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Selling an under-construction property? Ask these questions

It is a good idea to book profit even before the property is being built. But be careful when you are selling it at that stage, as it is a complex transaction.

Sukanya Kumar

Real estate has been a rewarding asset class for many savvy investors over past decade. Buying a property at pre-launch stage and then selling it to an end consumer at a profit has been a source of substantial profit for many investors. Some even do not want to wait till the possession of the property and end up flipping their property when it is getting built.

However, the transaction at ‘under-construction’ stage means a lot of complications. When an investor wants to sell his under-construction property to a new buyer for making profit on his investment, then he assigns the rights of the property completely to the new buyer in exchange. This transaction requires the builder also to be a party as the first buyer has neither paid the full consideration, nor in possession of the property. This tripartite (Assigner, assignee and builder) is called an "Assignment Deal".

To add more to the confusion, the investor or seller may have availed a loan and the buyer too may be taking a home loan to fund the purchase. It means there will be total five parties to this transaction – the buyer, the seller, the builder, the banker of the seller and the banker of the buyer.

Sounds confusing? Hold on. Earlier I have written about the questions the buyers should ask when he is getting into such a transaction. Today I will share the questions the seller of an under-construction property.

Here are the questions an Assigner (Seller) should ask:

1. Do you (buyer) have your self-contribution amount readily available or you need to liquidate the same?

This is a very important question we forget to ask. Buyer pays a token and blocks the property for very long time, giving reasons like he is waiting for the stock market to rise so that he can sell his mutual funds and shares, or waiting for his own property to be sold before he pays the seller more money, which are scary. Please ask this question directly without any hesitation as your loss of opportunity may cost you high in case this deal gets cancelled due to delay.

2. Are you (buyer) are planning to take a loan? If yes, do you already have the sanction letter? Does it have any special conditions which you may not meet such as closure of some other loan to be eligible for the desired loan amount?

Everyone aspires to take a home loan. But one can never be 100% sure that he will get one. The rejection could be for multiple reasons. Here's a link which gives you a host of reasons why your loan can be rejected.

3. If the assigner has a loan, will the assignee be willing to close it with his self-contribution funds?

Sometimes this seems to be an easier solution, but the lender of the buyer may have issues with it as they need money receipts from the seller along with buyer's bank statement as proof that he has paid the seller his own equity. Paying of the seller's bank loan may not stand as a valid document there. Your mortgage adviser will again come in handy in sorting this out for you with your lender.

4. If the loan amount of assigner is large and does not get covered with the self-contribution amount, will the lender of assignee be willing to takeover the vendor's (assigner's) loan?

A vendor takeover loan is the essence of the assignment transaction if both or even one party is borrowing. This need a lot of structuring, designing the process-flow and lots of documentation. Since the title of the property remains with the builder and the first loan cannot be closed before the second loan is disbursed, a conditional NOC (no objection certificate) is required to be obtained from builder. Since builder has already issued an NOC to the seller's bank, the explanation has to be proper and timeline of this transaction has to be strictly met. The risk of having two loans in the same property is a very uncomfortable situation for all parties, especially the lender(s). You will need your mortgage adviser here for sure for an unhindered transaction.

5. Who all will be jointly holding the property during transaction? How are they related? Is bank loan possible, if they are distant relatives, in-laws or non-relatives?

This is a question which is never asked. We come across many loan applicants who want their brother, married sister, in-laws, aged parents, brother-in-law and people staying in far away locations(where the lender may have not branches for operation) to become a joint property owner. These are mostly unacceptable by the relationship grid and geographical limit the lenders follow. The choice of lender becomes further skewed as all co-owners are mandatory co-borrowers; hence distant relations etc. better be avoided. And friends are a complete 'no'. You can borrow on a property which is jointly owned with your friend in India.

6. What will be the penal clause if the assigner fails to assign the property even after fulfillment of payment made by the buyer within committed time?

This, unfortunately has no recourse. If the seller backs out, he is in the most advantageous position. He has the buyer's money, may be loan partly / fully pre-closed, holds the property title in books of the builder and whatever you write on the MOU as penal fee, may not get recovered. You will have to do the transaction in good faith and better close it very soon before he starts getting better offers, as that mostly is the reason for such back-outs.

7. What will happen if the new buyer backs out after seller pays the transfer fee to the builder? Is it reversible?

The builder decides whether they want to return the transfer fee, which in most instances may not be the case. We would suggest the seller to request the builder to hold on to the fee for using it till he finds a new buyer.

The most important things in assignment transaction is the speed in which it is smoothly closed by keeping all parties involved and informed in advance, on the steps.

Do an educated transaction & never be surprised during the deal and avoid stress.

Happy investing in real estate!
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