After the failed predictions over the past couple of years about a fall in property prices, you are more likely to witness the prophesied Second Coming before the promised correction. So what should cash-conscious buyers do? Wait endlessly in the hope that realty prices falter or take the bait of glossy schemes offered by developers? While most such offers for new houses seem tempting, you won't derive any real benefit. Fortunately, there is a third option: cheaper flats in the resale market. No, these aren't old, mouldy apartments in decades-old projects. Quite a few of these houses have not even been lived in, but you can get them at a discount to similar houses within the same project or vicinity.
If you're wondering why resale flats are cheaper than the new ones being offered by the developer, it can be due to various reasons. One of them is that these houses have been snapped up by buyers and investors during the pre-launch phase with the intention of selling them after about three years to earn a profit. At this stage, they were only required to make the down payment. "Many investors book a property at the initial stage just to make a small profit. If they want to make a quick exit, they will price it cheaper than the one offered by the developer, for a faster sale," says Yashwant Dalal, president of the Estate Agents Association of India, an apex body of real estate developers.
Another reason is that a lot of investors who book flats during soft launches are offered heavy discounts by builders. So, even if such investors sell the flats at a price lower than the one offered by the construction company, they make a hefty profit.
While individual buyers readily make the down payment, a few find out that their finances are strained when they have to start paying the home loan EMIs after the construction is complete, especially if they are also paying a rent. The only option is for them to sell the current house as quickly as possible to repay the home loan, even if it means earning a smaller profit than the one they had hoped for. How you gain
The biggest benefit of buying in the resale market is that the construction is almost complete and some of the houses are ready to move in. Of course, in this case, you will also know that you are getting exactly what you are paying for. You can be sure that you won't be duped by the developer, who promises to install marble or wooden flooring and, instead, puts in regular tiles. Another advantage is that you can avail of the tax benefit beginning with the first mortgage payment. The tax deduction of 1 lakh on the principal component of an EMI is available under Section 80C, while the interest paid on a home loan is tax-exempt up to 1.5 lakh under Section 24B. However, this is possible only after you take possession of a house. In case of a property under construction, you have to pay the pre-EMI, which is the interest on the home loan. Though the total interest that you pay as pre-EMI can be tranched into five payments that are eligible for tax exemption for five years after you take possession, they are included in the capped amount under Section 24B. So there's hardly any benefit in this case. Problems you may face
In the resale market, the down payment is higher than that demanded by a builder, which is usually 20% of the value of the property. Also, the seller may ask for a portion of the selling price to be paid in cash, which means that you will have to apply for a smaller home loan. So, you should be sure that you can afford to pay 25-30% of the price.
Also, when you buy a property in the resale market, you are dealing with an individual rather than the developer, who has a reputation to protect. "You can't take anything at face value here, so you must thoroughly scrutinise all the property documents, especially those that verify the seller as the real owner of the property, who has the right to dispose it of," says Om Ahuja, CEO, Residential Services, Jones Lang LaSalle India.
Beyond the sale price, there will be additional costs that you should factor in, such as registration costs and transfer fee to the housing society. Before taking over the house, make sure that the seller has paid all outstanding dues and taxes. However, to get the utility connections transferred to your name, you will have to pay a fee to the relevant state departments or municipal authorities.
Though these houses are practically new, you may want to carry out renovations or changes to suit your taste. So, include such costs while finalising your budget.
There could be other minor issues like not getting the membership to the society's club because it is full or the lack of parking space. "If the first buyer did not buy the parking space, the new buyer may not be able to get a new parking lot even if he is ready to pay for it," says Ahuja. The situation may be worse if your family owns more than one car. What if the property is mortgaged?
If the house is already mortgaged with a bank, you should ask the seller to obtain a letter from the relevant bank stating that it agrees to relinquish the property documents when the loan is fully paid.
After you are satisfied with all the property documents, you can make a token payment to the seller and enter into a registered agreement with him. You can then deposit the balance payment to the seller's loan account, after which the bank will initiate the process of releasing the documents. The bank and the seller will fix a date by which you will have to make the full payment. If you are unable to do so by the due date, the bank will levy either a penalty or a premium over and above the outstanding principal, which you will have to pay.
If you plan to take a home loan to pay for the house, your bank will directly transfer a portion of the outstanding amount to the seller's loan account. Once the seller's bank receives the payment, it will issue a 'no objection' or 'no dues pending' certificate to the seller and hand over the original documents to your bank, which will then transfer the balance payment.