Booking a flat from a builder? Do the due first

A brand new home has its own charm, especially when its price is yet to hit the roof. Many individuals take the risk of booking a flat in an under-construction building mainly for that reason. It not only helps you fulfil the dream of owning a house, but is also cheaper than a read-to-occupy flat.

But, reports about builders failing to complete the project on time have made many prospective home buyers anxious about booking a flat in an under-construction project. Many also wonder if they should book a property whose final shape is still not known.

"The biggest advantage of an under-construction flat is a well spread out cash outflow linked to the construction's progress," says Gulam Zia, national director, research & advisory services, Knight Frank India. "You can also get the flat customised to your needs."

You can also choose the location of the flat, direction and floor when the builder is about to start the project. Locating them is easy, given the large advertisement campaigns that usually accompany a just-launched project and you need not have to go through the brokers. However, it is always better to ponder over few crucial points before booking a flat in an under-construction project.

Necessary Approvals

It is in your interest to ensure the project is completed on time. The builder can commence construction only when he has intimation of disapproval (IOD) and commencement certificate (CC) for the project.

IOD sets out the conditions based on which the building needs to be constructed. It is usually valid for a year and needs re-validation after that from competent authorities. CC is issued by local authorities, and it allows the builder to start the construction.

"You should buy an under-construction flat if and only if the builder has a commencement certificate for the floor on which you are booking a flat," says Dhiraj Jain, partner, real estate, SNG & Partners.

Clear Title

"Due diligence on the title is a must," says Jain. "The title - ownership right - should be clear of encumbrances and litigation."

The buyer has the right to verify the title documents. There are instances where the buyer gets into an agreement with the developer to buy a flat and then registers it with the competent authorities.

If the developer does not have the ownership of the flat, he cannot transfer its ownership to the new buyer by just registering it. It would make sense to engage a competent lawyer to conduct the title search.  Alternatively, you can also apply for a home loan. Home finance companies and banks do the necessary 'title search' and due diligence before approving the loan. Though they charge loan-processing fee, it is worth the buck since it ensures a peaceful possession in future.

Sample Flat

Most reputed builders use it as a marketing tool. "It is a visual presentation of what the buyer is going to purchase," says Rajev Sharma, country head, wealth management, investing banking and business strategy, Unicon Financial Intermediaries.

"Sample flats basically serve the purpose of giving the purchaser a sense of space and dimension," he says. "A sample flat can give the buyer an indication of what his or her own unit may look like once it is completed," says Mohammed Aslam, COO - residential services, Jones Lang LaSalle India.

"However, one should ensure that the dimensions and specifications of the purchased unit are the same as those of the sample flat."

It is better to check if the amenities in the sample flats are the same as mentioned in the agreement between you and the builder. There are instances where the builders use chandeliers or costly bathroom fittings to make the sample flat attractive, but such features may not be available in the flat for sale.

Mortgaged Property

Builders borrow from banks and NBFCs and mortgage the project with the bank. While buying an under-construction flat, if you are asked to draw a cheque favouring a specific account of the builder with a specific bank, it is a clear sign that the project is mortgaged with the bank.

While buying a flat in such a project, you need to have a no-objection certificate (NoC) from the bank. The NoC must state the details of your flat, such as flat num-ber and building.

If the builder cannot repay the funds taken from the bank, the bank can take over the project and ask the buyer to vacate the flat. An NoC will ensure the buyer does not face trouble, as it vacates the bank's charge on the flat if the buyer pays the entire price for the property.

The Price

Many prefer to buy an under-construction flat since the prices are lower when compared with ready-to-occupy flats. But one should take into account the cost of stamp duty and registration of the property, a one-time expense on electric meter, gas connection, cost of furnishing, fittings and modifications.

In large housing projects and townships, builders charge in advance maintenance deposits for up to five years. The buyer of an under-construction flat has to pay service tax at the rate of 2.38% of the property value. But the levy of service tax has been challenged in court.

Hence, builders ask for an escrow fixed deposit with a bank, the proceeds of which will be used to pay the tax if courts decide in favour of service tax. But, some builders prefer to go with an indemnity bond where the buyer takes the responsibility to pay the service tax in future if the courts approve it.

One should factor in all such expenses while compare the price of an under-construction flat with that of a finished one. The possibility of a delay in the completion of the project is what makes an under-construction flat cheaper than a finished one
Builder Track Record

"A prospective buyer should ascertain the developer's credibility, past projects, and performance and delivery record," says Aslam.

It is better to stick with the large players with a good track record as they have better execution abilities and access to resources.

Developers handling only project or traders jumping on an upcycle in real estate business are best avoided, as they are the first to get affected in the case of a fall in the real estate market.
Investor's Exit

If you are an investor in an underconstruction project and intend to sell the flat when the price rises while the project nears completion, it is better to run thorough the terms of the agreement.

Builders have been inserting the 'no-sale' clause in sale agreements, which state that the buyers cannot sell the flat only agter a certain period post completion. If you plan to exit before that, you may have to seek an NoC from the builder.

"The period stipulated in no-sale clause varies from 1.5 years to three years. There is no specific pricing available for an NoC although it ranges between Rs 100 and Rs 500 psf," says Sharma. The cost paid to the builder towards the NoC will eat into your profits.