Adopting a checklist approach can help you avoid errors and save time and money while buying your dream home.
When two colleagues at a software company, Mayank Patil and Sundar Iyer, decided to purchase a property in the suburbs of Mumbai, they had a different set of experiences altogether. Over the next eight months Mayank got into a number of challenges like lack of clarity on title of property, bank refusal to fund the project, delays by the builder in getting basic amenities. On the other hand Sundar started his house hunting with a seven points checklist on the key points to address while acquiring the property. Not surprisingly, Sundar’s journey was a lot simpler and largely hassle-free. In traditional Indian parlance there is aphorism that - “Marrying off your child and building a house are the two biggest challenges that a man faces.” But if you plan and execute the purchase of your property like Sundar instead of Mayank, chances are that your journey will much smoother.
Here is the seven point checklist that Sundar opted for while purchasing the property.
1. Does the property fit into your budget, tax framework and financial plan?
When you buy a property, banks will be willing to fund the property. Most banks and home financing companies will finance up to 80-85% of the cost of the property. The balance will have to be brought in as your equity margin. Ensure that you have these funds available with you. Secondly, check your CIBIL score, which is offered online for a small fee. If you CIBIL score is high in the range of 750-900 you stand a much better chance of getting a loan at different loan providers. Thirdly, ensure that you can afford to pay the EMI. The thumb rule is that your EMI for the home loan should not be more than 40% of your net take home salary after considering your routine expenses. This is also the criterion that the banks will use while financing like five times of your gross salary. Lastly, ensure that you are able to get the full tax benefits. There is a tax exemption of Rs.200,000 under Section 24 for interest on home loan, an additional deduction of Rs.50,000 for first-time buyers and an outer limit of Rs.150,000 under Section 80C for principal repayment. You need to structure your EMIs in such a way that you are able to make the best of all these provisions.
2. Check the location and amenities of the property
This may appear to be quite elementary, but a little bit of focus can save you a lot blushes later. Ensure that basic requirements like provisions, vegetables and other household needs are just a stone’s throw away. The closer your property is to a bus-stop or railway station or metro station, the more convenient it is for you to commute efficiently. Ensure that getting from your house to the city centre or your office does not involve too many traffic snarls and road chokes. These minor issues can make life a lot easier when you move into your new house. Also check out the water supply, sewerage and electricity connection agreements and approvals from the municipality.
3. Check out the rental potential and resale value prevailing...
When you buy property, there is a strong investment angle to it. As an investment, there are two things you need to consider. What is the rental value of a similar property? The rental value in most cities ranges from 3-5% of the value of the property per year. The higher the rental potential as a percentage of the price you pay, the better it is. Secondly, you also need to evaluate the re-sale value and potential of the property. You may always need to move to another city and you do not want to be stuck with an illiquid property, nor do you want to do a distress sale. Above all, you also need to ensure that you are not left with negative equity; meaning your loan outstanding must not be more than the value of the property.
4. Understand the actual cost of the property you need to pay
Buying a property can be quite a nuanced affair. What your builder or seller tells you is the cost at which he is willing to sell the property. There are other adjunct costs that can add up to quite a bit. The registration cost is about 1% of the value of the property while the stamp duty varies by state and can add up to 2-4% depending on the state in which the property is located. Most builders impose additional costs like building fund, club fees, gymnasium membership fee, car parking charges etc. In addition, you may also have to bear additional costs like estate agent fees, land surveyor fee, notary charges, legal opinion fee etc. Add all these up to get a picture of your actual cost. More importantly, understand the difference between carpet area, built-up area and super built-up area. Most builders quote the price based on super built-up area which includes common corridors and common space. What you must understand is the carpet area which is the area you will actually get to live in.
5. Check that the title deeds and paper work are crystal clear...
This is the most important step. Ensure that the title deeds of the builder/seller are clear. You can check these link documents at the office of the sub-registrar. Ensure that there is no encumbrance, pending legal case, property dispute or lien on the property. A lawyer can help you check these items for a nominal fee. Remember, your financing bank will do all these checks but it is always safer that you also get these checks done independently. Any deficiency can lead to problems when you try to sell the property later. Also once you make the initial payment ensure to get the allotment letter if it is a builder and an “Agreement of Sale” if you are buying an existing property. Your purchase of property will be completed only after the sale deed is executed and registered with the registrar. Normally, this sale deed will have to be hypothecated with your financier and you can keep a photocopy of that.
6. Executing the purchase and follow up activities
Once you take possession of the house, immediately inform the bank as your tax benefits will kick in from that date. The period prior to that has a different tax treatment as pre-construction period. With the sale deed, you can register the property in your name. At this point you will have to pay the stamp duty, so prepare yourself financially for the same. Once the property is registered in your name, the payment of municipal taxes on that property becomes your responsibility. You need to ensure that municipal taxes are paid on time without fail, as it is an important proof of continued ownership.
7. Possession and future maintenance...
Remember, the builder is responsible for maintenance of the building for a period of 18 months after the Occupancy Certificate (OC) is given. Also remember to get a car parking allotment letter with a map of the parking lot. By the end of the 18 months, the builder along with representatives will initiate the formation and registration of the society, which will elect its representatives and take over the management of the society from then on.
What Sundar managed to do was to adopt a more methodical and checklist approach to buying a property. This enabled him to plan his property purchase much better, saving him the hassles. Here is a 5-point summary of the points that you need to consider as a property buyer:
• Check what you are able to buy and the best deal that banks can give you
• Compare properties, estate agents, financiers and pick the best deals
• No laxity on paperwork. The devil lies in the details, so get involved in the detailing
• Ensure the property adds value in terms of location, resale price, amenities etc.
• House is a long term investment. So, envisage your needs for the next 10 years.
This quick check list helped Sundar through his property buying journey. It can help you too!