Home Sweet Home

Home prices crashed in the mid-1990s, and it took 2002 for them to go up again. When they did, they galloped. As a result the bud-get buyer, who comprises the bulk of the market, was left out in the cold. This would have continued had real estate developers not been overtaken by the ‘sub-prime’ crisis that they could not anticipate. Post Lehman’s bankruptcy, volumes in the Indian property markets were reduced to a trickle. Going forward, transaction volumes are expected to remain lower. Why?
The recent housing boom was riding on the back of four broad factors—rising incomes, job security, low property prices and interest rates, and tax benefits associated with buying a house. While tax benefits remain, the other major drivers of demand have lost steam. For genuine home buyers though, things are getting better as a steep correction in property prices gets underway. It’s now the time to ask what is a good price for a property.
Unlike for stocks, where individuals are mostly price takers, real estate is different in the sense that it depends partly on your bargaining skills. If the seller is under distress, your dream house can be a steal. Rental yield is a tool you can use to see whether you are striking a deal at close to fair value. The typical historical yield of residential properties in India has been around 5-6 per cent. The rental yield is the annual rent that a property would command divided by its market price, multiplied by 100. During the boom phase, the rental yield in some cases had gone below 3 per cent. So, before you settle on the price, get an idea of the rentals the house which you are planning to buy would command and the prevailing prices in the area.
If the rental yield of the house is less than 5-6 per cent, then bargain further till you are able to get a price which brings the rental yield close to the 5-6 per cent levels. Also, get an idea of prices that prevailed in that location around 2005 as that was the time the euphoria started. Once you have got an idea of the price, add around 15 per cent to account for inflation and start your negotiations. Another way you can get a fair value of a property is to deduct 25-35 per cent off its peak value. Other parameters to consider in the house-hunting journey are as follows:

City or Suburb: This is possibly the first point you will have to settle once you have decided to buy a house. Where to buy? Upcoming projects in the suburbs are typically cheaper than those within the city. The locality where you buy is also important as the population around will deter-mine the number and quality of local area amenities. Check if amenities like supermarkets, schools and pharmacies are nearby. “Primarily, buyers should check the location of the project and its proximity from local hospitals, schools, railway stations etc. They should possibly try to make background checks on the builders and their projects,” says Maneesh Grover, Vice-President, Mantri Realty.[PAGE BREAK]

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Moreover, how the surroundings develop could affect the resale value of your house. Also, consider the vacant spaces around your property as they won’t stay vacant for long. Going forward, if the plot is likely to house a 5-star hotel, it will increase the value of your property. Your developer will also be able to describe the area’s master plan but it’s a good idea to check it out for yourself from the local municipal authority.

New or Resale: Ideally, of course, we all want to move into a plush new apartment built to our specifications. However, if you are smart, you could well get a great deal on a resale property. Both have pluses going for them. So see what your budget allows and then decide. A new property will, of course, have no obvious problems like chipped roofs, cracked plaster etc. If it’s still under construction, you can be all the surer of the quality of construction than you will be with an old house. Also, the paperwork in closing a deal on a new flat will be slightly easier. With a resale property, the background check and paperwork can get quite tedious because it can often go back many years and will involve your digging out ancient records.
There are some precautions you must take before settling for a resale property. One, deal with the owner directly, or you will end up paying a large brokerage. Additionally, dealing directly with the owner lets you be sure of the paper-work. Start by ensuring that the seller has the original title deed of the property and the right to transfer it. The other points to check are that the resale flat has no tenants and that it is not mortgaged to any lender. Check that dues such as the property, society, water taxes and electricity bills have been paid in full. Also, take possession of all relevant documents, including the original allotment letter, completion certificate, occupation certificate and other documents given by the original developer.

Ready or Under Construction: The problem with ready-built homes is that you only have the developer’s word for what went into the construction, and you could be in for a negative surprise. This can happen even with reputed developers. In a home that’s still under construction, you know you are paying for what you see - whether it is the flooring, woodwork, paint or interiors. In case you feel clueless about details of materials used, call in an expert to get an opinion.
Also, once a house is ready, you cannot make small changes like keeping place for a dish washing machine or a walk-in closet, which would have been done for free had the flat been under construction. In fact, most developers also allow you to change interior layouts, like [PAGE BREAK]

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substituting a wall with a dining table, while the flat is still under construction. More importantly, once a flat is complete or nearly complete, you lose the cost advantage as prices move up by 25 per cent a year on an average once the project is advertised.

Builder Record: Check earlier projects the developer has worked on to see if they were completed on time and if the construction has stood the test of time. Also, see if he has any cases pending against him. If a builder has a dubious record, going for the project is not advisable even if the rate is very attractive. “Buyers should check the reputation and track record of the builder whose project they are interested in. They shouldn’t just be lured by the discounts or concessions given by builders but genuinely assess why discount is being given. They should try to also try to learn the experiences of people who have dealt with the builder before if possible,” says Dharmesh Jain, Chairman & MD, Nirmal Lifestyle.

Down Payment or Construction-Linked Payment: These are the two options when buying a house. Under the down payment plan, you pay the entire cost of the property within a stipulated period which is usually within 30-45 days of booking the flat. These plans typically come with a 7-12 per cent discount on the cost of the property. On the other hand, a progress-linked plan does not offer any discounts. The finance company releases the payment in tranches, with the last payment made when you take possession. “Buyers should assess their own needs very carefully. They should consider their own income patterns and not rush into heavy financial commitments. They should be clear how much loan they wish to avail and the time required getting their loans approved,” says Jain.
Apart from losing out on the discount, you also pay more on a construction-linked plan because although you start paying the EMIs only after taking possession, banks charge you simple interest on the tranches released during the construction period. The advantage of a construction-linked plan is that in case there is a dispute with the builder, you can hold back payment. Typically, for instance, the last tranche will be 5-10 per cent of the total amount, which makes a significant bargaining chip. However, in the down payment option, your entire money is blocked in case of a dispute. So, decide if you want to take the risk for the sake of the savings or otherwise.

Pre-Approved Versus Attractive Deal: Many institutions have started the[PAGE BREAK]

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practice of pre-approving certain real estate projects. This places both the developer and the home buyer at an advantage. While the developer gets a stamp of approval from the lender which enhances the brand value of the project, the home buyer can be secure since a thorough due diligence on the legal and technical aspects of the property would have already been conducted by specialists on behalf of the institution. Pre-approval, naturally, also means lesser paperwork and time for the loan to be granted and disbursed. On the whole, it’s far more sensible to settle for a pre-approved property even if other developers offer attractive discounts, since you don’t want to end up with a property where a loan application is likely to get rejected at the nth hour.

Paperwork: This is extremely critical when making such a huge purchase. Make sure you get experts to check the documentation. Some of the critical documents are:

a) The sale agreement details the agreed price, payment and construction schedule, apartment plans, delivery date and the developer’s liability in case of delay in handing over possession. “Mostly buyers don’t check the terms of agreement properly. On this issue they should seek clarity from a legal expert. They should also check the approvals claimed by builders through the local authorities. A little caution can help avoid most common pitfalls,” advises Jain.
Remember that the developer has no liability after he has handed over possession to you. Attached with the contract is a spec sheet, which is part of developers’ standard marketing material. It details the quality and grade of materials that will be used. To that extent, it’s as important as the contract itself. Ensure that your developer sticks to this spec sheet so that you are guaranteed a minimum quality of material.

b) Apart from the contract, be sure to obtain the allotment letter and the completion and occupation certificates. Documentation includes back-ground checks on the builder/developer to ensure he has clear title of the property. Check if the building plan is sanctioned and that the builder/developer has all the necessary approvals from the local municipal corporation, area development authorities, electricity board, water supply and sew-age boards, etc. Lenders usually have an in-house panel of lawyers and valuers who have good liaison with the local municipality and sub-registrar’s office, and are, therefore, better equipped to deal with this. Hence, taking a loan even if you don’t need the money is a good idea.[PAGE BREAK]

c) Ensure that your contract has clauses that cover these two eventualities. In case of delayed construction, the developer should compensate you. Likewise, the contract should cover you against cost overruns, as, for instance, when raw material costs go up during construction by clearly stating who bears the burden and in what proportion.

There is a definite legal precedent to protect you in case your builder does not compensate you in case of a delay. The Supreme Court has ruled that housing construction activities come under the Consumer Protection Act, and that a delay in handing over possession amounts to denial of service. Also, if a builder uses sub-standard material or makes misleading representations, the consumer is entitled to compensation.

Tip: While the downward spiral in prices is expected to last for a while, if you are a genuine buyer you should use this opportunity to buy a house of your own before prices start to head north once again - though that is still some distance away. Some experts suggest that prices will bottom out by the end of 2009. So, if you are a genuine buyer, wait till March 2009 before making a decision because if developers have to blink and cut prices, they will do so by then. Interest rates, too, are likely to go down further, and that process will only be helped by the government’s efforts to give housing a boost and keep the economy on course. There has never been a better time to start searching. The buying however can happen towards the end of 2009.