Month: January 2018

Pre-Launch/Under Construction/Ready to Move/Resale – Which should I choose?

Today, buyers have options to buy homes that are in various phases of construction. Their options range from pre-launch phase, to under-construction phase, to ready to move apartments to resale apartments. This article highlights the pros and cons of these options.

Pre- Launch Phase

In pre-launch phase, developers start marketing projects even before basic approvals are in place. This is a soft launch and to attract investors, developers normally offer an “early bird discount” of up to 20%. Developers use these soft launches to start generating cash flow.  This kind of investment has the highest risk as not all approvals may be in place and no date has been set for commencement of construction. In many of these projects, financial institutions may not be keen on extending loans to buyers. The buyers however, have to pay an initial payment and have ample time to garner funds for the project. In many cases, during a soft launch sale, the builder signs an agreement with the buyer to sell at a later date, as the final terms and conditions of sale may not be clear at this stage.

Investing at the soft-launch stage is more risky than at the advanced stages of construction. It is not advisable for a person with a low risk-taking ability unless the project is by a reputed builder and has all the necessary approvals. In addition, it is advisable to pursue projects that have been approved by reputed banks.

Under Construction Projects.

This option is one of the most popular practices exercised by prospective homebuyers. In this case, the builder has received the necessary approvals and has been legally allowed to commence construction. It gives the buyer time to acquire funds as the payment is made in instalments based on the construction phases. The buyer can choose the location and orientation of his apartment and there is some scope for customization of the apartment. This type of investment also has risks, as there can be a delay in construction. There can also be some structural changes, which can result in deviation from the approved plans. If the project is delayed further, many of the buyers can be faced with having to pay the monthly EMIs along with their rents, which can prove expensive. Such type of under construction projects are also subject to service tax and VAT.

Ready-to-move-in apartments

This option provides instant ownership. There is minimum risk involved as the builder has completed all the legal formalities. The buyer purchases “what he sees” and therefore there is no guesswork on the materials used for construction. A ready to move apartment does not attract service tax or VAT. However, in the case of ready-to-move apartments, homebuyers may need to make the entire payment in a short period. The buyer has limited options in terms of the floor choices and pays more than buyers who had opted to buy during the under-construction phase. The buyer has limited scope for customization, as the apartments are already finished and ready to move in.

Resale homes

Buying from the resale market, is yet another option for home buyers. Apartments in this category will cost 15 – 20% lesser than the ready to move homes. These are older homes, and this kind of deal is only beneficial if it is developed by a reputed builder and if the construction quality is good. This is a good option if buyers want to purchase an apartment in an established neighbourhood.  In the case of resale properties, one must examine all the documents including hidden encumbrances, legal clearances, before investing.

A buyer should invest in a property whether it is pre-launch, under-construction, ready-to-move-in, or resale depending on one’s individual needs and financial capabilities.  In all the options, it is important for the buyer to evaluate the risks involved and ensure that all the relevant documents and legal clearances are in place. To have a better understanding on the documents that are required for each of the above options, it is prudent to consult an expert before investing.

Deepa and Rajan after months of searching finally bought their “Dream Home” and were in the top of the world!  The property was at a prime location where the prices were appreciating at a fast rate.  After a couple of years, as their family was expanding, they decided to sell the flat and were really confident that the sale would fetch them a great price and that they would be able to sell off their apartment in no time!.

Many prospective buyers looked at the apartment and tried to secure a loan to buy the property. However, their requests for loans were rejected by the banks – not because of their financial standing, but because of one unanswerable question “Where is the seller’s undivided share of land in the Agreement?

Deepa and Rajan were taken aback as they realized that they were only sold the building that had depreciated over time. They did not own any proportion of the land on which the apartment was constructed.

Many property owners are unaware, that Undivided Share of Land is the share of land owned by them when they purchase the apartment. Simply put, when one buys an apartment, the potential buyer is buying two things – the constructed flat in which they reside, and a proportionate share on the land on which the apartment is built.

In real estate, the price appreciation is on the land price as technically the building itself depreciates over time.  Also in the unlikely event of an earthquake or should the government acquire the entire property for a project of national relevance, what would be the fate of the apartment owners if they did not own a portion of the land?

For any future redevelopment  of the project, it is important to have a portion of the land in the owner’s name. The sum of all the flat owners share of land has to be equal to the area of the property. It is important for potential buyers to take note that the undivided share of land should be proportionate to the area of their apartment.

There have also been cases where the builder has allocated less undivided share to apartment owners and kept some part of himself and the original landowner. Prior to investing in a property, please ensure that you examine the draft agreement and verify the percentage of land that has been allocated as undivided share of land.

Rekha and Prakash had been looking to buy an apartment in Sarjapur Area, Bangalore for quite a while. They were particular about Sarjapur Area as it was close to their places of work and there were good schools in the vicinity for their four-year-old daughter. They found a nice looking apartment complex, which had advertised three bedroom “luxury” apartments for 75 lakhs!  The glossy brochure they got from the builder’s office had photographs of beautifully decorated apartment with “world class amenities”. Both Rekha and Prakash were excited and decided to take the plunge and invest in a three BHK flat.  What both of them overlooked was the asterisk and conditions apply in small print.  When they decided to make a down payment on the apartment, they were in for a rude shock – there were many hidden costs that were not accounted for in the initial costs!

A few hidden costs can escalate the total cost of the apartment significantly. It is important for potential buyers to be aware of the some of the hidden costs mentioned below and be prepared for the additional expenditure when buying an apartment.

Registration Costs and Stamp Duty Costs

Registration costs and stamp duty costs are mandatory while getting your property registered and depends on the total cost of your apartment.  In Karnataka, the Stamp Duty and Registration costs are approximately 5% and 1% of the total registered property value respectively.  In addition to this, the buyer has to pay 10% cess and 2% surcharge of the Stamp Duty.  In Bangalore Urban Area, the Stamp Duty is approximately 5.6% and in Bangalore Rural, the Stamp Duty is 5.65% as the surcharge in Bangalore Rural is 3%.

Parking Space

In some cases, parking spaces are not included when you buy an apartment. Depending on the locality of the apartment complex, the charges for parking spaces vary. These charges can vary from a lakh to almost five lakhs depending on the type of property, locality and size of the parking space provided,

Maintenance Costs

Many developers charge at least one-year maintenance charges upfront for the maintenance of common facilities like lifts, landscaped areas, water, electricity in common areas, swimming pools and club houses etc. These charges are significant in apartment complexes that offer so called “world class and luxury amenities.”

Infrastructure Charges

Apartment buyers have to cough up for security deposit costs for electricity and water from infrastructure providers like BESCOM, BWSSB, etc.

Escalation Charges

There have been many instances where developers have hit the buyer just before registration with escalation charges. These charges are allegedly due to increase in prices of materials such as cement, sand, steel, etc. This clause is often a part of the Sale Agreement, which most buyers tend to ignore.

Preferential Location Charges

If you a looking for an apartment with a view to the landscaped garden or swimming pool be prepared to pay Preferential Location Charges. These premium charges depend on the location, size, and orientation of the apartment. These charges can range from an additional Rs 25 to Rs 100 per square feet.

Interiors cost

While the glossy brochures show you apartments with beautifully constructed interiors, the apartments are sold with minimum amount of interior work and finishes. Owners have to spend considerable amount of money in getting the interiors done. This includes all the woodwork, for the bedrooms and living spaces, cabinetry and tile work for kitchens and electrical fittings for the apartment. This expenditure can cost one a fortune depending on the type of interior finishes and work undertaken. It is safe to assume that a minimum of 8% to 10% of the total cost of the property will need to be shelled out for interior work.

As you can see, there are more costs involved than meets the eye. Make sure you factor these costs into your budget before embarking on searching for your dream home!

Vikas, an IT professional, moved back from New Jersey, USA along with his wife and two kids. He had a plum job in one of the leading IT Companies and decided to invest in a villa in an exclusive gated community in Bangalore. While driving around he and his wife were impressed with the community, which had amenities similar to what they had in the US – a clubhouse, with swimming pools, a coffee shop, gym, spa, grocery stores and children’s play area. The layout was beautifully designed with paved footpaths, biking paths, manicured lawns and landscaped common areas. The brochures highlighted the exclusivity and security of the gated community. Vikas knew that such a development would cost a fortune and was willing to invest in it as it meant a secure lifestyle for him and his family – free from the noisy and chaotic Bangalore traffic!

However, a year later, he along with all the others who had bought villas in that gated community where in for a big surprise, when city officials came in with bulldozers and demolished the main gate demanding access to the roads inside. It was learnt that the developer had relinquished the roads to the city authorities. Most of the people who live in gated communities are not aware that as per the Bangalore authorities, there is no concept of “gated communities” in Bangalore. According to City authorities, these gated communities are nothing but layouts and residents cannot claim exclusive access to roads and open spaces within the community. In most cases, the developer takes permission to form layouts and construction of residential blocks, but they are not allowed to block part of the layout from public access.  Unfortunately, developers in their enthusiasm to market and sell the villas highlight the security and exclusivity of these communities and do not inform potential buyers that roads and common facilities rests with the city authorities.  It is therefore important for potential buyers to see the approved layout plan before investing in a property.

Karthik, a software engineer had booked for a three-bedroom villa that was under construction in one of the upcoming residential areas in Bangalore. This villa was developed on agricultural land that had been converted for residential use. As the builder was a reputed one, and had undertaken several projects, in Bangalore, Karthik went ahead and paid a substantial amount as a down payment for the villa. However, just before he could register the property, Karthik was in for a huge shock… It appeared that the agriculture property belonged to a joint family and one of the family members had challenged the sale of the property to the developer.

When land belongs to a joint family, it is important to determine whether the consent of all family members have been obtained for the development of the property. If any shareholder is kept out of the deal, he or she has the right to challenge the deal and take legal action, which can jeopardize the project.  In such situations, it is important for potential buyers to examine all the documents including the family tree. This document shows the genealogical tree in the form of a flow chart indicating the names and details of the family of the owners of the property that is being sold. The family tree is a tricky document and not easy for a common person to decipher. Reviewing the family tree is a lengthy process and requires due diligence from an expert to avoid any legal hassles later. It is important for any buyer who plans to buy property that belonged to a joint development to engage the services of a legal expert to ascertain the family tree.

Akhil Shastry moved to Bangalore from the US to start a new chapter of his work life with a start-up IT Company. He was not interested in a standard apartment, but rather wanted to invest in a contemporary penthouse in an upscale apartment complex. His rapidly increasing net-worth, combined with his aspirations of leading an affluent lifestyle played a major role in deciding to go for a luxurious penthouse, which was being sold at almost 60% more than the other flats.  The penthouse was equipped with additional luxury features like a Jacuzzi on the rooftop and provided an amazing panoramic view of Bangalore.

He decided to finance 70 percent of the apartment cost partly with the hefty bonus he received the year before, and with his savings, he had set aside. When he approached the bank to secure a loan for the remainder amount, he was in for a rude awakening – the penthouse with all its posh amenities was an illegal construction, since the builder had not received sanction to build the last two floors. As the building had deviated from the original sanction plans, the City Authorities had not issued an Occupancy Certificate.

While having a penthouse as a primary place of residence is a statement of affluence, it is important to make sure that such investments are genuine and legal. Before embarking on such an investment, it is important to make sure that the authorities have sanctioned the building plans including that of the penthouse and that the building has been issued a completion certificate and an occupancy certificate.

Shashidhar bought his apartment in 2005 in Koramangala, a posh locality in Bangalore. It was a BBMP approved project with a sanctioned plan. He registered his property and lived with his wife and son until 2015. In 2015, as his son was now attending engineering college, which was almost 20 kms from Koramangala, he decided to relocate to a bigger apartment near his son’s college. As Koramangala was a most sought after location, several parties were interested in buying the apartment. He finally decided to sell his apartment to a young IT professional Vijay, who had decided to avail a loan from a bank to buy the apartment. However, to Shashidhar’s dismay, he was unable to sell the apartment, as he did not possess a valid Occupancy Certificate!  In this case, although it was an approved project, the OC was not issued as the finished project deviated more than 5% from the approved plan.

An Occupancy Certificate (OC) is a document issued by a statutory body like a municipality to certify that the building complies with the rules and regulations of that area and meets the required health and safety standards. It is the builder’s responsibility to apply for OC upon completion of the project.  In many cases, however, the builder fails to obtain OC and hands over possession to the buyer.

As a potential buyer, it is important to carry due diligence of the property prior to purchasing it. One should ascertain that the construction of the apartment complies with the approved BBMP plan. Without the OC, the owner cannot occupy the premises. The process involved to obtain an OC in such a scenario is long drawn out and cumbersome and sometimes requires the buyer to resort to legal action!

A reputed builder built a multi-crore 15 storey 200 apartment unit overlooking a lake in Bangalore. The complex was nearly completed with final touches being given to it. The idea of having a house overlooking the lake and close to nature enticed several people to invest in this development. The lake was pitched as unique selling proposition and the price of the apartment units were priced almost 30% more the market value. One fine morning, the city authorities cracked down on the developer ordering the developer to stop construction activities. It was later learnt that the builder had violated the lakes buffer zone and had encroached on a storm water drain by building the apartment complex on it, and diverted the flow of the storm water drain. The authorities seized the property and ordered the removal of the makeshift housing of the workers.

According to the National Green Tribunal (NGT), landmark judgement of May 2016, a 75-meter buffer zone should be maintained around the lake and wetlands. In case of Storm Water Drains (SWD), a 50-meter buffer from the edge of primary SWD, a 35-meter buffer from the edge of a secondary SWD and a 25-meter buffer from a tertiary SWD has to be maintained.  Many of the buyers who had invested in this property were devastated as they saw their hard-earned life savings literally “go down the drain!”

Potential buyers who are investing in projects close to water bodies should approach the sale with caution. It is important for a potential buyer to be aware if the developer is encroaching on the lake buffer zone or the storm water drain. While it is the responsibility of local authorities to conduct proper due diligence of the proposed properties submitted for approvals, it is imperative that buyers also conduct a due diligence before investing their life savings. Currently, with the absence of any official maps, it is best to rely on the services of a qualified surveyor to ensure that the proposed development does not encroach on the lake or storm water drain buffers. There are revenue maps as well as Google maps available to check against this and it is critical that prospective buyers hire the services of a professional before buying the property.

Swati Avinash, a marketing professional with a leading MNC was quite impressed with an upcoming housing project in Whitefield, Bangalore where the developer promised to create over a hundred luxurious flats with modern amenities. From the brochures and marketing material, the proposed complex looked exceptional for a mid-segment housing project, and hence she booked an apartment, as everything about this project seemed to be in place. This project “ticked” all her boxes – the reputation of the builder, the location of the project, the price, and the delivery schedule. However, shortly afterwards, she was exposed to the reality of “loading percentage” which she was not aware of.  She realised that the cost of the additional space that she was paying for in the name of super built-up area over and above her carpet area was close to 50 per cent more than the usable space!

Loading percentage, is the difference between super built-up area and the carpet area, and has been point of contention between the builders and the homebuyers for a long time! Most often, the buyers are not aware of the fact that they have to compromise with the usable carpet area.  Unfortunately, there is no scientific formula that defines the ideal loading percentage. Housing analysts indicate that in the mid-segment projects in major cities, any loading that is beyond 25 – 30 per cent is unacceptable.

Fortunately, the Real Estate Act clearly states that all builders should quote the prices based on carpet area and not super built area. As per the act, carpet area is defined as the net usable floor area, excluding the area covered by external walls, areas under service shafts, exclusive balcony or veranda area and exclusive open terrace area, but includes the area covered by internal partition walls of the apartment.

Buyers should be aware of the loading factor from the developers, and should only invest in a property if they are convinced. While buying an apartment, it is also important to measure the flat to verify the claims of the builder on the actual liveable space.