Everyone desires to purchase a house. Generally, there are three options to purchase your dream home. One can opt to purchase an under-construction, ready-to-move or resale property. Each comes with their advantages and disadvantages which are explained below.
These are properties that have been announced by real estate developers and will take time to complete.
1. Convenient Payments - A major advantage associated with under construction properties is that they are affordable for most of the people through a home loan. People make a down-payment which is generally 20% of the property price and then start paying the monthly EMI’s every month. This way a lot of people are able to own the house in a convenient manner. EMIs are paid as the work progresses. Therefore, initial EMIs are low in case of an under-construction home. Even if one is not taking a home loan, they can pay the money in parts by opting for construction-linked payment. A lot of choices
There are various locations where new projects come up, so the choice in terms of location or which floor you want is generally high. If you are not happy with 12th floor, you can pay accordingly and take the 3rd floor
2. Price appreciation - Under Construction properties are generally on the outskirts of the city and hence the price appreciation due to future development is good in under construction properties. Since the price paid is less, you may get higher returns for an under-construction property.
1. Project Delay - On an average the completion deadline is given by the builders. Depending on the size of the project, it is 2-4 years, but it gets delayed and further delayed most of the times. In some cases, the 2 years can turn into an excruciating 4 to 5 years or even more. This delay can be attributed to issues pertaining to the land dispute, cash crunch and most of the times incomplete permissions from authorities.
2. Incomplete Projects - There have been cases where builders could not complete the housing complexes because of a cash crunch, high interest rates, or high raw material costs, diversion of funds into other projects and at times legal reasons, resulting in buyers losing their money.
3. Meeting your expectations - The under construction property might not turn out the way you thought. This can happen on various fronts like quality, amenities, layout etc. Sample flats are built to entice you however the final flat may look drastically different. There might be issues pertaining to water supply, electricity etc. The quality of the construction material used, doors and windows fillings can be compromised with, electrical sockets and switches can be of cheap quality, plumbing can be an issue and even the facilities like parking space, children playing area and other amenities might be below the mark of what you expected.
4. Income tax claim issue - You can avail for tax benefits only after you get the possession of the house. If you are going to buy under construction property, be ready to pay rent + EMI and not receive any tax benefit unless you get the possession certificate.
5. Price Appreciation might get affected - Your property rate might not appreciate the way real estate experts might have predicted due to a change in the market outlook. If major infrastructure projects get cancelled in that vicinity, the property rates are bound to reduce.
6. No clarity on maintenance charges - In under-construction flats one cannot be hundred percent sure about the exact maintenance charges to be paid till one occupies the flat. The maintenance charges may vary depending upon the facilities provided by the developer.
Real Estate Law 2016 and Under-Construction Property
However the New Real Estate Bill passed in March 2016 aims to minimize the disadvantages of the under construction properties in the following ways: The builders will have to deposit 70% of the amount in an escrow amount so that the funds collected from the consumers for one project cannot be diverted to another.
If there is any delay in the completion of the project, then the builder will have to pay the money with the same interest rate being paid by the customer to the bank; back to the customer. The builder cannot make sudden changes in the layout of the under-constructed property without the approval of the clients.
The State Level Real Estate Regulatory authority will ensure that all the projects are registered and that they are delivered on time.
These are properties that are ready to reside in. One can get immediate possession of such properties as the construction work is already completed and there is no waiting period.
1. Get to see it - Unlike under construction properties, ready-to-move properties are completed and you get to see them before purchasing. Here there are considerably fewer chances of a miss-match of expectations and reality. One can witness not just the house but the entire residential building or complex.
2. Instant availability - These properties can be availed instantly. One can save the expenses attributed to paying rent and transportation by opting for a ready-to-move-in property.
3. No service tax - Generally, when a builder sells a property in a group housing project before it is fully developed a service tax is levied. The amount depends upon the carpet area of the property. However, if the property is ready for possession, then you do not have to pay this tax.
1. Payment in one-go - In case of Ready-to-move in properties, all the payment has to be made upfront and all at one time. There are no stages of payment like you have in under construction properties. So even if you are buying it on a home loan, generally you have to pay all the down-payment, registration charges, stamp duty etc. all in one go.
2. Low price appreciation - Ready-to-move properties do not appreciate as beneficially as under-construction property as most of the development has already taken place and the price has appreciated over a period of time.
Resale properties are those that had been occupied by someone else. If someone sells a property after residing in it for some time, it will become a resale property. The resale property can be bought from the original buyer or the investor.
1. Economical pricing - Price of resale properties is economical as they are available at a cheaper rate. However, this will depend upon several factors like the age of the building, location, developments in the vicinity etc.
2. Immediate possession - Like ready-to-move properties, resale properties also aid immediate possession.
3. Settled - In case of a resale property, the neighbourhood and the building or complex is generally settled. One can have a look at the immediate neighbourhood and also gauge the aesthetic value of the real estate property.
1. Makeover - One might need to incur expenses pertaining to the renovation of the house.
2. Down payment - As you are dealing with an individual, the down payment might be more than that associated with ready-to-move and under construction property.
3. Inspection - Physical inspection of the site becomes imperative and needs to be done meticulously in comparison with ready-to-move properties. The documentation also needs to be checked diligently as chances of fraud are paramount in such cases.
4. Conclusion - Consider the following points while deciding either of the above mentioned options – your budget, locality, price appreciation, builder’s reputation, have you purchased the house from an investment standpoint or a residential standpoint, whether you want to reside in the house for a long period or a short period, proper documentation, inspect the property and plan out the EMIs. Consider all three options, weigh the advantages and disadvantages and make an informed decision while opting for a property.
Stages of construction and their financial implication
Various stages of construction have their own financial implications. Whether you are availing a loan to build a home on a land you own or going for an under construction property, the following points will guide you to make your journey hassle-free.
1. Construction Loan - A construction loan is a short-term loan that is availed to pay for the cost of building a house. It may be offered for a term that allows the customer to build the house. Such loans have a variable rate that fluctuates with the prime rate. While applying for such a loan, a lender will have to be provided with a construction timetable with detailed plans and a budget.
Types of construction loans -
a. One step loan- In this type of loan, the lender for the construction loan and the mortgage are the same
b. Multi-step loan- In this type of loan, the mortgage and the construction loan are split, wherein, the construction of the building is completed and the mortgage payment starts only after the house is built.
2. Working of construction loan - A schedule of payments is drawn up in terms of the construction loan.
3. Draws - The builder is provided with funds at designated intervals for the continuation and completion of the project.
These disbursements are provided at the various stages of the construction process, such as foundation, lock up (the stage where windows and doors of the property can be locked). The number of draws and the amount to be paid is negotiated between the lending institution, the borrower and the builder. The lending institution may release the draws after the inspection of the construction pace. After the draws have been paid and construction completed, the buyer will have to take the end loan to pay off the construction loan. The balance that is left to be paid off the construction loan is rolled into the normal mortgage.
4. Disbursement at various stages
Disbursement of the loan amount is not done in one go. Depending on the progress of the construction, the amount is released in instalments at the various stages of construction. For the disbursement of the loan, most lending institution follows the 80:20 scheme, wherein the buyer pays 20% down payment and the rest is disbursed lending institution in instalments.
Various stages of construction -
The construction of a building is a long drawn process that involves various stages.
1. Foundation- The foundation stage involves laying the foundation of the house with steel placements etc.
2. Frame and Brickwork- At this stage, the builder puts up the frame of the house which includes roofs and windows.
3. Lock Up- It is so named because at this stage the doors and the windows become lockable.
4. Second Fix- At this stage, the plumbing and the electrical work is completed, plaster boards, gutters and pipes are installed.
5. Completion- This is the final walkthrough stage wherein the builder acquaints the buyer with the various features of the house.
Payment at various stages of construction
The stages of construction; foundation, frame and brickwork, lock up, second fix and completion provide an idea about the payment schedule of the construction loan availed.
A proper contract lists out all these stages along with the amount to be disbursed at each stage. Because the payment will be made at various stages, it is necessary to get a fixed price from the builder so that the lender is aware of the amount to be released at each stage.
Progressive draw down
The payment of the loan amount in various stages of construction is referred to as the progressive draw down. The interest paid is less in such stage wise withdrawals than what needs to be paid on the withdrawal in lump sum. Usually, the builder requires to be made five payments, i.e. in the five stages of construction. The builder can be paid directly by the lender upon request. Before the final payment, an expert will be sent by the lender to investigate the completion of the construction; if it is not found to be satisfactory then the lender can withhold payment. The interest and the repayments will only be charged on the funds used.
Percentage of payment at the various stages
a. Foundation stage - maximum 20% of the total price.
b. Framework, lock up, second fix stages - maximum 70% of the total price combined.
c. Completion stage-remaining 20% of the total cost.
It is important to note that the lender will not pay more than 35% at each stage.
1. The progressive draw down on the construction loan suffers from a few disadvantages. If the construction of the house is not completed on time, then the buyer will have to pay a fee to extend the loan.
While paying off the construction loan, if the credit amount of the borrower drastically changes, then the buyer will not be qualified for an end loan. The buyer risks foreclosure until the previous amount is paid off and a new loan can be availed.
Points to be kept in mind
The lender usually takes 2 – 7 working days to release the payment for the various stages If the total cost of construction is hard to be determined, then the buyer should apply for a variable cost construction loan
The lender should be provided with the buyer’s contact details as well as the builders’
A construction loan is usually availed to make the process of building a home easier. The provision of the payment of the borrowed amount at different stages makes it easier for the buyer as well as the lender to keep a track on the progress of the construction.
Given the myriad of options, choosing the right property becomes a tricky affair for prospective buyers. Many home buyers are lured by the prospects of pre-launch offers advertised by the builders. To safeguard the financial interests of the buyers, it is important to understand the concept in detail.
Defining a Pre-Launch Offer?
A pre-launch offer usually involves creating buzz by spreading information about an available property that has not yet been put on the market. The finances involved in a pre-launch offer are usually lower compared to the launch offer, making it sound perspective to buyers who invest in the property. The investors/ buyers usually have to wait for one or two years before the project is completed and they can take possession of the property.
Difference between a Pre-Launch and a Soft Launch
For a layperson investing in a prospective property, it becomes necessary to understand the difference between pre-launch and soft launch in the real estate language.
Pre-launch is kind of a distant dream wherein the builder raises money from the public for real estate projects that do not have the regulatory approval of licenses and clearances yet. In soft launch, the money is asked to be invested only after all the regulatory approvals are in place.
Given that pre-launch is considered to be an illegal affair, the builder usually insists on cash payment so as not to leave a paper trail. In soft launches, which are legally permissible, the payments are usually made through arrangements that are legally viable.
Advantages of pre-launch for the customer
Given the interest in buying one’s own property, the pre-launch offer sometimes proves beneficial to the investors.
Discounts - The pre-launch offers usually provide great discounts to the early bird investors.
Rebate - It provides a good rebate to the investors in terms of their overall finances if the project finishes on time.
Sell - The investors are allowed to sell off their property to other buyers once the project is completed and this is done on mutual agreement with the builder as the investor in the first place provided the cash necessary for completion of the project
Disadvantages of pre-launch for a customer
The pre-launch investment by a buyer is a risky affair and as such it has its flipside as well.
Burden - Conscious delay by the builders in the completion of the project, if the property is not creating enough buzz in the market or legal delays, leads to excessive financial burden and mental and emotional harassment for the investor.
No tax benefits - Investors also undergo the loss of tax benefits if the delivery of the house keeps on getting delayed. The income tax rule which allows a deduction for both principal repayment and interest payment cannot be availed until taking possession of the house. If the project keeps on getting delayed, then the investor will have to continue paying the EMI of the house without getting any tax benefits.
Limited exit routes - Investing in a pre-launch property leaves one with limited exit routes. Opting to cancel the investment might lead to heavy losses if the market conditions are not right. For those looking to sell off the house might not find buyers right away as prospective buyers would be more interested in buying a fully constructed house rather than one under way.
Advantages of pre-launch for developers
The builders are heavily oriented towards offering a pre-launch investment to potential buyers.
Create buzz - Through information spread via word of mouth, the pre-launch affair helps create a buzz around the upcoming property.
Cash flow - It keeps a constant stream of cash flow for the company and also helps the builder to use it for other projects if necessary.
Capital - The builders can attract an interest-free capital from the investors.
Clientele - It helps to retain an old customer base by providing them with new projects as well as develop a new clientele.
Disadvantages of pre-launch for developers
Not just customers, the builders also face difficulty with their pre-launch offers.
Legal issues - Since pre-launch offers are not legally permissible, and the buildings do not have the necessary regulations, there is the possibility of being tangled up in a legal mess that takes time to sort out.
Delays - Delay in projects or overall cancellation of the project leads to monetary losses as well as the loss of a clientele base for the builder.
Negative publicity - The negative publicity garnered because of one failed pre-launch project might shed a bad light on the other projects of the builder.
Factoring in on the pre-launch offer
It’s imperative for the prospective buyers to keep in mind a few factors while going for a pre-launch offer.
Compare - It is necessary to make a comparison of the pre-launch price to the future market price and this can be done with a review about the demand of the project, comparison with other projects in the same area etc.
Completed projects -It is necessary to find out whether the builder has successfully completed projects before and if he has enough funds for the current project.
Documentation- The investor should know whether or not the builder has the necessary documents to start and complete the project like that of the Intimation of Disapproval as guidelines for the builder etc.
Clearance - The investor should ensure that the project is on its way to being cleared by banks or housing loan companies.
The Legal Route
To ensure that the money invested is not misused, investors should make sure that an agreement (receipt) is signed between the builder and the investor that spells out monetary transactions conducted. In case the project fails to launch, this agreement can be used as proof in the court of law to get back the money invested.
Pre-Launch Offer and the New Real Estate Regulation, 2016
The new Real Estate Bill passed in March 2016 aims to provide a lifeline to the customers so that they are not duped by the Pre-Launch offers:
a. Without the necessary regulatory approvals already in place, builders will not be allowed to advertise pre-launch offers.
b. The builder will have to provide information about the project and the plan layout, the status of the approvals, details of the projects completed in the past 5 years so that the buyers can make an informed decision.
c. The project layout as advertised in the pre-launch offer will have to be delivered. Otherwise, the builder may be fined for the same.
Given that investing in a pre-launch project is a high-risk undertaking, the investors should be assured of the credibility of the builder. The investment should be done only when the buyer has enough resources to sail through bad weather. Otherwise, the lack of regulatory approvals that lead to legal hassles might prove dampening to the investor. The investor should do a thorough scrutiny of the proposed project and then make an informed decision about the investment.
Difference between Leasehold property & Freehold Property
Freehold property means, that you own it outright. The building and the land attached, thereby belong to you. The title of the house rests with the “freeholder”. In case of such ownership, the owner has full and undisputed rights to the property.
1. You do not incur annual ground rent and relative expenses
2. There is no timed lease to be worried about
3. The number of participants in the process of ownership is also negligible hence reduces dealing with the various parties
4. While it may have its benefits, the freeholder is responsible for maintaining the property and the land. These costs can be expensive, hence it is recommended to budget for this pre-emptive cost before investing in a freehold property.
Higher Value - The value of freehold flats are generally higher than leasehold properties.
Fewer charges - Freehold owners are not subject to various charges as they have absolute right over the property.
Responsible for maintenance -Since the owners have the absolute right, they are in charge of maintenance and repair of the property. In case of renovations and repairs to the property, the owner is responsible.
Complete ownership -The owner or freeholder enjoys complete and absolute ownership of the property.
Home Loans - It is easier to get home loans for freehold property, provided the title is clear.
Management - Managing of the property is a hefty task, at times it is time consuming and incurs high costs.
Initial cost - For a freehold property, the initial cost is high, as the property includes the land expenses.
Regulatory Costs - The property incurs various costs such as property tax and state tax, however, if the purchase is through a home loan, tax deduction can be availed.
In a leasehold property, the owner or agency gives the property on lease to the lessee for a stipulated period. The ownership rights are with the lessor. The lessee is transferred the temporary right and authority to use the property. Although the lessee has a right, there is certain restriction of sale, transfer or gifting of such properties, and they have to obtain permissions from the owner in that case.
For such ownership, a lessee pays lease premium or annual ground rent fixed by the owner in the contract. While the lessee is not responsible for maintaining the property, he/she will have to share cost for maintenance and repairs with the true owner. In addition, the lessee also will be liable for paying service taxes and related costs.
Properties such as apartments or flats can never be freehold as the land is shared by other flats. Leasing flats are quite popular in metropolitan regions.
Economical - They are relatively cheaper as the land cost paid is lower than in case of freehold.
Credible - When buying due to stringent checks for developers and sellers, the titles are credible and verified.
Tax deduction - The lessee enjoys the benefit of tax deductions on annual income tax.
Mortgage issue - Major drawback includes that, once the property has only 80 years remaining on the lease, its value plunges. In such a case, it is tougher to get a mortgage on such property.
Long process - Process of buying the property is longer, the required clearance from State, owners and the society are time consuming.
Renewal - Renewal of the lease is completely at owner’s discretion.
Converting leasehold property to freehold property
If the opportunity so arises, converting leasehold to freehold is a great option. If the owner is willing to sell, the leasehold property can be purchased directly from him. Some states like Delhi allow such conversion, however, the applicable state rules need to be checked before making the decision.
The conversion process -
1. For the conversion, the buyer (lessee) needs to pay one-time amount to the owner.
2. The amount can be in lump-sum or in equated monthly instalments (EMI), however, EMI will incur regular interests.
3. The state also has a detailed list of conditions for conversion of leasehold property. One such condition is that the leasehold property should possess clear title and there should be no on-going legal proceeding for the same.
4. In case there is such a legal dispute, the property can only be converted post-settlement.
5. The lessee should meet all such regulations for a successful conversion.
6. The lessee and the owner both need to provide adequate proof and documentary evidence such as No Objection Certificate (NOC), etc.
Which one to go for?
If you want the ownership of your property, Freehold is your only choice. But if that is not your priority, leasehold too is a worthy option. Leasehold property comes with a long list of formalities to be taken care of before purchase. Freehold property is comparatively easier. Apart from taking the pros and cons of both in consideration, your choice of either ownership or lease should also depend on the availability of finances – home loans have made this easier – or it aligning with your future plans.
What is meant by Carpet Area, Built-Up Area, Super Built-Up Area
First time home buyers are often misguided when house hunting due to real estate jargons used by the builders and developers. The knowledge of these terms is significant for a profitable investment in a property, especially an emotional investment like first house property. Before you go house hunting, brush up on the following terms, so you don’t get duped. This real estate knowledge will empower you to make negotiations and have a pleasant house hunting experience.
Carpet area, as the name suggests, means the area inside the property where a carpet can be laid and is measured wall to wall. It is the actual space available for use within the property minus the thickness of the wall. This is the measurement you should be aware of before buying a property. The carpet area gives an idea of usable space for each room such as kitchen, living room, bedrooms and bathrooms. Some builders also include balcony and verandas, it is better practice to confirm what entails the area, to prevent eventual buyer’s remorse. Carpet area nowadays is usually around 70% of the built-up area.
Built-Up Area or Plinth Area
Built-up area = Carpet area + walls + utility + balcony. An area after addition of carpet area and thickness of inner walls is called built-up area or plinth area. Walls consist of 20% of the built-up area. Other spaces such as balcony, flower bed and utilities are inclusive and amounts to 10% of built-up area. Thus, 30% of the area is not usable and the remaining 70% is available as carpet area. For example: If the developer says built-up area is 2200 square feet, 30% (660 sq. feet) is the built-up and remaining 70% (1540 sq. feet) is the carpet area.
Super Built Up Area
Super built-up area: Built-up area + amenities and common areas. Also known as saleable area, super built-up area is added to built-up area. This area generally consists of amenities and passage. Developers usually calculate amenities such as the space for pools, garden, passages, etc. within the super built-up area. It is usually calculated by adding 15%- 50% of loading factor* to the carpet area. Home buyers need to beware when developers quote super built-up – their preferred sales tactic – it does not give you an accurate measurement of available living space. The following is an illustration of how builders calculate built-up for flats/ apartments. Flat 1 (F1) area- 2200 sq. feet Flat 2 (F2) area – 1200 sq. feet The common area measures to 1000 sq. feet. F1 share - 400 sq. feet and remaining 600 with F2. Super built-up thus calculated is- F1: 2200+400= 2600 sq. feet F2: 1200+ 600= 1800 sq. feet
Here are certain things you need to be sure of before you make that purchase:
1. There is no fixed ratio of super built-up to built-up or carpet area.
2. Old buildings have higher percentage of carpet area than new construction, where the percentage could be as low as 60 to 70 %.
3. When comparing property quotes, compare them to same measurements, i.e., carpet area to carpet area, etc.
4. Make sure to ask the builder or seller the super built-up is area and what it consists of. Ensure that all the area details are mentioned in Sale Agreement. Minute changes in these details could mean higher purchase price for you, hence you need to be clear of them before buying.
*Loading factor is defined as the area which includes the proportionate share of the common area for a flat which is determined by applying a multiplier to the carpet area.
5. It is necessary for the buyers to remember that as per the regulations of the new Real Estate Bill that has been passed in 2016, the builder has to advertise and sell the property as per the carpet area instead of the super built-up area.
Difference between Builder floor apartment and a multi-storey apartment
The inordinate expansion of real estate has provided people with a variety of options regarding their living spaces. Although visible to the naked eye, not many understand the actual difference between the different types of residential spaces. As potential buyers, it becomes necessary to understand the variety that real estate provides and as such the following will highlight the difference between a builder floor apartment and multi-storey apartment.
Builder Floor Apartment- It is a residential space in a low-rise independent building that has all the amenities of a housing unit. It generally consists of two or four floors.
Multistory Apartment-It is an apartment in a multistoried building in a housing complex, usually constructed by private builders or governmental authorities. The apartment usually consists of many floors as per the layout plan.
The difference between a builder floor apartment and a multistorey apartment can be understood by referring to the following points of comparison, which can round up as advantages and disadvantages of the apartments as well.
Construction - Builder floors are constructed by local builders in the area provided by the landowner. The builder also gets part ownership in the building. Builder floors are considered to be a good investment opportunity by those seeking to renovate their house and at the same time gaining some profit from the market.
Multistoried apartments are usually constructed by government authorities or private builders and then sold to individual buyers.
Finances - A builder floor is on the higher side of the price scale as the builder has to compensate his expenses for constructing lesser number of floors.
A multistorey apartment is cheaper compared to a builder floor as the property builder optimizes his expenses by selling the different apartments to customers.
Facilities - A builder floor does not have the facilities of swimming pool, parking etc. A multistoried apartment is usually provided with the facilities of gym, car parking, swimming pool etc.
Area - Builder floors are spacious as flats are not cramped into one floor. Multistoried apartments, in order to accommodate a number of housing units, have lesser space in the flats. But they are usually provided with more open spaces in the complex.
Service and Maintenance - A builder floor usually involves maintenance of the building with other floor owners. But there is no monthly maintenance charge involved.
A multistoried apartment, as per rule, involves the payment of maintenance charges in terms of gardening, cleaning etc., irrespective of whether those services are actually availed by the residents or not.
Parking facilities - Builder floors need not necessarily have a particular parking area within the building premises. An extra car may be required to be parked outside the building premises. Multistoried apartments are provided with parking spaces for all the residents. Some usually allow parking for visitors as well.
Safety - Builder floors might be prone to security and safety concerns due to unrestricted entry in the absence of a security staff.
Multistoried apartments are usually gated communities with restricted entry, CCTVs and round the clock security.
Privacy - Builder floors have more independence and privacy as one family usually occupies the whole floor. Multistoried apartments have less to offer in terms of privacy and independence as there are usually 3-4 flats occupying a particular floor.
The Choice - The choice between a builder floor and a multistorey apartment ultimately rests with the potential buyer, as while investing in a property different considerations have to be kept in mind in terms of finances, security, services and privacy.
Buying or selling a house involves a lot of investment as well as commitment. As such a property involves a lot of emotional connection as well as financial commitment, it becomes necessary to ascertain whether that property is worth it or not; and that is where the valuation of property comes in.
Property valuation or real estate appraisal means calculating the value of the property at the market value. Real estate appraisals are necessary to ensure that the amount of investment being made in a property is worth it and such appraisals also form the foundation of home loans, taxes etc. Property valuation also helps set, the selling price of a house.
Authority for property valuation
A property valuation or real estate appraisal is done by a certified, state-licensed professional. A property appraiser usually considers factors such as-
1. Recent sale of other properties
2. Replacement cost of the property
3. Operating cost of the property
4. Repairing charges
5. Rental income, if any, that it might earn
A professional property appraiser becomes important in order to have an unbiased third party opinion before, as well as after a home sale or purchase. A professional appraiser uses a few methods for calculating the value of a property.
Market approach - Comparison of the property is done to similar properties that have been recently sold and is usually used for the valuation of the farm, vacant properties and residential properties.
Cost approach- The assessor calculates the replacement cost of the property in reference to the current labour and material charges. The appraiser may sometimes add the value of the land as well.
Income approach- The assessor, by taking into account the operating expenses, maintenance charges and financing terms analyses how much money the property might earn if it is rented out.
Common Considerations by the property appraiser - Property valuation aims to achieve an estimate of the best transaction price for the property. Apart from the mathematical model, the property appraiser also keeps some general considerations in mind while evaluating a property.
1. Qualitative considerations such as condition and infrastructure of the property, location of the property and legal restrictions (if any)
2. Quantitative considerations such as the total area of the property, age of the property, number of other buildings in and around the property
3. The appraiser also does the valuation depending on the locality and the neighbourhood, present political situation of the country as well as economic stability
Points to be kept in mind
The homeowner or seller appoints a property appraiser to understand and estimate the value of the property, as most of the times they are not competent enough to do so on their own. But, home sellers/buyers have to ensure that they do not blindly follow the evaluation given by the professional expert and can keep in mind a few points when their property is being appraised.
Ascertain that the agent has researched the value of the property by using a comparative market analysis, i.e. in relation to other properties sold as well as about to be sold in the market
Ascertain that the agent has asked all the relevant questions related to the maintenance of the property and that a chance has been given to the homeowner to provide a proper justification regarding wear and tear of the property As a potential buyer, ensure that the agent has properly informed regarding any shortcoming or potential difficulty in the property
Ensure that the agent explains the implications of the contract before the submission of any document A property valuation is helpful in understanding the different nuances of the property which sometimes the potential buyer might not be able to see or not be told by the seller. It also helps current homeowners determine the actual value of their property and gives them a scope for figuring out another scope for expansion of investment. The valuation or appraisal reports are also used by the funding agencies to determine whether the funds provided to the borrower are worth it or not. The reports are used by the government agencies to determine the property tax as well.
Difference between Buying and Renting a Property
Buying or renting a property is not just a financial consideration; it is, in fact, a lifestyle decision. Buying a house involves a hefty financial commitment. A prospective customer has to make a choice between spending a part of the monthly income on rent and paying off home loans. We delineate the differences between buying and renting a property with regards to their advantages and disadvantages so as to help you make an informed decision. The difference between buying and renting a house can be understood in comparison to the points as listed below.
Financial aspect - Owning a home offers the possibility of increasing personal wealth, as the principal on the loan is paid over time, giving a chance to build equity depending on the market value. Owning a house makes it into an asset.
Renting a home provides a possibility of being left with more cash in terms of savings than what might be required for to pay off the mortgage after owning a house. But without the possibility of building equity, the rented house becomes just a roof over the head.
Ease of movement - Owning a house may sometimes prove to be dampening, if, after investing the money, one needs to move for job responsibilities. This might prove to be an added financial burden, with paying the mortgage on the house as well as rent in the new place, specifically for those whom company accommodation is not available. Renting a house helps with the ease of movement, as apart from paying the house rent in a new city, no other additional housing cost is involved.
Maintenance - Owning a house means that the owner has to take the responsibility of the maintenance of the house. The maintenance has to be done keeping in mind the living conditions at present along with the future prospect of maintaining the market value of the house in case of reselling. Renting a house means that all the responsibilities regarding the maintenance and repair of the house rest with the landlord.
Owning a house vs. renting a house - Both owning a house and renting a house comes with their set of advantages and disadvantages which are delineated as follows.
Advantages of owning a house - Paying off the mortgage usually mean hassle-free living in terms of financial considerations relating to the house. Given that the house is an asset, it can be used for funding other investments Any changes or renovations as preferred by the homeowner can be made without being answerable to anyone
Flipside of owning a house - Given that owning a house is a big financial investment, one needs to be sure about whether they can afford it or not. One has to be prepared for a fall in the market value of the house. Going over the top while buying a house means there might be a need to cut down on other expenses like extravagant holidays or frequent outside meals one needs to be prepared for the extra expenses incurred in terms of maintenance and renovation.
Perks of renting a house - Renting a house provides a/b flexibility of movement in case of sudden change of job. It does not require a long-term commitment on the part of the tenant. Renting provides an affordable opportunity to live in an area or building which might be too costly to buy. Renting makes moving out of the house easier
Downside of renting a house - The tenant is bound by the rules mentioned in the lease agreement and does not have the freedom to make structural changes to the rented apartment. Renting a house does not provide the opportunity for return on investment on the house as the money/rent goes to the fund of the landlord. The tenant has no control over the rent amount fluctuations, which are decided by the landlord. No protection against non-renewal of lease when the term of the agreement expires
Benefits of tax on home loans - Although home loans come with the burden of EMIs’ (Equated Monthly Instalment), homebuyers are provided with a breather in the form of tax benefits on home loans. However, it is very important to keep in mind that the tax benefits on home loans can be availed only on fully constructed properties.
Tax Benefit under Section 24 of the Income Tax Act
For those with self-occupied house property, the tax benefit that can be incurred for interest on a home limit is limited Rs.2,00,000, irrespective of whether the property is self-occupied or vacant
The deduction is available on loans taken for purchasing a fully constructed house or for constructing a house. The purchase or the construction has to be completed within three years of taking the loan from the end of the financial year
The deduction of interest on loans taken for repair or reconstruction is limited to Rs. 30,000 As per the Budget of 2016, if a property is not acquired or completed within 5 years of availing the loan from the end of the financial year, the interest benefit would be reduced to Rs.30000. This is a relief to the buyers in a way as the earlier cap used to be 3 years.
Tax Benefit under Section 80C
Section 80C provides the benefit of a claim of the portion of EMI which goes towards principal repayment. The deduction limit under the tax benefit of this section is Rs.1,50,000. It should be noted that this is a combined cap for all the investments that are clubbed under Section 80C such as EPF (Employee Provident Fund) etc. The amount paid as stamp duty charges and registration fees is eligible for deduction under this section
Tax Benefit under Section 80 EE
The Budget 2016 has provided for the following benefits under Section 80 EE- An additional deduction of Rs.50,000 for the first time home buyers on properties valued less than Rs.50 lakhs and on loan amount Rs.35 lakhs sanctioned between April 2016 to March 2017
A running common belief is that rich people, who have enough money at their disposal for this generation as well as others to come, do not need to avail home loans. With the cash at hand, they can readily afford to buy the property they want without the hassles of bank approvals. But reality suggests that it is advisable for rich people to take up loans as well.
Depending on the market trend, they are more likely to get a lower interest rate on a huge amount and as such will have the opportunity as well as the financial ability to invest in other ventures and expand their financial interests. Banks also look forward to attracting rich clients towards their home loans as they are least likely to default on their payment. Taking out a home loan means that the rich become eligible for tax benefits under the Income Tax acts as well.
The decision about owning a house or renting one depends on the comfort and vision of the individual’s life. However, housing markets and life circumstances are too varied for any outsider to make a generalized statement regarding the best option. Future buyers or tenants can only be provided with an idea about the situation, the ultimate decision is at the customer’s discretion.
Steps involved in buying a house
Checklist that needs to be considered during a site visit and buying a house
Buying a house is one of the biggest investments thus, it is important to get it right. Knowing the right questions to ask and the necessary inspection to be made is the right way to ensure that the investment being made is worth it. The following checklist can be prepared by a prospective buyer regarding the aspects of the house that need to be looked into.
Financial aspect - Before investing in the house, the buyer should ask the seller of the house if the place is involved in any financial liabilities so that the position of the buyer is not affected once the house is taken possession of.
Maintenance - There is no house that does not require maintenance of sorts. As prospective buyers, it is advisable to conduct a thorough check of the house to see whether all parts of the house are easily accessible for repairpersons to work on in case of emergencies. Also, ensure that there are no persistent plumbing problems.
Location - It needs to be checked whether the area where the house is located has all the amenities such as schools, grocery shops as well as easy availability of transportation. It should also have a running water supply, electricity, and should not be a flood-prone area. The buyer should also take a note of whether or not street lighting is available in the area.
Bedroom - Whether or not the bedroom will be affected by noise factor, light factor or any other factor that might cause a nuisance to the inhabitants should be looked into. The temperature of the room throughout the year must be considered. If the bedroom is fully furnished, then its quality must be checked as well.
Kitchen -Whether the pipe connected to the basin and the sink is working properly and that the water in the basin dries up quickly needs to be checked by the buyer along with the availability of proper gas connection. The kitchen cabinets should also be checked to verify if they are spacious enough or not.
Bathroom - The buyer should check whether or not the taps and showers are without leakage, the working condition of the flush, the existence of an exhaust fan as well as the supply of running water.
Outer property - You should take a tour outside the house to take note of the condition of the paintwork, significant cracks in the wall and signs of dampness.
Drainage - A thorough inspection should be done to check whether a proper drainage system is available in the house. Lack of a drainage system might lead to flooding from a partially blocked sewer.
Insulation - Check for the presence of proper insulation in the ceiling space, walls and under the floor.
Unkempt conditions - Check for evidence of cracked windows, unhinged doors or doors that don’t close properly and the condition of the wall and the ceilings.
Furnishings - There should be clarity whether floor coverings, curtains, blinds, air conditioner and heaters are included in the contract within the price range of the house.
Legal Documents -One can insist for a report from a builder or an engineer regarding the condition of the house and if not found satisfactory, the contract can be cancelled. The buyer should also hire a proper lawyer to ensure that all the documents are in place and valid.
The checklist is a helpful way to turn the house into a home without rushing into and not letting the heart take control over the head. No house is perfect and it is in the buyer’s best interests to find the shortcomings early on so that there is no regret after moving in or extra expenses in renovating the house.
Steps involved in buying a house
Buying a proper house is a major financial and emotional commitment. This means that buying a house cannot be a hasty decision. It has to be planned and executed properly so that there is no remorse on the part of the buyer. Below is a list containing important steps that need to be kept in mind while going for that dream house.
It is usually recommended that people should look for homes that do not cost more than four to five times their annual household income. This is because prospective home buyers are usually asked for 20% of down payment. The best way to go forth for buying a house is to get pre-qualified for a mortgage and this can be done by providing certain financial information to the banker. Depending on the information provided, the bank will inform about how much money can be lent and this will help the individual narrow down their choice about the kind of house they will be able to afford. The individual should be assertive enough to not let the lender determine a monthly amount that will not be affordable.
Find the builder
An individual should have an idea about the kind of builder they would like to work with. While looking for a builder, the individual should have a few points in mind.
1. A builder with a list of estimates should be avoided. Always ask for fixed prices and a direct comparison with other properties in the area.
2. Keep an eye out for discount prices and bonus inclusions. However, at the same time be aware of fraudulent schemes because sometimes offers which are too good to be true are usually not true.
3. It is necessary to ask the builder if they will build the house as displayed in advertisements and at an itemized cost. This becomes necessary as many builders do not construct the houses as advertised.
4. Keep a close watch on the construction process and also on what is covered by the builder’s warranty. Sign up for lien releases so that the sub-contractors etc. are properly paid and no loophole is left for being sued for unpaid bills.
5. As the Real Estate Bill passed in 2016 makes it mandatory for the builders to provide details about the projects completed in the past five years along with the other structural data, it is suggested that the buyer should ask for such information from the builder.
Selecting the property -
Just because a property looks good in an advertisement and is coming good on the budget does not necessarily mean that it will be feasible for the customer. Following things need to be kept in mind while selecting a property.
1. Location and neighbourhood- A property which is far off from the workplace, educational institutions, hospitals and other necessary locations will not be beneficial in the long run. The neighbourhood in which the property is located is also very important. A safe and comfortable neighbourhood is necessary for security concerns.
2. Transportation- It is always advisable to select a property that has public transportation nearby and also does not involve much of self-driving to regular places, including the workplace. Otherwise, excessive transportation costs get added to other expenses including the mortgage.
3. Proximity - Proximity to regular leisure activities, restaurants, friends and family is an important criteria in the selection of a property.
Factors in buying a house -
While buying a new house it is necessary to take several factors into consideration.
1. Long haul- It is necessary to invest in a house in which the individual sees themselves living for a number of years. Otherwise uprooting one-self continuously puts an emotional as well as financial strain.
2. Affordability- Keeping in mind the current and future expenses, it is necessary to not exceed the bank account and only go for a house that can be afforded while leaving enough money for other expenses.
3. Adaptability- A house that can be adapted to the necessary lifestyle changes is a good investment. A house that is multi-functional for years to come saves on a lot of expenditure as well.
4. Type of house- It is necessary to have one’s preferences sorted regarding the kind of house they would like to live in. Money should be invested in a place that makes the customer as well as their family lead a comfortable life, financially as well as psychologically and emotionally.
Real Estate Agent
A real estate agent is not a necessity, but rather a tool which makes the process of buying a house easier. Real estate agents are aware of the market and will guide the buyer towards the proper home They can provide with helpful information about the property, information which might not be accessible to you otherwise
A proper real estate agent is one who is ready to answer any question that may be asked by the prospective buyer
Offer for the house
Making an offer for a house is based on faith, a belief that the house will make the buyer comfortable and happy with the hole in the pocket. While negotiating with the seller it is necessary to remember to be not too stingy yet in tune with the price range. Once an offer is made on the price of the house to the seller, there is the probability of a negative as well as positive reply. If the response is in positive, it is not necessary to close in on the deal immediately.
Home inspections are contingent with the purchase offer as it allows the prospective buyer to look for structural damages to the building or any other damage that might not have been pointed out by the home seller. This gives a chance to the buyer to negotiate the offer or withdraw one if significant damages are noticeable. The buyer can also decide if they want the seller to make repairs to the house before finalizing the deal.
A sale can be closed by the buyer if the house is found to be satisfactory financially as well as structurally. The closing of the sale involves signing of the necessary paperwork, including the loan papers. The process usually takes a couple of days. The closure of the sale involves the payment of the previously decided down payment. Once all the payments have been made and the paperwork sorted, the individual is allowed to take possession of the house. The points listed are just an attempt to make the process of house hunting easier by listing out ideas that might help the prospective buyer.
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