Monday, 22 April 2013

Buy cheaper flats in a resale

After the failed predictions over the past couple of years about a fall in property prices, you are more likely to witness the prophesied Second Coming before the promised correction. So what should cash-conscious buyers do? Wait endlessly in the hope that realty prices falter or take the bait of glossy schemes offered by developers? While most such offers for new houses seem tempting, you won't derive any real benefit. 

Fortunately, there is a third option: cheaper flats in the resale market. No, these aren't old, mouldy apartments in decades-old projects. Quite a few of these houses have not even been lived in, but you can still get them at a discount to similar houses within the same project or vicinity. If you're wondering why resale flats are cheaper than the new ones being offered by the developer, it can be due to various reasons. One of them is that these houses have been snapped up by buyers and investors during the pre-launch phase with the intention of selling them after about three years to earn a profit. At this stage, they were only required to make the down payment.

"Many investors book a property at the initial stage just to make a small profit. If they want to make a quick exit, they will price it cheaper than the one offered by the developer, for a faster sale," says Yashwant Dalal, president of the Estate Agents Association of India, an apex body of 
real estate developers.

Another reason is that a lot of investors who book flats during soft launches are offered heavy discounts by builders. "To get funding before construction commences, builders offer investors at least a 20% discount to the prevailing market rate," adds Dalal.

So, even if such investors sell the flats at a price lower than the one offered by the construction company, they make a hefty profit. While individual buyers readily make the down payment, a few find out that their finances are strained when they have to start paying the home loan EMIs after the construction is complete, especially if they are also paying a rent. In some cases, they find another project that is more to their liking. Obviously, in either situation, the only option is for them to sell the current house as quickly as possible to repay the home loan, even if it means earning a smaller profit than the one they had hoped for.

Also, a seller may prefer to dispose of the house before he starts paying the EMI. This is because the home loan principal repayment benefit of up to Rs 1 lakh under Section 80C is reversed if a house is sold within five years of buying it. The amount that he had claimed for tax deduction would be included in his salary and become taxable. Another factor that could influence the seller's decision is that he would want to exit the property before taking possession. This would help him avoid paying the additional charges, such as the fee for parking space or club membership. The seller could also avoid paying the registration charges and stamp duty, which can be as high as 12% of the value of the property.
Not paying these will help him offer the house at a discount while selling it. How you gain The biggest benefit of buying in the resale market is that the construction is almost complete and some of the houses are ready to move in. So, unlike in the case of a project that is still under construction, you don't have to worry about when you will get the possession.
"There is always a risk associated with projects that are being built in terms of delays or handover. An added benefit in the resale market is that if you are leasing an apartment, shifting to a fully built house will help you save on rental costs, unlike purchasing a property under construction, where you pay the rent as well as EMIs," says Anshuman Magazine, chairman and managing director (South Asia), 
CB Richard Ellis.

Of course, in this case, you will also know that you are getting exactly what you are paying for. You can be sure that you won't be duped by the developer, who promises to instal marble or wooden flooring and, instead, puts in regular tiles. Another advantage is that you can avail of the tax benefit beginning with the first mortgage payment. The tax deduction of Rs 1 lakh on the principal component of an EMI is available under Section 80C, while the interest paid on a home loan is tax-exempt up to Rs 1.5 lakh under Section 24 B. However, this is possible only after you take possession of a house. In case of a property under construction, you have to pay the pre-EMI, which is the interest on the home loan.

Though the total interest that you pay as pre-EMI can be tranched into five payments that are eligible for tax exemption for five years after you take possession, they are included in the capped amount under Section 24B. So there's hardly any benefit in this case. Problems you may face In the resale market, the down payment is higher than that demanded by a builder, which is usually 20% of the value of the property. Also, the seller may ask for a portion of the selling price to be paid in cash, which means that you will have to apply for a smaller home loan (see 9 questions to ask). So, you should be sure that you can afford to pay 25-30% of the price. Also, when you buy a property in the resale market, you are dealing with an individual rather than the developer, who has a reputation to protect.

"You can't take anything at face value here, so you must thoroughly scrutinise all the property documents, especially those that verify the seller as the real owner of the property, who has the right to dispose it of," says Om Ahuja, CEO, Residential Services, Jones Lang LaSalleIndia.

Go through the original sale deed and the society's share certificate carefully. If you plan to take a home loan, you will have the advantage of the bank doing the necessary due diligence. Beyond the sale price, there will be additional costs that you should factor in, such as registration costs and transfer fee to the housing society. Before taking over the house, make sure that the seller has paid all outstanding dues and taxes. However, to get the utility connections transferred to your name, you will have to pay a fee to the relevant state departments or municipal authorities. Though these houses are practically new, you may want to carry out renovations or changes to suit your taste. So, include such costs while finalising your budget. There could be other minor issues like not getting the membership to the society's club because it is full or the lack of parking space.

"If the first buyer did not buy the parking space, the new buyer may not be able to get a new parking lot even if he is ready to pay for it," says Ahuja. The situation may be worse if your family owns more than one car. What if the property is mortgaged? If the house is already mortgaged with a bank, you should ask the seller to obtain a letter from the relevant bank stating that it agrees to relinquish the property documents when the loan is fully paid. After you are satisfied with all the property documents, you can make a token payment to the seller and enter into a registered agreement with him. You can then deposit the balance payment to the seller's loan account, after which the bank will initiate the process of releasing the documents.

The bank and the seller will fix a date by which you will have to make the full payment. If you are unable to do so by the due date, the bank will levy either a penalty or a premium over and above the outstanding principal, which you will have to pay. If you plan to take a 
home loan to pay for the house, your bank will directly transfer a portion of the outstanding amount to the seller's loan account. Once the seller's bank receives the payment, it will issue a 'no objection' or 'no dues pending' certificate to the seller and hand over the original documents to your bank, which will then transfer the balance payment.

Why are resale flats cheaper?

1) Builders are reluctant to bring down the price as:

Existing buyers may want a refund since they bought at a higher price.

The builder has to give an exit option to the people who invested in the prelaunch phase.

Property developers are hoping for the market to pick up.

Some builders can manage to hold on to prices as they have access to funding.

2) The recovery in the market is taking too long and some investors want to exit even if the profit is less.

3) Individual owners may not be able to hold on to an investment property if they face a fund crunch or can't afford the EMIs.

4) There is oversupply in some markets and the owners are more willing than builders to lower the prices.

9 questions to ask

1) What's the cash component?

The seller may want a part of the selling price in cash. In the sale deed, he may quote only the amount that you pay through cheque, not the entire price. In this case, you won't get a home loan for the full price.

2) Is the property registered? 

Several properties are sold through power of attorney. Check if the property is included in the government registry. If it isn't, it should be cheaper.

3) Is the house free of debt? 

Is the property mortgaged to the bank or has the home loan been paid? If possession has been taken, are all the utility bills paid?

4) Are all documents in order? 

Check documents like the share certificate in the owner's name, agreement made by seller with the last party, and the NOC from the housing society.

5) Do you need to deal with the builder? 

Many flats are being sold by investors even before they take possession. In such a case, check if you need an NOC from the builder.

6) Is the property disputed? 

Are there any lawsuits regarding the property? You don't want to pay for a house and realise that it won't be yours for years.

7) Why is the property being sold? 

This is important as there could be issues like noisy neighbourhood, seepage problem, water scarcity, etc.

8) Who will pay the tax? 

The Budget proposes to impose a 1% TDS on properties worth more than `50 lakh and the onus to pay will be on the buyer. So, you should clarify this with the seller before finalising the deal.

9) What are the transaction costs? 

Enquire about the transfer costs that you will incur. Though some fees are fixed, the housing society may, at its discretion, demand additional charges.


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