About investing in under-construction properties…

As under-construction properties turn riskier, due to slowing sales, a buyer needs to protect his interest in the property. There has to be recourse if the developer defaults or does not stick to the promised deadline or specifications. The ideal option is for a buyer to sign and register an agreement for sale. However, this might not work out to be feasible for all.

Single agreement

In Maharashtra and Delhi, an agreement to sell is the most important document for under-construction property. Explains Anirudh Hariani, solicitor at Hariani & Co, when a person books a flat in the pre-launch stage, the developer gives an allotment letter. This is not a registered document but a simple letter that states details of buyer, developer and some information related to the property purchased.

An agreement to sell can be registered once the developer gets permissions, such as commencement certificates and sanctions for the project plan. This document is enforceable and contains details such as date of possession, amenities, area of the house, etc. A developer cannot deviate from it. In some states, like Maharashtra, the laws make it compulsory to register an agreement to sell with the sub-registrar and pay the relevant stamp duty if the developer takes more than a fifth of the total cost of the flat.

“If buyers don’t register the document, they don’t have the title. They are relying only on trust,” says Ramesh Vaidyanathan, founder and managing partner of Advaya Legal. Paying stamp duty and registering the agreement will also prevent the realtor from re-selling the house to someone else, he adds.

”If you don’t register the document, you don’t have any right in the property. You can only claim the money paid,” says Hariani. When sales pick up and price starts escalating, developers often approach old buyers and ask them to take back the money and cancel the booking. Later, they sell the same flat to someone else for a higher price. In such cases, if the agreement of sale is not registered, the buyer’s standing in court will be weaker.

Dual agreement

In Tamil Nadu and Karnataka, developers enter into two agreements with buyers, one for sale and another for construction. The former gives the buyer undivided share in the property. When someone buys a property, he/she is entitled to two things, the house and proportionate share of land on which the building is getting constructed.

A construction agreement is a comprehensive document that describes rights, duties and obligations of both parties. It also has specifications of the apartment to be constructed.

Explains Vivek Chandy, partner at J Sagar Associates: “The total property cost is split in the two agreements. The sale agreement mentions the amount paid for the undivided interest in the land and the construction agreement mentions the money paid for construction of the apartment. The split is typically done in the manner that is the most tax-efficient.”

Nitin Bhatia, an independent consultant, says when an individual is looking for an under-construction property, it’s better that a person not register the documents in states that have dual agreements. Public sector banks (PSBs) give a loan based on the price mentioned in the registered document. And, buyers usually register the agreement to sell, which has rates in line with government-approved values. This means the bank will sanction a lower amount than the actual property cost. “If the documents are not registered, banks take into account costs mentioned in both agreements for sanctioning a loan,” says Bhatia.

For those taking a loan, registering the agreement works like a double-edged sword. If they don’t, then the bank might not lend. If they do, the entire onus of servicing the loan and chasing the developer to finish the project falls on them.

When a buyer registers the agreement to sell while taking a loan, he becomes the title owner. If the developer defaults and the buyer does not get the property, he will still need to continue paying the equated monthly instalments. On the other hand, the developer gets a source of funds once the buyer takes a loan.

In cases where projects are stuck after 90 per cent completion (because the developer violates laws during construction and the municipal body does not give the occupancy certificate), the only thing buyers can do is go to court. Hariani says the faster option is to approach consumer redressal fora.

Way out

For those taking a house on loan, it is better to go for bank-approved projects. Here, lenders evaluate the realtor and the project before sanctioning the loan. In an approved project, finance companies could also be lending to the developer. They will ensure the project is completed and the developer doesn’t default.

Those going for a self-funded house should negotiate with the developer on keeping a bigger chunk as balance payment until the occupancy certificate is obtained. They should also record these details in the agreement they sign with the developer.

THE TWO SIDES

Why register?

Developer cannot deviate from the agreement
Enforces builder to deliver everything promised
Realtor cannot resell the house
Better legal footing

Why not?
Can help get better deal on loan (in southern states)
Builder does not have necessary approvals
Construction agreement not signed
You might want to cash out early

Approach existing owners to get better rates

If you are looking for under-construction property, first approach the existing owners of the project. Recently, a client was quoted a price of Rs 5,500 per sq ft for a property under development. He managed to get a flat in the same project for Rs 4,500 (including transfer fee) from an existing owner. It was profitable for the seller, as he had got the house during the pre-launch stage for Rs 2,900 a sq ft. Developers lure buyers by offering attractive prices. For example, if flats in a locality are going for, say Rs 4,000 a sq ft, the developer will offer it at Rs 4,500. It looks tempting to buy a new construction at a small premium to older houses. But the actual picture may turn out be completely different. In such cases, the builder charges extra for amenities such as club house membership. Then there are value added tax and service tax. Buyers will also need to pay for property registration. When all costs are added, the final rate would be Rs 5,500-6,000/ sq feet.

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