Outlook Money]


Property is worth the investment only if the return on rental income is 8% of purchase price or more. That is - if the cost of house is 50 lakhs - you must be getting a minimum rental of 32 K on it. However - you can lower rental threshold on purchase decision to 6% if property is likely to escalate by 10% in next years annually.

It is a sell call for a house if rental income for the property falls below 4% and price escalation lower than 6%. In case of an expected negative trend in house price - sell call is to be made.

1 comment:

Pia @ homes for sale in philippines said...

Buying a new home can be an exciting adventure, especially for first-time buyers. Your post also gives the buyers an idea on what to consider when buying a home.