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Buy now, but be wary

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Closer to completion, the better.
Closer to completion, the better.

It’s a buyers’ market in realty right now. But here are some safety guidelines to apply before the buyer seals the deal.

R. Balaji

A reader from Valasarawakkam, a residential area in the western part of Chennai, wanted a word of advice — would a particular residential project planned on the Old Mahabalipuram Road be completed on time? Can the builder be depended upon to stick to schedule? Also, is this the right time to buy?

The answer to the last question would appear to be relatively easy. Industry experts seem to agree this is a good time to buy — developers are aggressively pushing projects, offering discounts and lowering prices; banks are bringing down interest rates on home loans and the indications are that the rates could drop further.

But as for any assurance on whether a particular developer will stick to schedule is not something even experts can answer with any degree of confidence. But there are some pointers to taking a safe decision, they say.

Some safety guidelines

A common response from the industry experts is that buyers should go for property that is got the statutory approvals, where work is in progress — the more advanced stage of completion the better — and most importantly, consider the developer’s track record. Naturally, these projects are bound to be costlier as compared to those that are yet to be cleared by the Government authorities and there is no assured schedule on when the work is going to start leave alone be completed.

So why do developers launch projects that are yet to be cleared? One developer who did not want to be quoted pointed out that developers are trying to tackle a sharp swing in the market — a few months ago, developers could set their own price and there were buyers willing to pick up property at whatever the price, investors were willing to fund projects as they were assured of huge returns. But now builders find themselves having to cut prices, rework plans to cut down on apartment sizes to make them more affordable, and project funds are scarce even for completing projects that they have committed to after investing big money on land.

So, the advance paid on a project that is yet to be launched represents one way of improving cash flows in a slow market. In the last one month, after the harvest festival ‘Pongal,’ in mid-January, that marked the start of the auspicious season, a spate of residential projects was launched. A common feature with many of them was that they were priced aggressively, in what is loosely referred to as the ‘affordable’ segment — which seems to range around Rs 30 lakh and most of these were projects that were awaiting statutory approvals. A process that builders acknowledge can take anywhere between one and two years. Buyers were only too willing to book an apartment in a project that existed only on the developers’ brochures because they were promised at attractive prices. What happens now?

Effectively, the builders cannot start construction on the projects without the approvals and buyers who pay an advance of a few lakh rupees will simply have to wait without seeing any progress. But for the builders it is interest-free money in a tight market. Often the buyers are bound by a contract that prevents them from taking their advance back or they do so after forking out a stiff penalty.

Do your homework

Mr Chitty Babu, Chairman and Managing Director, Akshya Homes, says there is no doubt that it is the right time to buy. Developers are marketing their products aggressively, bank interests are as low as ever and buyers have a wide choice of projects to choose from. But, the buyer has to beware — check the documents thoroughly, see the plan approvals and related paper work are in place, check if the project is progressing and at what stage it is in and most importantly, the reputation and track record of the builder and ability to deliver.

When a buyer pays a couple of lakh rupees as advance for an unapproved project, he may have to wait up to two years for the statutory approvals from the Chennai Metropolitan Development Authority or the Department of Town and Country Planning to happen.

Having invested several crore rupees in a property, the builder has to cough up the interest during the waiting time. A two-year delay can add up to Rs 300-400 a sq.ft to the cost of a project, Mr Chitty Babu says.

Mr M.K. Sundaram, Chairman, Builders Association of India, says buyers should not be in a hurry to rush into a transaction if they find it attractive at first glance. Unless a project has an approved plan and the project is at a stage where a builder specifically earmarks apartments for the buyers, the risk is high. The builder cannot be blamed for making people wait longer because the Government has to sanction the plans.

But who is to blame? All agree it is the Government agencies such as the Chennai Metropolitan Development Authority, the Department of Town and Country Planning that are at fault. Why should it take up to two years for project approval, ask developers. If the government authorities speed up the process of approvals it would represent a huge benefit, they say.

Choose carefully

According to Mr Prakash Challa, President, Confederation of Real Estate Development Association of India, the buyers will have to be choosy about the projects – ensure that the approvals are in place. Reputed builders now compensate buyers when there is an inordinate delay. The confederation is now putting in place an arbitration system that will mediate on issues between developers and buyers when problems crop up. The system is successful in places like Pune and Karnataka and will soon be introduced in Tamil Nadu.

In most cases the developers cannot be blamed for the delay as the system in place is a long and complicated process involving multiple government agencies. The developer can provide the plans and title documents but there are over 15 No-Objection-Certificates that have to be obtained from a range of agencies like traffic police, water supply and drainage, electricity board, airports authority, pollution control boards and the Public Works Department. The process has to be revamped and streamlined, he said.

(This article was published in the Business Line print edition dated February 8, 2009)
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