Business Today

Beware the Traps

Some of the common ways in which real estate developers try to cheat property buyers.
Pritam P. Hans | Print Edition: Aug 18, 2013

India's real estate industry is notorious for its lack of transparency. Buyers often find themselves locked into properties which have serious flaws or paying for things they neither wanted nor need. Worse, without their knowledge, they might be made to shell out more to fund fines levied on builders. To tackle the problems, the government has decided to set up a regulator - the Union Cabinet has already cleared the Bill okaying this. But till the regulator becomes a reality, buying property remains a risky task. Buyers often find themselves stuck with properties whose construction is not even entirely legal. To avoid this, some knowledge of the tricks developers play on buyers is worth having. Here are a few widespread ones:  

Development Plans: All construction has to adhere to the National Building Code. Most developers do get their plans cleared by the authorities, but some do not adhere to them strictly. "In most cases, the building is not built according to the plan submitted. The violations range from the height of the building to margins," says Vikas Malpani, Co-founder and Vice President (Communities),, a real estate portal. "Some builders think even if they violate rules, their buildings will be regularised later by the concerned urban local body," he adds.
Value Addition: Recreational clubs and other amenities, such as gyms, can be another issue, as buyers have no option but to pay for these. "Buyers are usually not given the option of not buying club membership and other amenities. Legally, it should not be done, but it is a common practice these days," says Samarjit Singh, Managing Director, India Homes, a New Delhi-based property brokerage. What is worse, in some townships and projects that promise a grand lifestyle, developers do not transfer the ownership of facilities with commercial value, such as club house, gym and tennis court, to resident associations. "Builders retain rights over such facilities in the builder-buyer agreement and profit from them. In such an arrangement, residents end up paying for maintenance while the builder enjoys ownership rights," says Malpani. 

Saleable Area: In a building, the maximum built-up area is linked to plot size. The ratio of built-up floor area to plot size is called the Floor Space Index (FSI) or Floor Area Ratio (FAR). It is different for different localities. Some spaces, such as balconies, terraces, voids and open parking lots, are not included in the FSI calculation because these cannot be monetised. However, in many cases, once the layout has been approved, developers convert these into habitable spaces through 'creative construction' and charge based on the super built-up area, i.e., the total area of the apartment plus its share of common spaces. "It is difficult for buyers to calculate the super built-up area," says Sachin Sandhir, Managing Director, RICS (Royal Institution of Chartered Surveyors) South Asia, a professional real estate body. 

Development Charges: Developers have to pay 'external development charges' (EDC) to the government for civic amenities such as roads, water and electricity supply, sewerage and drainage. The EDC is fixed by the local authorities and is passed on to buyers in proportion to the built-up area of their properties. The EDC is clearly mentioned in the agreement. In the normal course, this is no problem. But there have been cases of projects running into trouble with developers failing to pay the EDC amount to the authorities. If EDC is not deposited on time, a penalty is imposed. Some developers pass on the penalty to buyers. You can check the EDC rates by visiting the local town planning authority.

Clearance Certificates: For new constructions, developers have to seek clearances from the local authorities. When the building is ready, the local authority awards a completion certificate stating that the approved plan has been followed. This is mandatory for getting basic amenities such as water and power. But this certificate alone does not give occupation rights. There is also an occupancy certificate, which is awarded after authorities check that the rules for fire safety, elevators, electrical wiring, water supply and waste disposal have been followed. "The occupancy certificate is issued by the same authority that sanctions the plan. It does so after verifying that the building has been constructed according to the plan," says Sandhir of RICS. Living in a building without an occupancy certificate can be difficult. "Without it, residents may not be able to get water and sewage connections. The local authorities can also demolish buildings that do not comply with their by-laws," says Malpani. 

Many developers, especially the small ones, do not take the trouble to get occupancy certificates. "Builders escape using various loopholes in the law. Having invested their money, and waited for years, buyers move in without basic amenities, fearing they may lose the property," says Singh. There are other problems too. Lenders do not finance properties without occupancy certificates at the resale stage. 

Parking Space: Parking space within a building, as per a Supreme Court verdict, cannot be sold separately. These are common spaces, which have to be handed over to the society for management. Some builders now include the cost of parking space in the quoted price and mention it in the sale deed. But in most cases, home buyers have to pay extra for parking, that too in cash and without proper documentation. Though builders cannot sell parking spaces separately, they still allot it to buyers. This allows them to charge Rs 1 lakh to Rs 15 lakh per space. But even after this, the actual allocation is done by the housing society, the rightful owner of all common areas.

Advantage Builder: Builder-buyer agreements blatantly favour developers. The buyer has no role in deciding the terms and conditions. For instance, builders insert a price-escalation clause, which allows them to change the area of the apartment as well as revise the price. You can never be sure if the price you are being charged is justified or not. "Every developer follows his own standards for valuation and price fixing. Sometimes, a new launch may be at a higher rate than the prevailing market rate. This impacts pricing in the entire region," says Sandhir of RICS.

Courtesy: Money Today 

  • Print
A    A   A