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Five real estate traps to avoid


Since a home buyer apportions the bulk of his savings and income to a single investment, he wants to save as much as possible. Property developers exploit this penny-pinching penchant by offering various innovative schemes that are laden with freebies. At face value, most of these options appear tempting, but when you scrub off the gloss, you’ll discover that they are riddled with traps. Let’s take a look at five of the most popular schemes, the truth behind them, and how you can still benefit from them.

1)Pre-EMI sharing schemes

What it means

When you take a home loan, it is usually disbursed according to the stages of construction, so you don’t need to start paying the EMI till the construction is complete and you get the possession of the property. However, you do have to pay the interest on the loan from the first disbursement. This is called pre-EMI and a lot of builders agree to pay this amount for a specific period, usually 24 months.

What’s the catch?

This scheme is helpful if you are renting a house since paying the pre-EMI and the rent can strain your finances. However, before opting for it, you should make sure that the builder hasn’t padded up the cost. He may not offer any discounts or throw in any freebies in the deal. So, you should bargain first to lower the price of the house and then opt for the scheme.

Another risk is that if the construction of the property is delayed, your pre-EMI payment period may stretch for more than two years, and you will have to make the balance payments yourself. This will negate any benefit that you may have derived on the payments made by the builder.

Try to bargain with the builder to extend the tenure of the scheme till possession and not restrict it to a specific time period. This keeps the pressure on the builder to hasten completion and give possession since he is paying the interest till then.

Another thing you need to check with the builder is if he will pay the interest at a pre-determined rate. If this is the case and the home loan is on a floating rate, the liability for any increase in rate would be on you. You should also enquire if the builder will pay a penalty for delay in construction/possession.

2) Freebies and gifts

What’s on offer

Builders often offer free gifts when you book a house. These can include cars, gold coins, club membership, parking space, even a fully paid holiday for your family. Since a car park usually costs Rs 1-10 lakh, most customers are eager to take up this offer. Some property developers have begun offering to pay the stamp duty and registration charges, which range from 5-12.5% of the value of the property.

What’s the catch?

According to a Supreme Court ruling of 2010, builders cannot charge for parking space, yet most of them continue to do so. To comply with the apex court’s ruling, some developers offer parking lots for ‘free’, but actually add this to the cost of the house by increasing the price of the super built-up area.

The same is true for the other freebies that they offer. So, in reality, you don’t get any real benefit. “A good way to determine whether these freebies are added to the cost of the house is by comparing the price of the property to similar ones in the vicinity.

If there isn’t much of a difference, opting for the builder to pay the stamp duty and registration costs can be to your benefit. In case of other things, insist on a cash discount rather than the freebies.

3) Sample flats

What it is

It is difficult for buyers to understand the blueprints, so developers construct a flat temporarily and display it for prospective clients. This helps them see how their flat will look like after construction.

What’s the catch?

As a part of his sales strategy, the developer adds a lot of amenities that will probably not be part of the actual property. These can include high quality tiles, wooden flooring, superior quality paints and imported sanitary and electrical fittings.

Another trick, especially for small-sized flats, is to scale down the size of the furniture and add lots of bright lighting in the sample flat to make the property look bigger and more spacious than it actually is.

When you visit a sample flat, carry a pen, paper and measuring tape with you to note down all the amenities that are installed in the property. Then cross-check with the builder whether the exact things will be provided to you or not. You should also scrutinise the agreement documents carefully to ensure that you will get what the developer has promised you verbally.

4) Buy-back schemes

What it means

To assure the home buyer that the price of the property will escalate, the developer offers to buy back the flat after a fixed period at an appreciated price. Such properties usually have a lock-in period of 3-5 years. At the end of the lock-in period, the home owner can retain the property or sell it to the builder at the predetermined rate.

What’s the catch?

The scheme is a good option for investors as you can be sure of the amount you will get for the house after the lock-in period. Of course, if the prevailing market price at the time is much higher than that promised by the developer, you could sell the house in the open market.

The biggest risk in this scheme is whether the developer will keep his word. The lack of a centralised regulatory body in real estate lets most developers slip through watertight agreements that leave home owners helpless.

Even if the builder is trustworthy, the lock-in period may become a problem if you face a financial crunch and need to sell the property as the developer may be the only person who could buy it from you, and he may do so at the same price at which he had sold it to you.

5) Guaranteed rentals

What it means

This offer is primarily aimed at investors who want to earn a regular income from the property. When the buyer signs the contract, the developer guarantees an annual rental income that ranges from 6-12% of the value of the property, and may even issue a few quarterly post-dated cheques to assure the buyer of the authenticity of the scheme. During the tenure of the contract, the possession of the property remains with the builder, who, in turn, leases it to his regular clients like corporate, financial institutions, banks, etc. The scheme also includes free maintenance of the flat.

What’s the catch?

Such schemes are usually launched by developers who are facing a cash crunch. So it’s possible that if they are unable to generate enough cash flow, the post-dated cheques may start bouncing. It doesn’t seem feasible for a developer to offer rental returns as high as 12% because he has to bear the maintenance costs. So, you must ensure that no hidden costs are included in the purchase agreement. A rent that is 4-5% of the value of the property is more credible and a good return. The guaranteed return is based on which amount? Some developers offer these only on the initial booking amount, while others will pay up only after you have made the entire payment for the property. In most cases, the realtor sells only 25% of the project under this scheme, so if you have a problem later on, you will have just a handful of investors to support you.

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Category : Flatons Advisors Blog &Uncategorized



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