Points Before You Book a Flat

Planning to Purchase a Flat?

Shelter is that basic need which distinguishes human from all other living beings. Nature equips animals and even micro organisms with the body type and physiology to survive in the wilderness and surroundings of the area they take birth. Plants and vegetation also grows in the environment most suitable to their well being and growth. Minor mismatches are adjusted through adaptation naturally.

The human beings with the almost similar body and physiology however counter the forces of weather, nature and other hostile factors -living or non- living through the shelter they create or secure. The shelter could be procured by lease/rent or outright purchase of a dwelling unit. People have different needs, budgets and priorities when they choose their abodes. While a decision to change a rented house is simple, easy and with minimal consequences- but changing a purchased one comes with complexities, difficulty, costs and consequences which one may find mixed bag of the good, bad and ugly. We cover the topic of purchasing a plot and construction tips elsewhere on the Web Site on the button “Planning to Buy a Plot and Construct?”.

In present times buying a residential apartment is a highly complex and intricate decision which a large number of people have to make. There are numerous options and choices to make. A large number of factors need to be pondered over to arrive at the most suitable and appropriate one. We have attempted to list them under three distinct heads. But we move on to these let us examine the nature of living, advantages and disadvantages of making an abode in an apartment which in most cases is likely to be multi storied and constructed by someone other than the person occupying it. This implies that whatever the purchaser thinks he chooses remains for life (or at least till he goes for another one), with very little scope for material alterations. The topics and considerations are both vivid and vast. Here we consider a few of these.

1. Choosing the City and Locality of the Project:– The foremost question while addressing this topic is two fold desirability and budget. Most persons purchase apartments during their work spans of life. They get comfortable with the city, become part of a social circle and tilt their decisions in choosing the same for settling down and purchasing the dwelling unit around. This tilt is obvious, natural and mostly logical too. There are however a few other aspects which need consideration. These are about the suitability of the place for life after retirement and in the age which everyone most crucially wants to spend in good health, safety and comfort. During the work life span, earning and children education holds vital importance. But as children graduate to higher education and ultimately settle down into their own professional and married lives, they are bound to separate from the parents for a substantial period until dependency due to old age reunites them under the same roof. Even in this scenario, it is the parents who would have to leave their own place and move in with the children since they can’t leave their workplace and shift grand children’s education.

It can safely be deduced that while choosing the place, post retirement life holds equal importance. Prices of most apartments do not increase beyond a particular point. It would prove to be the best decision if one could live in the self- owned apartment during work life and continue in the same post retirement. It has manifold benefits:–

  1. Tax savings on the interest paid.

  2. Benefits of HRA if in a job.

  3. Saving of repeated brokerage, transfer, registration and stamp fee etc.

  4. Escape the harassment and financial loses in repeated jobs of interior, modifications, readjustments and renovation work.

  5. Above all, feeling of settling down and accumulation of good memories in the same abode.

The benefits listed above far surpass the investment benefit outlook. One should rather decide on the basis of suitability of a place rather than financial growth outlook in the area. The whole process and puzzles of changing residence take substantial time, effort and energy and are therefore best avoided if possible, no matter how much the quantum of lure of financial benefit.

The budget bridges the gap between what one wants and what one could get. However, if in a stable job or having a stable source of income one should always consider the income growth in coming five to ten years and increase the budget allocated for housing needs. As the income grows one wants to upgrade the residence in place and locality. So it is rather better to take an optimistic view of your income and invest as per projected income growth at least 10 years ahead. 10 years is a good planning figure since nature of savings and expenses change during the period. Children’s education and settlement are time bound and unavoidable expenses which carry a before and aftermath on income, savings and expenses 5 years either side of the event.

Calculations of the income generated and money saved due to acquisition, are some valid parameters which should not be lost track of, while determining the actual budget or capacity of investment one may possess. An under or overkill should best be avoided.

To summarise don’t under spend on the property you wish to make your abode. Consider income growth in coming years. You may be short on finances in paying EMIs during the initial years, but in most likelihood and taking the optimistic view, situation would ease with growing income. With increased income people mostly realize only later that they should have opted for better location and bigger budget than they had thought.

2. Size of the Apartment- The size of the apartment one should opt for, is not an easy question to answer. It has multidimensional aspects to be addressed. The first is the minimum size which would accommodate purchaser’s family comfortably and if possible an extra bedroom for the occasional guest. While making an estimate of the optimum size, each child has to be treated as a grown up, as we expect the apartment to serve well through many decades during which the kids would grow and hopefully continue to live with, or at-least frequently visit their parents, despite their independent lives.

Too big a size becomes counter- productive since bigger than optimum accommodation is not only difficult but also escalates the maintenance bills. Even utility bills are higher. A good thumb rule about the optimum size is the one which can cater for two generations and a bedroom for the guest. It is best left upto the second generation to cater for the third generation. Experience has shown that three generations are rarely found to be staying in the same apartment for one reason or the other. It is commonly observed that when the financial resources and affordability grows, later generations shift to a separate dwelling unit, rather than all living in the one big enough to accommodate all.

3. The Promoter, Builder or The Construction Company- This category is the most important aspect of an apartment project. Real Estate (Regulations and Development) Act, 2016 (RERA) came into force with full provisions on 01 May 2017. RERA aims to precisely administer this very professional and at times notorious category of persons. Most of the builders, construct with money collected in advance from the persons who book apartments in the project. This means they first collect money and then use some part of the collection to carry on with the construction. Most of their supplies to the project in terms of both material and service are on credit. Construction materials and equipment usually carry good margins for suppliers too and it is for this reason, that they invariably offer long term credit facility to projects to be recovered when the apartments in the project are booked and sold.

During the pre RERA times, builders/promoters raised projects without even having the title to the land in their names. This was done by entering into a Memorandum of Understanding (MOU) with the land owner(s), who was assured a share of receipts, as and when the project sold apartments. In few cases land owners themselves became developers and builders. Whatever may be the case, any construction project to reach its desired completion, relied heavily on bookings and receipts from purchasers in various stages. But this is not the end of indefiniteness and uncertainties. What really made the situation complicated? The estimation of the entry and receipts from that minimum number of purchasers, which would ensure ‘break even’ of each stage of construction, is nearly impossible. The things really went out of hand in bigger projects, if the number of purchasers ran short of such a stage wise ‘break even’. The list of failed projects of bigger size, now far exceeds the smaller ones, for this precise reason.

Medium size projects have faired better on this count. Larger projects have better margins of profit. But break even occurs only once they have sold and got receipts of a substantial percentage of the total. Smaller projects are local in nature, more personality based and follow no fixed patterns. It is the owners of bigger and medium size projects who have more economic and muscle power and are better equipped to evade the penal consequences of their misdeeds.

We recommend choosing mid -size projects over the Big and Smaller ones. They are the right mix of economy and risk, both for the Promoter/Builder and the purchasers, since they reach break even number sooner and remain economical due to an optimum number sharing the common facilities.

RERA has made provisions for take over of the project in case of default in delivering the promised good to the purchasers. RERA mechanism is expected to bail out the property purchasers from situations gone bad. But bail out is a bail out and not too much could be expected out of a project which has suffered irrecoverable losses in terms of capital and disbalanced inventory losses and bank interests. Though expected yet sceptically not with real benefits which yield from a plush project with every thing going great guns.

It is for this reason that choosing the right project becomes most important. Builders have been switching investments between their multiple projects for various reasons hoping to bail out the ones in most distress for the time being or s a boost to the one appearing most prominent. There are no legal bars to it unless the builder-buyer agreement incorporates specific provisions prohibiting shifting of investments.

While it is not possible to exhaustively cover all the aspects which need to be looked into before paying that initial apparently meagre booking amount, we provide following vital check points which should be found incorporated in the builder-buyer agreement.

CHECK LIST OF INCLUSIONS IN BUILDER-BUYER AGREEMENT

  1. Specific mention of the total of units with approvals.

  1. Phases or stages in which construction would proceed.

  1. Specifications of construction material and workmanship.

  1. List and specification of electrical, sanitary and hardware fittings.

  1. List and specifications of permanent fixtures and provisions which would be provided by the builder.

  1. Preferably let there be a sample flat and annexation of all its specifications to the builder-buyer agreement.

  1. List and specifications of the external development facilities and tentative/approximate charges post take over of the project.

  1. Specification and earmarking of units which form part of each distinct time schedule if there are different time schedules for different set of units within the project.

  1. Explanation for longer than 18-24 months’ time period for offer and readiness for possession since this is the time within which a well- managed project comfortably finishes the construction and interior.

  1. Construction stage rather than time linked payment schedule.

  1. Optimization of instalment amount vis a vis construction worth. The finishing and interior components involve maximum expenditure and hence a major chunk of the total payment say around 25% (and not 10% which is normally reserved) should be kept payable at the time of offer of possession with all interior and external works complete.

  1. Often this a is a clause which is omitted any reference to. It is about the external development. It should cover development of external facilities- sewerage, water, lighting, security, facilities and all other external amenities -parks, playgrounds etc. The builder should commit to bring up and complete the development of external facilities with the completion of first set of units being offered for possession rather than the later or the last ones.

  1. Timing and money are the core of real estate business. Delay in handing over of a unit causes substantial opportunity and financial losses to the purchaser/user. The profits of builders do not remain limited to merely the bank rate of interest on the capital. In case of delay the losses to the buyer are way beyond the calculations of merely the rate of interest on capital. Financial commitment to a project binds the buyer in more ways than one. Hence, if the delay is attributable to the builder, then interest rates should be fixed at penal rates (at-least double the bank rates) rather than at or little above the bank rates of interest.

It has been the practice in some builder-buyer agreement to fix bank rates of interest to be paid by the builder in case of delay. The builder is encouraged to delay since the cost of capital which he has to borrow from financial institutes or open market is much higher than the one he is obliged to pay to the buyer. Such builders use purchaser money for long durations instead of completing the project and are happy to pay agreed rate of interest for delay which is lower than other avenues and is available in home without any procedural hassles and penal costs. However, RERA provides for interest at the same rate from the builder as he has specified to recover from the purchaser. Salient point is that it is to be recovered from the date of payment by the purchaser and not from the date delayed beyond agreed date of possession.

  1. One of the most important tip for a builder-buyer agreement is avoidance of the arbitration clause. In our experience an arbitration clause never suits the individual. In outcome arbitration would benefit the builder establishment more than the individual. Consumer courts and RERA like authorities are better oriented to suit the interests of the buyer and option of arbitration should best be avoided inclusion in the builder -buyer agreement.