Home Truths. In no man’s land

Buying land has been a favourite proxy to investing in real estate, thanks to the lower investment requirement and scope for higher returns compared with a constructed property. Many sellers are now offering land on monthly instalments with promotional gifts thrown in, to attract buyers. If you are lured by these schemes, remember that they are unregulated and are hence a risky proposition for buyers.

The schemes let you purchase a plot of land by paying a fixed sum every month, over a period of two-five years. The land owner and the buyer enter into an agreement stating the terms, such as specifications of the plot, payment terms and penalty clauses. The buyer makes monthly payments and once the full amount is paid, the land is registered in the buyer’s name.

The buyer has an option to pre-pay the amount and get the title transferred after a certain number of payments. Penalty clauses may state that if the buyer fails to make payments for two months, the agreement would become void and the full amount forfeited. While the scheme is simple enough to attract unsuspecting buyers, the main issue with such schemes is that there is no protection for buyers. The seller is typically an individual and there is no registered entity under which the scheme operates.

Hence, unlike other deposit schemes, it would not be under the purview of any regulatory agency such as the Ministry of Corporate Affairs, SEBI or the RBI. And there is the risk that the seller may disappear with the money. Given that you pay in advance with a promise to register it at a future date, he can also sell the land to someone else or sell you land with legal issues.

In these cases you may be left with no recourse to claim your money. The seller could offer to refund your money after some time, if he gets a better deal from another party, cautions Shyam Sundar, an advocate.

Alternatively, he could also demand more money to transfer ownership, especially if the land price has appreciated. If any dispute arises, the agreement is not an enforceable legal document unless it is registered. “It costs 2 per cent of the sale value to register the agreement and this will create an encumbrance on the property with your name in the registrar’s record,” he notes.

Despite the odds being clearly stacked against the buyer, there are a few reasons why people seem to prefer these risky schemes. One is the ability these schemes provide to purchase unconverted agricultural land.

Lending institutions offer loans only for land meant for residential purposes where construction can take place, says Harshil Mehta, CEO, DHFL. Loans for plots are classified into two parts — first is loans on the land purchased; and second is a composite loan for land and construction costs.

Another reason is the restrictions placed when banks give a loan. “House construction has to start within a certain number of years when you take a land loan. For many who view land as an investment and have no intention of constructing a home, such loans are not attractive,” says Ganesh Vasudevan, CEO, Indiaproperty.com, a property listing service. Also, similar to investing in unregistered chit-fund schemes, buyers believe that they know the seller or the agent well. For instance, the seller or agent may own a house or run a business in the neighbourhood. This gives them the comfort to invest, but this can be misplaced trust. Incidents of sellers defrauding hundreds of buyers have been reported in many States.

The best option, therefore, is to avoid buying land on instalment. Even when you are convinced about the reliability of the seller, there may be legal issues with the plot. The land you buy in such a scheme tends to be small and it may be tempting to save on legal costs. But buying land requires checking the land titles to ensure there are no issues with ownership. For instance, you need to ascertain that the seller has full rights and no third-party can claim partial ownership.

You must check the non-encumbrance certificate and parental documents for the last 30 years, recommends Sundar.

Second, look up the plot you are tempted to buy to ensure that it has clearly defined boundaries. There must be basic infrastructure, such as road access to the land. “Buying a plot that is appraised by a lending institution is highly recommended as it eliminates a lot of risks,” advises Vasudevan.