Personal Finance

Ask the right questions when picking a developer

Meera Siva | Updated on March 10, 2018

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Buyers need to do some homework before selecting a builder

A home is a big-ticket purchase. But, often, buyers do far less due diligence compared to when buying a mobile phone or appliance. While project features, price, location and legal compliance are all important, the biggest risk in a home purchase is in selecting a builder. With low barriers to entry and potential for high margin, there are thousands of developers who may not have the ability to deliver when things turn tough. So, the onus is on the buyers to ask the right questions when making their choice.

Developer details

One important question to ask is whether the builder has registered with the Real Estate Regulatory Authority (RERA). Each State has a registration agency and a website where buyers can find details of the project that includes builder information. For instance, details of earlier projects completed by the builder can be found here. It is mandatory for all projects to be registered and buyers can hope for better transparency through their State’s RERA website.

Additionally, real estate portals that provide project information also give insights on the developer. For example, PropTiger gives information on how long the builder has been in business and the number of projects completed, including RERA registered ones.

Other online resources include the developer’s own website that provides details on projects completed or under execution. Independent agencies such as Crisil and ICRA also provide ratings on developer, after evaluating qualitative factors such as management and quantitative factors such as past delivery record.

Customer feedback

You can visit completed projects to find specifics. You can see how the building looks and pay attention to visual details — whether there are any cracks, etc. You must also talk to home owners to get their feedback on home ownership experience.

Simple facts such as on-time delivery, quality of construction, responsiveness of developer to issues or questions may help you evaluate better. Home buyers are forthcoming in sharing their views. It helps to get more than one opinion to avoid any personal bias.

A pertinent question to ask the owners may be whether they will buy another home from the same builder. If the answer is yes, you can probe the positives. If it is no, you can understand the reasons and get insights on what to look for in your selection.

You must ask not just about the buying experience but also life after moving in. For example, you must check if occupancy certificate was provided and records were properly handed over to the home owners association. The quality of construction and maintenance standards are important to evaluate. It also helps to maintain notes so that you can build your own checklist.

Financial checks

A builder also needs good financial strength to ensure on-time delivery and good quality construction. This can be ascertained in a few possible ways. For instance, typically, builders who can get bank loans or those backed by private equity funds may not face liquidity crunch. You can also find out which lenders are approving home loan for the project. Banks such as SBI, for instance, do detailed diligence on the project and the builder before approving the project for loans to buyers.

You can get the builder’s financial data from the Ministry of Corporate Affairs website. All registered companies are required to submit their details, including audited financials, and you can access this for free or by paying a small fee (based on type of information). Another source of financial information is credit rating agencies such as ICRA and Crisil.

If the project has been launched, you can try to find the sales momentum. If sales is tepid in the locality, the builder may need to rely more on external funding rather than customer advances. This can add to the financial risk; be cautious.

Other factors

If you are considering a builder without a track record, it may be safer to wait until construction is completed. Also, buyers should not just go by brand name; they must be cautious even with reputed developers. Particularly, when the builder forays into new geographies, his ability to deal with the local issues and build resources needs to be verified. It may be safer to wait for them to complete one phase of a project. You can buy in the next phase, if you can wait.

You also need to evaluate the strengths of the developer for the specific type of project you are considering. For example, a builder may be well experienced in constructing villas but his ability to deliver a high-rise cannot be taken for granted. Likewise, large township projects, even by builders with a long credible history, carry risks of delays and issues.

The writer is co-founder, RaNa Investment Advisors

Published on December 03, 2017

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