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Lower prices come with risks for projects underway

When buying a house,a buyer always has a doubt whether to go in for a ready-for-possession property or book one under construction.

Written by Santhosh Kumar |
July 9, 2011 1:45:54 am

When buying a house,a buyer always has a doubt whether to go in for a ready-for-possession property or book one under construction. Here,we examine issues related to buying a property under construction.

The primary advantage of an under-construction property is that it will invariably come cheaper than a ready-for-possession property. Depending on the stage of construction and also the response that the project has already elicited from other buyers/investors,the rates can be from anywhere between 15-30 per cent lower.

Also,its value often appreciates even if it is not completed. It is incorrect to assume that property value may not appreciate while it is being developed. It has been observed in a number of cases that property prices usually appreciate once they are nearing the phase of completion. This aspect is usually inherent to the property,and is attributed to the stage in its life-cycle.

The market is likely to read a lesser risk in a project nearing completion. Consequently,it may be willing to pay a slight premium on account of this aspect. Therefore,it makes a lot of sense to invest in a property under-construction by a credible and reputed developer.

The primary disadvantage would be that the property cannot be immediately used for occupancy or renting out,and one’s money is locked into an as-yet non-performing asset. There may also be delivery delays or sometimes even defaults that can have serious financial repercussions.

Checklist

To begin with,if one is buying into an under-construction project,the developer’s bona fides and market standing should be carefully researched and verified.

A buyer is entitled to ask for a copy of the project’s drawings,duly stamped by the municipal authorities. Choose a location that has potential for appreciation. Do check the options available for a construction-linked payment plan,which are usually structured on a project-to-project basis.

Changes In Plan

Certain necessary changes are usually permitted and also mentioned in the agreement. Once actual construction begins,there may be grey areas on the blueprints that come to light only later. Sometimes,this may involve new regulations on parking space or other aspects beyond the developer’s control.

DELIVERY DATE

There are many such instances,as can be expected in a largely unorganised market. Generally,reputed builders deliver on time and as per promised specifications. Small developers,however,often default by stretching their projects beyond the promised delivery date — sometimes by as much as a year.

Often,this is caused by funding issues. They may also skimp on construction costs,banking on the buyer’s ignorance of quality parameters. Sometimes,the drawings they submit to the municipal authorities are not sufficiently detailed,leading to non-approval of their projects. There are also fly-by-night operators who pocket their clients’ up-front payment and then disappear altogether.

Most developers operating in city centres are well-established and experienced players with reputations to protect. The incidence of gross defaulting on promises is less than 10 per cent. It can,however,be as high as 15-20 per cent in emerging suburban areas.

Many developers who respond to sudden property booms in suburban areas are simply traders who are putting up the only project they ever will in their entire lifetime. They have no experience or technical knowledge and often do not have banks backing them. Most emerging suburbs are also defined by unclear land titles.

Hence,a prospective buyer should ask for copies of all necessary permissions prior to making a financial commitment and also check whether the project is funded or approved by a known bank.

In case of doubt,purchasing property through a lawyer qualified and experienced in handling real estate-related issues is certainly advisable.

— Author is CEO – Operations,Jones Lang LaSalle India

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