Tips to buy a house despite land acquisition troubles
Times have seldom been as tough for home buyers. Lenders have increased interest rates a number of times in recent months. On another front, the land acquisition issue is becoming too hot to handle.
Knowledge is power!
Raj Kumar Pandita, 42, wishes he had more of it. Pandita, like 30,000 others, fell for the comparatively lower rates being offered by builders in Noida Extension, outside Delhi, and booked a flat. Months later, he regrets not knowing that the farmers who were made to sell their land for his project had moved court.
The initial tremor came from the Allahabad High Court, which in May struck down land acquisition by the Greater Noida Industrial Development Authority (GNIDA), an Uttar Pradesh government undertaking, in Shahberi village, where his house was to be built. Pandita, who escaped Kashmir's bloodshed to build a new life in Delhi, fears he may lose his home again.
Times have seldom been as tough for home buyers. Lenders have increased interest rates a number of times in recent months. On another front, the land acquisition issue is becoming too hot to handle.
In Noida Extension, for instance, the court order came at a time the buyers had paid substantial money to the builders.
EXPERT TIP: How to cut down your home loan burden
The buyers-people like Pandita, AN Singh and Vikas Tyagi-were attracted by the rates. When flats in the National Capital Region (NCR) were being sold for Rs 3,500-5,000 per square foot, small- to mid-sized builders in Noida Extension were quoting Rs 1,500-2,000. It was a dream chance to own a house in the NCR.
Pandita has already paid Rs 20 lakh for a flat priced at Rs 22 lakh. AN Singh, an engineer with a public sector telecom company, booked a 3BHK flat by taking a loan of Rs 5 lakh against his provident fund.
The case of Vikas Tyagi, who lives in Rajarhat, a Kolkata suburb, is unique. Tyagi booked three flats, all as an investment. These included a 3BHK flat and a 2BHK flat for Rs 31 lakh and Rs 19 lakh, respectively, and a 3BHK flat for Rs 19 lakh. He has taken a loan of Rs 50 lakh to fund his purchase.
Now, the buyers have tough choices to make.
The Supreme Court has asked the builders to either refund the money with an "appropriate interest" or offer buyers apartments in other projects. It's a tough call.
In case of a refund, the buyer would have paid more interest to the lender than the 'appropriate interest' he will get. One builder, for instance, has promised to pay 8%, while the home loan rate is 10-12%.
While builders are stalling the refund process saying a clearer picture will soon emerge, GL Sagar, secretary, Noida Extension Flat Buyers' Welfare Association, says the option of shifting to another project is not workable. "Property prices in areas such as Gurgaon are higher. So, the builder will offer projects only in Noida Extension. As more villages are demanding higher compensation, the fate of all residential projects in Noida Extension is uncertain," he says.
BEYOND THE BROCHURE
What should you look for while buying a property? Generally, buyers focus on the price, area, number of rooms, location, possession date, etc. There are many other points, such as finances of the builder and legal clearances to the project, that are equally important.
"The market is going through a tough time. There is no liquidity, property prices and interest rates are high, the global economy is jittery and the domestic equity market is erratic, making it a challenging environment for property developers. In this scenario, it makes sense to do a financial health-check of developers and their projects before investing," says Vineet K Singh, business head, 99acres.com, a property portal.
Sadly, aspects like the reputation of the builder, the status of the land title and the price break-up-which should be key to arriving at a decision-do not figure on buyers' checklists. Here, we list some points and how you, as a buyer, should look at them.
Builder's Reputation: As a buyer on a tight budget, who is probably taking a home loan, properties under construction are more attractive than the ready-to-move-in ones. They are more affordable and offer flexible payment options.
However, the risks are also higher, as timely project completion will depend on the builder's resources and efficiency. Therefore, when buying an under-construction property, it is important to check the developer's delivery record.
Remember that lack of transparency is a good enough reason to delete a project from your short list.
Past performance: "Track record is one of the most important factors to be considered while finalising a property. A builder with a good reputation and long experience is likely to be a long-term player and one can expect it to have a professional approach with proper systems and processes in place," says Ganesh Vasudevan, vice president and business head, Indiaproperty.com, a real estate website.
Current market prices of a developer's past projects are a good indicator of its standing in comparison with peers. If you are buying from a new builder, do a more thorough investigation.
Internet makes research easy. Usually, a lot of information is available on blogs, discussion forums and property websites.
"Enquiries with local brokers and current customers help," says Singh of 99acres.com.
Financial standing: While the source of funds and the debt a builder has taken are important, getting this information is difficult as most builders are not listed. "Some builders give these details when asked, but verification is a difficult task," says Vasudevan.
"What one should look for is a company with strong cash flows as such a company is likely to execute projects well," says Singh.
"A buyer should check if the project is funded by a bank and whether all approvals are in place," says Mohammed Aslam, chief operating officer, residential services, Jones Lang LaSalle India.
Real Estate Rating: Crisil Real Estate Star Ratings (Crest), launched last year, provides key information about projects in a standardised manner. "This is perhaps the only independent rating of developers and is very useful," says Vasudevan.
The factors the rating agency looks for are the quality of documentation, construction-related risks, financial flexibility/viability and the track record of the builder.
"While buyers are interested in additional information and expert opinion, they are constrained by inadequate information given by the developers, absence of a centralised repository or registry on projects and lack of objective, credible opinion. Crest guides buyers by giving opinion on the project they are interested in. The rating indicates the quality of the project," says Akash Deep Jyoti, head, real estate ratings, Crisil.
CREST also enables buyers to track the progress of the project. "Key project information and progress photographs are available on our website," he adds.
It is particularly useful for customers who buy a property outside their city of residence. Crisil has so far rated at least 80 projects in about 20 cities.
This doesn't imply that a project without Crisil rating is a bad choice. If you are interested in such a project, see table below for Non-rated Projects, to know how you can check a builder's reliability.
Legal verifications: It is important that you verify title papers, construction certificate, clearances from municipal authorities and latest tax receipts. Don't hesitate to ask for copies of all necessary permissions prior to making a financial commitment.
A clear land title is a must and should be validated. "The buyer should check whether the land on which the project is coming up has been registered and development rights transferred. A verification of the last four-five transactions is advised. The time frame can be as long as 50-60 years," says Vasudevan of Indiaproperty.com.
Ideally, even pre-launch bookings should happen after the land is registered. "However, in many cases, builders announce launches even if approval from municipal authorities is awaited," says Singh.
You must also ask for the encumbrance certificate in case of old properties. The document lists all transactions related to a property, be it sale, lease, mortgage, gift, partition or release.
Another good way to confirm that a property is out of legal tangles and has all clearances is to check if financial institutions are lending for the project. This is because they do the necessary due diligence before clearing loans.
However, it's not a foolproof system, as was seen is Noida Extension, where a number of large banks and financial institutions were giving loans.
"It is sensible to get the opinion of a lawyer who specialises in property transactions to check whether everything is above board," says Vasudevan.
Getting a property registered and maintaining an up-to-date record is a must to prevent fraud and litigation. The law does not recognise unregistered owners and does not give them any right over the property.
"Registration of the undivided share (UDS) of land, in case you buy an apartment, is usually done at the time of down payment and signing of the construction agreement with the builder. In some parts of the country, the UDS is transferred to the cooperative housing society and not to individual flat owners. In both cases, registration of ownership is important," says Vasudevan.
Zone of property: In urban areas, land is regulated according to zonal classification. Apply to the urban development authority for a zonal certificate to ensure that the property you plan to purchase is in the residential zone. If the area is listed under any other category such as commercial or industrial, it is illegal to construct a residential building there.
Sometimes, agricultural land is converted for non-agricultural use. In such a case, an application is filed with the tehsildar/deputy commissioner, along with a fee, to get an endorsement order. So, if the land falls under the converted zone, don't forget to include the endorsement order in your checklist.
Construction of buildings within 60 metres of highways is not permitted. In coastal areas, one cannot build within 200 metres of the high-tide zone.
Making the Payment: Besides the price per square foot, which builders flash in advertisements to tell you how affordable their flat is, there are a number of other costs that can blow up your budget. When you buy an apartment, you pay for the built-up area. That's a given. But there are costs such as floor rise charges, infrastructure fee, car park charges, club membership fee and pre-maintenance charges, too. Therefore, ask for a price break-up.
Also, there are different payment schemes which you should know about.
Some builders offer an upfront payment option at a significant discount or give incentives such as an additional car parking and furnishings to lure buyers to pay more upfront. "There is usually an early-bird discount at launch which may be as high as 5-10% of the cost of the apartment," says Vasudevan. Most large and reputed builders encourage cheque transactions and issue appropriate receipts.
There is also a need to check clauses related to cost escalation and penalty for delayed payments to avoid trouble.
"If you have to take a loan, opt for a lender which has approved the project and choose the loan amount and the repayment tenure on the basis of your cash flow and income growth prospects," says Vasudevan. Even if the purchase is self-financed, it is good to pay according to the stage of construction to reduce the risk.
Sample Flats: Developers give wide publicity to 'sample flats.' But how accurate are they in giving a sense of what your house will be like? "Sample flats are showpiece meant to incite interest and indicate the 'lifestyle potential' of the unit. They basically serve the purpose of giving the buyer a sense of space," says Aslam of Jones Lang LaSalle.
Therefore, fixtures in your flat may be different from the ones in the exhibited version. It is a good idea to seek confirmation from the builder on this with a detailed description of the quality (brands, models) of materials to be used.
Remember that the builders quote the price of an unfurnished flat. So, if you want any additional feature that has been shown in the sample flat, you must ask for it. In such a case, an additional charge will be levied, which will appear in the annexure to the sale agreement.
IGNORANT BUILDERS
What happens when you do everything right but things still do not work out? Let's see what went wrong in Noida Extension. When the builders were allotted plots, the Allahabad High Court had ordered status quo on the acquired land.
The builders refuse to accept responsibility. They say the land was allotted by a government body, which is assumed to have acquired it through legal means and after ensuring clear titles.
The Supreme Court, however, has a different opinion. "It is difficult, if not impossible, to believe that the builders were not aware of the pending litigation despite the fact that they had successfully manipulated the change of land use and modification of the development plan in active connivance with the functionaries of the authority (GNIDA) and the state government," it said.
"(A) note dated 22 October 2009 recorded by the (Uttar Pradesh) Industrial Development Department shows the officers concerned were in know of the pending writ petitions and with a view to making infructuous the stay order likely to be passed by the high court the process of issuing a notification under Section 6(1) read with Section 17(1) was hastened," it said.
RADAR FAILURE
When borrowing from a bank, there appears to be an additional comfort of investing in a property which has cleared the lender's scrutiny.
Is this true? We cannot be sure. Several affected projects in Noida Extension were pre-approved by major banks and financing companies for home loans.
How did banks fail to detect the pending litigation and its possible implications? A top executive of a leading private housing finance company with a large exposure to troubled assets in Noida Extension compares it with a sovereign default. "The land was sold/leased by the state government. What more guarantee do you want?" he said, on condition of anonymity.
"Approval to projects on the disputed land was given on the basis of the lease deed executed by the Noida/Greater Noida Industrial Development Authority with the builders. The ruling rendering land acquisition by the GNIDA void is an extraordinary development that banks could not have foreseen," says Bhaskar Niyogi, chief general manager (real estate, habitat and housing development), State Bank of India (SBI).
The total exposure of SBI in Greater Noida and Noida Extension is about 0.30% of the total home loan disbursements in the region. The bank's loans to staff account for 60% of this.
When most banks were lending for buying properties in Noida Extension, why was SBI cautious? "The NCR market has a good potential, but it is also historically risky because of various unhealthy practices. In Greater Noida, land was 'leased' to the developers for up to 10 years. The developer does not get the title till he pays the entire 'premium' it has bid as well as the lease rental. He can pay in instalments over 9-10 years. Accordingly, it cannot pass on the title to the buyer of the flat till he clears the GNIDA's dues," says Niyogi.
The lease terms are also onerous. The GNIDA can repossess the land or cancel the lease for a variety of lapses. If a bank gives a loan, it has to assess the ability of the developer not only to execute the project but also to pay half-yearly instalments to the GNIDA.
"This assessment is difficult to make in the absence of enough financial information on the builder. So, SBI has approved very select builders of proven financial strength. Due to this cautious approach, the bank has practically no exposure to Noida Extension," Niyogi adds.
EXTRA PRECAUTIONS
After committing to finance a large number of flats, the lenders have stopped releasing money for the approved loans. (Loans are disbursed directly to builders. For construction-linked payment plans, the amount is disbursed in parts.)
As lenders can finance a maximum 90% of the price of a residential property valued up to Rs 20 lakh and 80% in case of houses that cost more than Rs 20 lakh, and buyers need to put in the rest before banks release the full loan amount, a large part of money paid comes from the buyer's own pocket.
Construction-linked payments mean the amount disbursed by banks and financial institutions is far less than their total commitment (approved loan amount).
BUYERS IN DISTRESS
Buyers hopeful of an amicable solution have their own concerns. Though the builders are not demanding any payment right now, those who have taken loans are worried they may have to pay additional interest due to the delays.
"The banks should not charge any interest till the issue is resolved and all EMIs (equated monthly instalments) should be temporarily stopped," says Rakesh Jain, 35, who has taken a loan to purchase his first home, a flat in Amrapali Group's La Residentia, in Patwari village.
INVESTMENT OPTIONS
Most stakeholders expect the row to be settled with the GNIDA offering more compensation to the farmers, who, it appears, do not want their land back.
"If projects in Noida Extension are scrapped, it will result in a public unrest and will have a wide socio-political impact. The authorities concerned will have to resolve the issue," says the executive of the housing finance company who preferred anonymity.
Once the issue is resolved, the builders are likely to increase prices for new buyers to make up for any additional compensation they may have to pay to the farmers.
So, should you invest in Noida and Greater Noida after the land issue is settled?
"If a permanent solution is found, these areas may again become attractive. However, people will obviously be cautious while buying a property in Noida Extension and Greater Noida. Also, with prices likely to rise, the demand may be affected to an extent," says Santhosh Kumar, chief executive officer (business), Jones Lang LaSalle India.
NO PEACE IN SIGHT
Selling land brought a windfall for farmers in the National Capital Region. It also made them feel cheated when the same land was sold to builders at more than ten times the price they were paid.
The farmers were paid Rs 850 per square metre for their land, which was notified for industrial development. The land was later sold to the builders for Rs 11,000 per square metre.
The recent court verdicts have resulted in a deluge of demands for more compensation, even from farmers whose land was acquired decades ago.
Burdened with a large number of such cases, the Allahabad High Court gave the farmers and the GNIDA time to reach a compromise by 12 August 2011. The large number of farmers' groups made negotiations difficult.
On 6 August 2011, the GNIDA claimed to have struck a deal with the farmers of Patwari, one of the affected villages. Hope could not last for even 24 hours as another group claimed the agreement was a farce as the farmers who had signed the deal were 'bribed' by the GNIDA or had 'vested interests'. It may take some time before a settlement acceptable to everyone is reached.
WHY THIS TROUBLE?
Land acquisition in India is governed by a law enacted during the British rule. It empowers the government with 'eminent domain', or the power to acquire private properties, including land, for 'public use' by merely paying compensation. Section 17 of the Land Acquisition Act, 1894, allows the government to invoke an urgency clause which bars land owners from filing objections.
This clause was used in Noida Extension. The manner in which land was acquired is central to the legal tussle between the farmers and the GNIDA.
On Shahberi, one of the Noida Extension villages where land was acquired, the Supreme Court ruled that the urgency clause had been applied without considering the rights of the land owners.
"What the authority (GNIDA) has done in these cases is to initiate the proposal for acquisition of land for planned industrial development of an area of which land use is distinctly shown in the development plan as industrial, but the real objective of the entire exercise was to make available land to the builders by ensuring acquisition otherwise than by agreement so that they may not have to pay higher price to the land owners and/or their transferees," it said.
NEW LEGISLATION
Amid the controversy over the land acquisition law and the Supreme Court terming it a 'fraud', the Union government has released the draft of a new land acquisition law.
"If passed by Parliament, the Land Acquisition and Rehabilitation & Resettlement Bill will be a watershed as it will bring land issues under unified regulatory governance. A national code of conduct for land acquisition will help developers resolve ambiguity in the manner in which land is aggregated," says Kaustuv Roy, executive director, India, Cushman & Wakefield, a property consultancy.
The new law will increase the compensation paid to the affected families manifold. In case of urban areas, the compensation for acquired land will be at least twice the market value, whereas in rural areas, it will not be less than six times the market value.
As even such a high compensation may fail to satisfy the farmers, the Bill attempts to share the benefits of any subsequent increase in the land's value with its original owners. If land is acquired for urbanisation, as in Noida Extension, 20% developed land will be offered to the original owners.
That's not all. If the land is sold within 10 years of the acquisition, the original owners will get 20% of the appreciated value.
This will make urban development smooth. It may also make properties in new urban pockets more expensive.
The legislation also addresses the issue of abuse of the land acquisition law. Once passed by Parliament, governments will be able to acquire land only for public purposes and not for private use by companies. The law also forbids change of public purpose of the land acquired for private companies.
Considering the protests by farmers against acquisition of cultivable land, the Bill prohibits acquisition of multi-crop irrigated land by the government.
"The draft land acquisition Bill makes an effort to bring fairness in the process of land acquisition and outlines an effective resettlement and rehabilitation entitlement to land owners and the displaced families whose livelihood depends on the acquired land and the scheduled tribes affected by the process," says Anshul Jain, chief executive officer, DTZ, a real estate consulting firm.
The draft law has a provision for payment of a monthly annuity to the affected families for 20 years. In addition, one member of the family will have to be offered a job. If this cannot be done for any reason, the affected family will have to be paid an additional one-time amount of Rs 2 lakh.
Apart from the land Bill, the Union Ministry of Housing and Urban Poverty Alleviation has prepared a draft Bill for the real estate industry. The Model Real Estate Act, a draft of which is being reviewed by the Ministry of Law, proposes to establish a regulator for the real estate industry. The regulator's key function will be to oversee compliance of norms by both developers and property buyers.
"The Bill aims to regulate the country's real estate sector and provide protection to home buyers. It is expected to bring transparency in real estate transactions. The proposed law has provisions that protect buyers from unreliable developers, false advertisements, mis-selling of properties and undue delays in project completion," says DTZ's Jain.
"If implemented, the proposed real estate law can create more transparency at the project level, with each developer being required to provide the exact status of his project in terms of approvals, construction progress and material management," says JLL's Kumar.
The proposed law also seeks to establish an appellate authority, providing an alternative redressal mechanism for buyers. It will also lay down the responsibilities and liabilities of builders.
At present, there is no law to protect buyers from unfair trade practices and one-sided contracts and payment schedules. Once the new law is implemented, the buyers will no longer be at the mercy of the developers.
The Land Acquisition Bill, which the government plans to table in Parliament in the monsoon session (1 August-8 September), is expected to come into force in 5-6 months. The wait for legislation for the real estate industry will be longer.
By the time the new laws reform the industry, the Noida Extension land acquisition row might have become history. Agitating farmers would have got higher compensation and the din of trucks, bulldozers and machinery on disputed land would be making builders and home buyers happy.
A few questions might still remain unanswered. Why did builders fail to take note of the litigation and court orders on the acquired land? Why did banks detect the irregularity only when it had turned into a huge problem for thousands of home buyers? Was it the rush to make money from a scarce resource-land?
Raj Kumar Pandita, 42, wishes he had more of it. Pandita, like 30,000 others, fell for the comparatively lower rates being offered by builders in Noida Extension, outside Delhi, and booked a flat. Months later, he regrets not knowing that the farmers who were made to sell their land for his project had moved court.
The initial tremor came from the Allahabad High Court, which in May struck down land acquisition by the Greater Noida Industrial Development Authority (GNIDA), an Uttar Pradesh government undertaking, in Shahberi village, where his house was to be built. Pandita, who escaped Kashmir's bloodshed to build a new life in Delhi, fears he may lose his home again.
Times have seldom been as tough for home buyers. Lenders have increased interest rates a number of times in recent months. On another front, the land acquisition issue is becoming too hot to handle.
In Noida Extension, for instance, the court order came at a time the buyers had paid substantial money to the builders.
EXPERT TIP: How to cut down your home loan burden
The buyers-people like Pandita, AN Singh and Vikas Tyagi-were attracted by the rates. When flats in the National Capital Region (NCR) were being sold for Rs 3,500-5,000 per square foot, small- to mid-sized builders in Noida Extension were quoting Rs 1,500-2,000. It was a dream chance to own a house in the NCR.
Pandita has already paid Rs 20 lakh for a flat priced at Rs 22 lakh. AN Singh, an engineer with a public sector telecom company, booked a 3BHK flat by taking a loan of Rs 5 lakh against his provident fund.
The case of Vikas Tyagi, who lives in Rajarhat, a Kolkata suburb, is unique. Tyagi booked three flats, all as an investment. These included a 3BHK flat and a 2BHK flat for Rs 31 lakh and Rs 19 lakh, respectively, and a 3BHK flat for Rs 19 lakh. He has taken a loan of Rs 50 lakh to fund his purchase.
Now, the buyers have tough choices to make.
| Freehold A property where the owner has absolute ownership, that is, complete control of the land and the buildings on it. It is better to buy a property from a seller who has a freehold right. Leasehold A property which has been leased for a specific period, mostly 99 years, from an owner with a freehold right on the property. The lease can be transferred only with the permission of the lessor. Power of Attorney It is a legal contract that gives the holder the right to maintain, rent, lease, mortgage or sell a property. However, the individual holding the power of attorney does not have ownership rights on the property. Mutation It is an entry of the transfer of property title in revenue records of a municipal body. It is only used for the purpose of paying taxes and, therefore, doesn't provide a legal title to the person. Sale Deed It is the main document through which a person transfers his rights on the property to the buyer, who then acquires absolute ownership. It is also referred to as the conveyance deed. Title Deed A document which shows details of ownership, rights, obligations and mortgages on the property. Ifthere are faults in this document, banks usually refuse to finance the property. Encumbrance Certificate An encumbrance certificate is an important document for property transactions. It is also issued for the purpose of mortgaging a property to avail of a loan. It certifies that the property is not already mortgaged. |
The Supreme Court has asked the builders to either refund the money with an "appropriate interest" or offer buyers apartments in other projects. It's a tough call.
In case of a refund, the buyer would have paid more interest to the lender than the 'appropriate interest' he will get. One builder, for instance, has promised to pay 8%, while the home loan rate is 10-12%.
While builders are stalling the refund process saying a clearer picture will soon emerge, GL Sagar, secretary, Noida Extension Flat Buyers' Welfare Association, says the option of shifting to another project is not workable. "Property prices in areas such as Gurgaon are higher. So, the builder will offer projects only in Noida Extension. As more villages are demanding higher compensation, the fate of all residential projects in Noida Extension is uncertain," he says.
BEYOND THE BROCHURE
What should you look for while buying a property? Generally, buyers focus on the price, area, number of rooms, location, possession date, etc. There are many other points, such as finances of the builder and legal clearances to the project, that are equally important.
WHEN BUYING A READY-TO-MOVE-IN PROPERTY... A complete legal due diligence has to be done while buying a ready property. "Checking legal clearances, payment of municipal, electricity and water charges, and property credentials in the local registrar's office is a must, apart from occupation and completion certificates," says Vineet K Singh, business head, 99acres.com. Completion certificate and occupation certificate show that the property meets local development rules and are usually the basis on which individual connections for electricity, water and sewerage are given. Hence, it is important to verify that these have been acquired from the authorities. In addition to this, just as in under-construction properties, check the parent documents of the land, development approvals, transfer of development rights to the builder, etc, before signing the papers. |
Sadly, aspects like the reputation of the builder, the status of the land title and the price break-up-which should be key to arriving at a decision-do not figure on buyers' checklists. Here, we list some points and how you, as a buyer, should look at them.
Builder's Reputation: As a buyer on a tight budget, who is probably taking a home loan, properties under construction are more attractive than the ready-to-move-in ones. They are more affordable and offer flexible payment options.
However, the risks are also higher, as timely project completion will depend on the builder's resources and efficiency. Therefore, when buying an under-construction property, it is important to check the developer's delivery record.
Remember that lack of transparency is a good enough reason to delete a project from your short list.
Past performance: "Track record is one of the most important factors to be considered while finalising a property. A builder with a good reputation and long experience is likely to be a long-term player and one can expect it to have a professional approach with proper systems and processes in place," says Ganesh Vasudevan, vice president and business head, Indiaproperty.com, a real estate website.
Current market prices of a developer's past projects are a good indicator of its standing in comparison with peers. If you are buying from a new builder, do a more thorough investigation.
Internet makes research easy. Usually, a lot of information is available on blogs, discussion forums and property websites.
"Enquiries with local brokers and current customers help," says Singh of 99acres.com.
Financial standing: While the source of funds and the debt a builder has taken are important, getting this information is difficult as most builders are not listed. "Some builders give these details when asked, but verification is a difficult task," says Vasudevan.
"What one should look for is a company with strong cash flows as such a company is likely to execute projects well," says Singh.
"A buyer should check if the project is funded by a bank and whether all approvals are in place," says Mohammed Aslam, chief operating officer, residential services, Jones Lang LaSalle India.
Real Estate Rating: Crisil Real Estate Star Ratings (Crest), launched last year, provides key information about projects in a standardised manner. "This is perhaps the only independent rating of developers and is very useful," says Vasudevan.
The factors the rating agency looks for are the quality of documentation, construction-related risks, financial flexibility/viability and the track record of the builder.
"While buyers are interested in additional information and expert opinion, they are constrained by inadequate information given by the developers, absence of a centralised repository or registry on projects and lack of objective, credible opinion. Crest guides buyers by giving opinion on the project they are interested in. The rating indicates the quality of the project," says Akash Deep Jyoti, head, real estate ratings, Crisil.
CREST also enables buyers to track the progress of the project. "Key project information and progress photographs are available on our website," he adds.
It is particularly useful for customers who buy a property outside their city of residence. Crisil has so far rated at least 80 projects in about 20 cities.
This doesn't imply that a project without Crisil rating is a bad choice. If you are interested in such a project, see table below for Non-rated Projects, to know how you can check a builder's reliability.
BENEFITS OF RATINGS For investors: Since they give incentives to developers to maintain standards with respect to legal and construction practices, they are expected to ensure orderly growth of this sector. For developers: Ratings are expected to help developers mobilise funds for projects and market them effectively. Also, ratings can be used to present the company in a favourable light to foreign collaborators as they can help individual and institutional investors frame investment policies. For lenders: Some banks and term-lending institutions in India use Crisil-Naredco (National Real Estate Development Council) ratings as cut-off points for limiting exposures. They also use them as the threshold point for fixing margin requirements, collateral, interest rates and other terms. Source: Naredco Checks for Non-rated Projects In case a developer or a project is not rated, you can adopt the following methods to evaluate the soundness of the project you plan to invest in:
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Legal verifications: It is important that you verify title papers, construction certificate, clearances from municipal authorities and latest tax receipts. Don't hesitate to ask for copies of all necessary permissions prior to making a financial commitment.
A clear land title is a must and should be validated. "The buyer should check whether the land on which the project is coming up has been registered and development rights transferred. A verification of the last four-five transactions is advised. The time frame can be as long as 50-60 years," says Vasudevan of Indiaproperty.com.
Ideally, even pre-launch bookings should happen after the land is registered. "However, in many cases, builders announce launches even if approval from municipal authorities is awaited," says Singh.
You must also ask for the encumbrance certificate in case of old properties. The document lists all transactions related to a property, be it sale, lease, mortgage, gift, partition or release.
Another good way to confirm that a property is out of legal tangles and has all clearances is to check if financial institutions are lending for the project. This is because they do the necessary due diligence before clearing loans.
However, it's not a foolproof system, as was seen is Noida Extension, where a number of large banks and financial institutions were giving loans.
"It is sensible to get the opinion of a lawyer who specialises in property transactions to check whether everything is above board," says Vasudevan.
Getting a property registered and maintaining an up-to-date record is a must to prevent fraud and litigation. The law does not recognise unregistered owners and does not give them any right over the property.
WHAT IS UDS? UDS, or Undivided Share, is that part of the land which is associated to an individual apartment and registered in the name of the apartments owner(s). This share of land has no specific boundaries within the total extent of the land on which the apartment is built and is usually expressed as a percentage of the total land. Each and every flat in the apartment complex has an associated UDS. The sum of all UDS is equal to the total land area of the apartment complex. This ensures that the title of the entire land as well as the entire building rests with the group of flat owners. The sale deed transferring the UDS in your favour must be duly registered before the construction of the flat starts. |
Zone of property: In urban areas, land is regulated according to zonal classification. Apply to the urban development authority for a zonal certificate to ensure that the property you plan to purchase is in the residential zone. If the area is listed under any other category such as commercial or industrial, it is illegal to construct a residential building there.
Sometimes, agricultural land is converted for non-agricultural use. In such a case, an application is filed with the tehsildar/deputy commissioner, along with a fee, to get an endorsement order. So, if the land falls under the converted zone, don't forget to include the endorsement order in your checklist.
Construction of buildings within 60 metres of highways is not permitted. In coastal areas, one cannot build within 200 metres of the high-tide zone.
Making the Payment: Besides the price per square foot, which builders flash in advertisements to tell you how affordable their flat is, there are a number of other costs that can blow up your budget. When you buy an apartment, you pay for the built-up area. That's a given. But there are costs such as floor rise charges, infrastructure fee, car park charges, club membership fee and pre-maintenance charges, too. Therefore, ask for a price break-up.
PAYMENT OPTIONS Buying a house is a huge financial commitment. Most buyers exhaust their entire savings in just paying a fraction of the total cost of the property. The rest is generally funded through bank loans. Fortunately, builders offer different payment options to home buyers. See which one suits your cash flow. Down-payment plans: Is the traditional and most common mode of payment, where one pays 90-95% of the total cost in 30-90 days from the booking date. Around 10% comes from the customer's pocket, called the 'down-payment'. 85% is paid by taking a home loan and the balance 5% is paid at the time of possession. Construction-linked plans: Under these plans, one pays around 25-30% of the total cost in 90 days from booking and the balance in instalments as the construction progresses. This plan is more suitable for people who want to minimise project development risks or do not have ready cash in hand. Time-linked plan: Here, one has to pay a certain pre-decided proportion of the total cost of the property according to a calendar that is set by the builder, irrespective of the stage of construction. This is a non-negotiable plan. Even if the project gets delayed, the customers are contractually bound to pay the instalments, making it a bad payment option. Flexi-payment plans: This is a hybrid version of down-payment and construction-linked plans. Under this payment structure, one needs to pay 10% of the property value at the time of booking and another 10% within two months of allotment. Up to 70% of the payment is done in tranches as in a construction-linked plan and the balance 10% is paid at the time of possession. |
Some builders offer an upfront payment option at a significant discount or give incentives such as an additional car parking and furnishings to lure buyers to pay more upfront. "There is usually an early-bird discount at launch which may be as high as 5-10% of the cost of the apartment," says Vasudevan. Most large and reputed builders encourage cheque transactions and issue appropriate receipts.
There is also a need to check clauses related to cost escalation and penalty for delayed payments to avoid trouble.
"If you have to take a loan, opt for a lender which has approved the project and choose the loan amount and the repayment tenure on the basis of your cash flow and income growth prospects," says Vasudevan. Even if the purchase is self-financed, it is good to pay according to the stage of construction to reduce the risk.
Sample Flats: Developers give wide publicity to 'sample flats.' But how accurate are they in giving a sense of what your house will be like? "Sample flats are showpiece meant to incite interest and indicate the 'lifestyle potential' of the unit. They basically serve the purpose of giving the buyer a sense of space," says Aslam of Jones Lang LaSalle.
Therefore, fixtures in your flat may be different from the ones in the exhibited version. It is a good idea to seek confirmation from the builder on this with a detailed description of the quality (brands, models) of materials to be used.
Remember that the builders quote the price of an unfurnished flat. So, if you want any additional feature that has been shown in the sample flat, you must ask for it. In such a case, an additional charge will be levied, which will appear in the annexure to the sale agreement.
IGNORANT BUILDERS
What happens when you do everything right but things still do not work out? Let's see what went wrong in Noida Extension. When the builders were allotted plots, the Allahabad High Court had ordered status quo on the acquired land.
The builders refuse to accept responsibility. They say the land was allotted by a government body, which is assumed to have acquired it through legal means and after ensuring clear titles.
The Supreme Court, however, has a different opinion. "It is difficult, if not impossible, to believe that the builders were not aware of the pending litigation despite the fact that they had successfully manipulated the change of land use and modification of the development plan in active connivance with the functionaries of the authority (GNIDA) and the state government," it said.
"(A) note dated 22 October 2009 recorded by the (Uttar Pradesh) Industrial Development Department shows the officers concerned were in know of the pending writ petitions and with a view to making infructuous the stay order likely to be passed by the high court the process of issuing a notification under Section 6(1) read with Section 17(1) was hastened," it said.
RADAR FAILURE
When borrowing from a bank, there appears to be an additional comfort of investing in a property which has cleared the lender's scrutiny.
Is this true? We cannot be sure. Several affected projects in Noida Extension were pre-approved by major banks and financing companies for home loans.
How did banks fail to detect the pending litigation and its possible implications? A top executive of a leading private housing finance company with a large exposure to troubled assets in Noida Extension compares it with a sovereign default. "The land was sold/leased by the state government. What more guarantee do you want?" he said, on condition of anonymity.
"Approval to projects on the disputed land was given on the basis of the lease deed executed by the Noida/Greater Noida Industrial Development Authority with the builders. The ruling rendering land acquisition by the GNIDA void is an extraordinary development that banks could not have foreseen," says Bhaskar Niyogi, chief general manager (real estate, habitat and housing development), State Bank of India (SBI).
The total exposure of SBI in Greater Noida and Noida Extension is about 0.30% of the total home loan disbursements in the region. The bank's loans to staff account for 60% of this.
When most banks were lending for buying properties in Noida Extension, why was SBI cautious? "The NCR market has a good potential, but it is also historically risky because of various unhealthy practices. In Greater Noida, land was 'leased' to the developers for up to 10 years. The developer does not get the title till he pays the entire 'premium' it has bid as well as the lease rental. He can pay in instalments over 9-10 years. Accordingly, it cannot pass on the title to the buyer of the flat till he clears the GNIDA's dues," says Niyogi.
The lease terms are also onerous. The GNIDA can repossess the land or cancel the lease for a variety of lapses. If a bank gives a loan, it has to assess the ability of the developer not only to execute the project but also to pay half-yearly instalments to the GNIDA.
"This assessment is difficult to make in the absence of enough financial information on the builder. So, SBI has approved very select builders of proven financial strength. Due to this cautious approach, the bank has practically no exposure to Noida Extension," Niyogi adds.
EXTRA PRECAUTIONS
After committing to finance a large number of flats, the lenders have stopped releasing money for the approved loans. (Loans are disbursed directly to builders. For construction-linked payment plans, the amount is disbursed in parts.)
As lenders can finance a maximum 90% of the price of a residential property valued up to Rs 20 lakh and 80% in case of houses that cost more than Rs 20 lakh, and buyers need to put in the rest before banks release the full loan amount, a large part of money paid comes from the buyer's own pocket.
Construction-linked payments mean the amount disbursed by banks and financial institutions is far less than their total commitment (approved loan amount).
BUYERS IN DISTRESS
Buyers hopeful of an amicable solution have their own concerns. Though the builders are not demanding any payment right now, those who have taken loans are worried they may have to pay additional interest due to the delays.
"The banks should not charge any interest till the issue is resolved and all EMIs (equated monthly instalments) should be temporarily stopped," says Rakesh Jain, 35, who has taken a loan to purchase his first home, a flat in Amrapali Group's La Residentia, in Patwari village.
INVESTMENT OPTIONS
Most stakeholders expect the row to be settled with the GNIDA offering more compensation to the farmers, who, it appears, do not want their land back.
"If projects in Noida Extension are scrapped, it will result in a public unrest and will have a wide socio-political impact. The authorities concerned will have to resolve the issue," says the executive of the housing finance company who preferred anonymity.
Once the issue is resolved, the builders are likely to increase prices for new buyers to make up for any additional compensation they may have to pay to the farmers.
So, should you invest in Noida and Greater Noida after the land issue is settled?
"If a permanent solution is found, these areas may again become attractive. However, people will obviously be cautious while buying a property in Noida Extension and Greater Noida. Also, with prices likely to rise, the demand may be affected to an extent," says Santhosh Kumar, chief executive officer (business), Jones Lang LaSalle India.
NO PEACE IN SIGHT
Selling land brought a windfall for farmers in the National Capital Region. It also made them feel cheated when the same land was sold to builders at more than ten times the price they were paid.
The farmers were paid Rs 850 per square metre for their land, which was notified for industrial development. The land was later sold to the builders for Rs 11,000 per square metre.
The recent court verdicts have resulted in a deluge of demands for more compensation, even from farmers whose land was acquired decades ago.
Burdened with a large number of such cases, the Allahabad High Court gave the farmers and the GNIDA time to reach a compromise by 12 August 2011. The large number of farmers' groups made negotiations difficult.
On 6 August 2011, the GNIDA claimed to have struck a deal with the farmers of Patwari, one of the affected villages. Hope could not last for even 24 hours as another group claimed the agreement was a farce as the farmers who had signed the deal were 'bribed' by the GNIDA or had 'vested interests'. It may take some time before a settlement acceptable to everyone is reached.
WHY THIS TROUBLE?
Land acquisition in India is governed by a law enacted during the British rule. It empowers the government with 'eminent domain', or the power to acquire private properties, including land, for 'public use' by merely paying compensation. Section 17 of the Land Acquisition Act, 1894, allows the government to invoke an urgency clause which bars land owners from filing objections.
This clause was used in Noida Extension. The manner in which land was acquired is central to the legal tussle between the farmers and the GNIDA.
On Shahberi, one of the Noida Extension villages where land was acquired, the Supreme Court ruled that the urgency clause had been applied without considering the rights of the land owners.
"What the authority (GNIDA) has done in these cases is to initiate the proposal for acquisition of land for planned industrial development of an area of which land use is distinctly shown in the development plan as industrial, but the real objective of the entire exercise was to make available land to the builders by ensuring acquisition otherwise than by agreement so that they may not have to pay higher price to the land owners and/or their transferees," it said.
NEW LEGISLATION
Amid the controversy over the land acquisition law and the Supreme Court terming it a 'fraud', the Union government has released the draft of a new land acquisition law.
"If passed by Parliament, the Land Acquisition and Rehabilitation & Resettlement Bill will be a watershed as it will bring land issues under unified regulatory governance. A national code of conduct for land acquisition will help developers resolve ambiguity in the manner in which land is aggregated," says Kaustuv Roy, executive director, India, Cushman & Wakefield, a property consultancy.
DRAFT LAND ACQUISITION BILL The draft Land Acquisition and Rehabilitation & Resettlement Bill, when passed, will replace the archaic Land Acquisition Act, 1894, which was enacted during the British rule.Key features of the Bill
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As even such a high compensation may fail to satisfy the farmers, the Bill attempts to share the benefits of any subsequent increase in the land's value with its original owners. If land is acquired for urbanisation, as in Noida Extension, 20% developed land will be offered to the original owners.
That's not all. If the land is sold within 10 years of the acquisition, the original owners will get 20% of the appreciated value.
This will make urban development smooth. It may also make properties in new urban pockets more expensive.
The legislation also addresses the issue of abuse of the land acquisition law. Once passed by Parliament, governments will be able to acquire land only for public purposes and not for private use by companies. The law also forbids change of public purpose of the land acquired for private companies.
Considering the protests by farmers against acquisition of cultivable land, the Bill prohibits acquisition of multi-crop irrigated land by the government.
"The draft land acquisition Bill makes an effort to bring fairness in the process of land acquisition and outlines an effective resettlement and rehabilitation entitlement to land owners and the displaced families whose livelihood depends on the acquired land and the scheduled tribes affected by the process," says Anshul Jain, chief executive officer, DTZ, a real estate consulting firm.
The draft law has a provision for payment of a monthly annuity to the affected families for 20 years. In addition, one member of the family will have to be offered a job. If this cannot be done for any reason, the affected family will have to be paid an additional one-time amount of Rs 2 lakh.
Apart from the land Bill, the Union Ministry of Housing and Urban Poverty Alleviation has prepared a draft Bill for the real estate industry. The Model Real Estate Act, a draft of which is being reviewed by the Ministry of Law, proposes to establish a regulator for the real estate industry. The regulator's key function will be to oversee compliance of norms by both developers and property buyers.
"The Bill aims to regulate the country's real estate sector and provide protection to home buyers. It is expected to bring transparency in real estate transactions. The proposed law has provisions that protect buyers from unreliable developers, false advertisements, mis-selling of properties and undue delays in project completion," says DTZ's Jain.
"If implemented, the proposed real estate law can create more transparency at the project level, with each developer being required to provide the exact status of his project in terms of approvals, construction progress and material management," says JLL's Kumar.
The proposed law also seeks to establish an appellate authority, providing an alternative redressal mechanism for buyers. It will also lay down the responsibilities and liabilities of builders.
At present, there is no law to protect buyers from unfair trade practices and one-sided contracts and payment schedules. Once the new law is implemented, the buyers will no longer be at the mercy of the developers.
The Land Acquisition Bill, which the government plans to table in Parliament in the monsoon session (1 August-8 September), is expected to come into force in 5-6 months. The wait for legislation for the real estate industry will be longer.
By the time the new laws reform the industry, the Noida Extension land acquisition row might have become history. Agitating farmers would have got higher compensation and the din of trucks, bulldozers and machinery on disputed land would be making builders and home buyers happy.
A few questions might still remain unanswered. Why did builders fail to take note of the litigation and court orders on the acquired land? Why did banks detect the irregularity only when it had turned into a huge problem for thousands of home buyers? Was it the rush to make money from a scarce resource-land?
 "Before investing in the Noida Extension flat, I undertook the necessary due diligence. As banks were also disbursing loans, I assumed it to be safe." AN Singh / 48 Ghaziabad |  "I will never buy property built on land acquired by the Uttar Pradesh government. It should be penalised for creating problems for home buyers and farmers." Raj Kumar Pandita / 42 Ghaziabad |  "You can never trust a builder or a government authority. Buying a ready-to-move-in property is relatively safe, but it isn't really an option due to high prices." Manoj Kumar Sharma / 32 Noida |
 "If the land is allotted by the government and nationalised banks are offering loans for flats, the project is assumed to be safe. Whom can a buyer trust now?" Rakesh Jain / 42 Gurgaon |  "I bought the flat based on the reputation of the builder. The next time I buy a property, I will do a more thorough check of the project and its land title." Jatin Das / 26 Delhi |  "I was sceptical about investing in Noida Extension due to the political environment in Uttar Pradesh. In future, I will not buy any property in the state." DEEPAK LAMBA / 35 Gurgaon |
