Personal Finance

Home Truths: What you need to look for while redeveloping property jointly

Meera Siva | Updated on March 27, 2021

Keep an eye on key issues when partnering with a builder to rebuild your house

Every asset has a lifetime, and brick-and-mortar homes surely start to show cracks. Typically, beyond 30 years, maintenance costs – for issues such as water leaks or clogged plumbing - may start to increase for buildings. And as your needs may have changed, you may also prefer a different floor plan or size; you may want better facilities such as more parking. These may prompt you to rebuild, rather than do a quick renovation.

You need to engage with a builder to get it done. However, rather than pay for the project and get a contractor, you can enter into an agreement with a developer, to be light on your pocket, plus even get some cash.

How it works

In a joint development, the house owners enter into an agreement with a developer to reconstruct their home. In exchange, the builder is given a share of the land that offsets the cost of construction.

For example, say an old apartment complex that has 4 flats of 1,000 sq ft each needs to be redeveloped. The property may have been built on a one-ground land (2,400 sq ft). The agreement terms may be that the owners each get a new 1,000 sq ft flat and the builder would construct additional floors and sell them. The undivided share of land would now be split between the four existing owners and the new owners who would buy from the builder.

The same joint development method works for independent houses as well. Similar to an apartment complex, the owners (typically members of the same family) get certain sq ft of constructed homes and the developer can build 2-3 more. While building independent homes can be done, what usually happens is that a single-family home is rebuilt as a multi-dwelling complex.

Besides constructing, the builder may also pay the owners upfront money and cover the rent costs (as owners need to move out) during the demolition and construction period. How much money you get as well as the share of land the builder gets and the owners keeps depend on many factors. For instance, a property in a prime location with sizeable land, where Floor Space Index (FSI) is high, rebuilt during a hot property market may fetch owners a higher payment and better terms, as they would have strong bargaining power. When there is some distress in the market, builders may negotiate on payment terms, especially what is paid upfront, citing liquidity issues.

Merits and risks

One clear advantage for home owners is to have a new home that fits your current needs, without having to worry about arranging money for construction. Also, for seniors, joint development can help unlock value from their asset and provide some amount of cash to cover their other expenses.

There are also risks and downsides to consider. One big headache is that of timing of the tax payment. Tax rules relating to redevelopment can be complex and subject to some amount of interpretation. For instance, tax liability arises when property transfer happens; there is often confusion on whether this is the date of the written agreement or project completion. It helps to consult a tax advisor and draft the agreement wordings the right way.

The first roadblock – when multiple stakeholders are involved – is often in getting started. Getting consensus from all home owners on the builder’s terms and timelines may be a long-drawn one. Redevelopment is a lengthy process and keeping the consensus can also be a challenge.

Consider the legal aspects of the agreement thoroughly, to protect yourself. Common issues where owners are short-changed include the rights of developers on the land and penalties for delays. One example is the rights granted to the builder for entering the premises, through a general power of attorney. This can be revoked if the contract terms are breached; but often owners do not register it and so it is not legally binding. The details of the proposed plan must also be specified clearly to avoid misunderstanding on what is built.

The biggest risk of all is the choice of builder. Rather than base the decision on good payment terms, also consider non-financial quality aspects. Verify the reputation – for quality, timely completion, responsiveness of the builder by going thorough reference checks. Ensure the builder has local expertise and currently has the financial and operational delivery capability.

Even with these, there is a risk that market conditions in the local area may worsen, causing demand to drop. If the builder is not able to find buyers, the project may be delayed. Owners may want to study the market - to know the going rates and terms in the area - before you go ahead with the project.

The writer is an independent

financial consultant

Published on March 27, 2021

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