The Hindu Business Line : Buy with care

Buying a house is probably the single largest investment that most people make in their life time. With the investment involving anywhere between Rs 30 lakh and a few crore rupees, there is a significant amount of the buyers’ own savings apart from the loan component that gets locked up in the project. This ties down the buyer to servicing the loan running up to a decade or two. Problems in this context could result in a great deal of heartburn and extended complications that could drag on interminably, not to speak of the huge financial loss.

With the problems that real-estate businesses are now facing, now is the time — more than ever — for the buyer to be extra cautious in choosing a real-estate developer.

As the construction industry faces a slump in demand due to various reasons — inflation, high interest rates, uncertainties in job market — that make potential buyers put off plans to buy a house and developers themselves face a liquidity crunch as financial institutions and other sources tighten fund flow, projects are likely to be delayed. This would mean delay in delivery schedules.

The trend is beginning to show and the problems are bound to increase. Such instances are happening more frequently than they have a year or two ago, say those in the construction business and funding institutions. The indications are that over the next couple of years, the problems could only magnify. Officials from banks and housing finance institutions said that problems relating to late deliveries were bound to increase in the case of projects booked over the last two years with deliveries promised over the next two-three years. These are among the worst affected in terms of high land costs, input costs which drove up the price of built-up area, which were shored up by a buoyant market then.

Such projects now find few takers in many of the urban centres.

Buyers could find themselves stuck with an expensive home loan on which interest is due as the project is delayed. ‘Buyer beware’ is a dictum that stands good always, but it is in the times of adversity, when the industry goes through a down cycle, that problems crop up more often. When they do, the buyers do not have much option. Taking recourse to judicial processes could be expensive and time consuming.

Keep project progress in sight

Time is money and time is one key issue here.

Extra care is needed in ensuring the agreement between the buyer and the seller strikes the middle ground in protecting the interest of both partners. Financial institutions study the capability of the borrower in deciding to disburse the home loan – but the agreement between a buyer and seller and the guarantee of the product being delivered on time is not something that the banks are concerned about. A buyer may find that on stipulated dates the payments have to be made.

The project may not progress as expected while the home loan and interest outgo increase. Invariably, most builders’ agreements with the buyers provide for payments based on a specific time table — the emphasis is on regular, time-bound payments — and not linked to project progress.

This should be a strict no-no, particularly in the current context, say experts. Buyers should take care to ensure that the payments are based on the progress of a project to ensure reasonable dates of product delivery. The buyers need to assess the builders’ background, reputation and the nature of the specific project before finalising plans to buy a house. If the gestation period of the project is prolonged over a few years as in the case of huge residential complexes or townships, the buyers should be exercise particular care in making a decision as the financial environment is unpredictable.

Pre-EMI interest sop

One major clause, a common sop offered by a builder in recent months, is the promise of pre-EMI interest being borne by the builder during the construction phase. This is no consolation, caution those in the know of things.

Often, because of this guarantee, the builder takes out the entire loan amount from the bank instead of the usual part payments. To the builder this is a cheap source of funds and there are instances where a bank has disbursed over 90 per cent of the loan well ahead of project completion. Buyers have to ensure that the money flow is linked to progress of the project and not to a time table.

Feedback to blproperty@thehindu.co.in

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