What are the factors to be considered while buying a house / flat? Here are some tips.
Buying a property is a huge decision for most middle class investors. It requires a large amount of down payment to begin with and then you have to hope against hope that the builder delivers the project on time.
Property is a very poor-liquidity asset class and if you land up with an incompetent builder who takes your money and does not complete the project, you are stuck with no recourse for a very long time to come.
Here are five tips to help you avoid such situations. Remember them before you buy your dream house.
1. Go to the biggest builder
This probably should be the most important factor in your consideration in buying a house. Big builders who have a good bank balance and a history of successful project deliveries are any day better than run of the mill small builders.
In the 2008-2009 market downturn, investors learnt it the hard way. Many small builders who had taken the investors money as down payment for a project vanished overnight. Investors who had put in their hard earned money lost out big time as the builders had decamped with all the money.
Going with the biggest builder in your city will come with a price tag. Their projects will always be slightly expensive than other projects which are run by small time developers. But its worth to pay a small premium and buy into a stable, good and dependable project.
You will be assured that your dream house will be built, even if there is a slight delay. Big builders protect their reputation very aggressively and will deliver projects to keep their brand name untarnished.
In fact, CRISIL has launched Real Estate Star Ratings in many cities in India. Make good use of that. It validates a builder on many parameters. Using CRISIL Real Estate Start Ratings will help you safeguard the most priced investment of your life.
2. Choose the location wisely.
Location of your dream house can be a very important factor in the valuation of the property in the long run. It is true that if you are buying the house to live in it, you should probably not be looking at the valuation. But buying a house which is distant from basic amenities like schools, hospitals and malls is a risk the investor is taking upon himself.
It’s often seen that builders dish out baits by advertising properties which are far flung from the city by masquerading them as weekend homes, cheap homes, and retirement homes among many others.
Be wary of buying your first home in a place where you think you cannot stay, and where you think you cannot rent it out easily.
You might have to pay a small premium to buy in a location where all amenities are located, but that is often better than buying in remote localities. Good things don’t come cheap.
3. Avoid the builder’s offers
Builders keep on launching projects with many offers to lure investors. Sometimes they want to pay the EMI till you take possession of the house; at other times they are ready to do up your kitchen; yet at times they throw in a LCD in the living room. Recently, a Pune builder was giving away cars with every house!
Please understand that there is no free lunch anywhere. The builders will account for all these extra charges in their overall costs and then sell the apartment to you. So it makes no sense to ride on these offers. There are no free things you are getting with your house.
You are better off buying these products yourself separately. A builder is there to sell you your dream house; if he is selling you add-ons to a house, comprehending his desperation is anyone’s guess.
Avoid the offers; buy what he is supposed to deliver best – your dream home.
4. Pay as your house is built
When you buy your dream home, you have the option of paying with time. This time linked payment option can be dangerous.
For example, if you agree to pay 10% in one year and 20% in another, you will need to do that irrespective of whether the builder has progressed development of the project or not.
A smarter way around this problem is to opt for a payment plan according to the slab construction of the building. So, when the base slab is laid, you agree to pay the builder 10%; when the building is constructed half way, you pay up 50% of your home equity and when it is 100% complete you pay the rest of the amount.
This makes sure that the builder will get paid only when he completes the project. In a way, the builders’ incentive to be paid leads him to progress the project in a fast paced manner.
Thankfully this is an option that banks are themselves stressing upon for sometime now. Avoid builders who do not have this construction-linked payment scheme with them.
5. Safeguard against delays in project completion
It is common knowledge that builders route the money you have paid for a particular project to fund other projects, at times in another city. This can lead to major delays in the delivery of your dream home.
It is always better to clarify upfront with the builder through a formal agreement what your options are in case of a major delay. You cannot be waiting forever expecting your dream house to be built.
And with no regulators in the real estate industry as of today, it is every man’s fight against the builders. Make sure you understand what options you can take if there is a delay. Getting a lawyer to vet your agreement is always a wise decision. Get the builder to agree on terms and conditions that you want in case there is a delay. It’s better to be safe now than to be sorry later.
Use the above five points to be armed for any eventualities that might happen in your tryst in buying your dream home.
This is a guest post by Radhey Sharma who writes about stocks, mutual funds, insurance, retirement, income tax and is an expert on subjects relating to Financial Planning in India.
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