The Hindu Business Line : No room for laxity

Mr Banerjee spent the day on which he should have celebrated his ‘Griha Pravesh’ (the house warming ceremony ) in an advocate’s office. He had received a notice from a bank telling him that the house he had bought from a friend was mortgaged property that would be seized soon.

Mr Banerjee cursed his fate but what he really should have blamed was his ignorance in not verifying the documents before buying the house, his advocate pointed out.

While some consider these risks a part of buying a property, experts say such hassles can be avoided by a thorough investigation of the title and the records in different departments before investing in the property. While it is preferable to consult a legal advisor to investigate the title, a good way to bring down the risk is by taking a home loan from a reputed bank since they conduct a detailed due diligence before approving the loans, suggests Mr R. L. Auddy, Solicitor and Advocate, Sanderson and Morgans.

Low awareness

“There is a lack of awareness among people about the importance of due diligence before investing in properties,” says Mr Todi, Managing Director, Bengal Shrachi Housing Development Ltd. A person looking for loan could also apply in two-three banks before zeroing in on one to ensure multiple investigations, he said.

“Banks have become very stringent about due diligence with the market for real-estate slowing down. They have also drawn lessons from the ill experiences of US banks during the sub-prime crisis,” he says.

Mr S. Biswas, General Manager (Marketing and New Initiatives), United Bank of India, says nearly 20 per cent of the home loan applications get rejected during the due diligence conducted by banks. United Bank conducts a two-level due diligence by the branch officers as well as through outside agencies. The most common causes of rejection of applications include false ownership sited in documents, construction in litigated land like slum areas, false deeds, false addresses provided by the applicant.

Loan defaults

While loan defaults out of other mortgaged based properties are on the higher side (5 per cent) at United Bank of India, instances of home loan defaults are the least, he says. Housing loans constitute over 20-30 per cent of banks’ portfolio.

The procedure for the due diligence of various properties, though fundamentally similar, will largely depend on the type of asset class getting transacted, says Mr Auddy . In case of land, land with building or flats, it needs to be verified whether the nature and character of land is homestead land.

If it were agricultural land, it has to be ensured that conversion has been made to non-agricultural land. Again, In case of apartments it is important to check if environmental clearance had been obtained before construction.

In the case of old properties it is necessary to check if there are payments or taxes overdue to local bodies , utilities or cooperatives, , he says.

The process of investigation would also depend on whether the property is a free hold (absolute ownership) or leased property. In case of leased property apart from the usual investigations, it is also important to check the right of lease in the lease deed and whether the earlier lease rents were cleared.

“It is advisable to check whether the floor area ratio (FAR) has been sanctioned from the municipality and if the property falls within the road alignment scheme. For buildings and apartments, one should check whether the construction is in conformity with the sanction plan and whether the occupancy certificate has been issued by the municipality,” Mr Auddy says. For all properties, it is also necessary to check if the water and drainage constructions have been obtained in accordance with municipal regulations.

Mr Abhijit Das, Regional Director, Jones Lang LaSalle Meghraj, says the value of an asset depends upon the accountability of the titles and therefore it demands a detailed checking. “Unclean titles render the asset no value legally,” he says.

“The things to check are the cleanliness of the title, whether taxes are pending, if there are legal claims pending on assets and whether the sanction plans are proper,” he says.

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