Buying a home? Beware of builder's pre-launch offers

Price of booking a flat in a pre-launch offer can be 25-30 per cent lower than market rate, but there is a risk of the project getting delayed or, in extreme cases, even cancelled.  

Buying a house at a price 20-30 per cent lower than market rates can be tempting. Which is why many buyers book houses in projects that are sold even before all clearances are in place.

Given the inordinate delay in getting these, there are instances of builders accepting bookings before they secure all the requisite approvals.

However, such properties could run into problems such as delay in completion, or a rise in construction cost or the entire project getting cancelled owing to clearances not coming through.

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Anuj Puri, chairman and country head at Jones Lang LaSalle (JLL) India, says the occurrence of developers accepting bookings without clearances is largely seen among non-listed players. "Instances can be seen in many Indian cities, particularly in emerging peripheral areas, where smaller developers have a tendency to acquire small plots, develop projects and sell these off as fast as possible to capitalise on pent-up demand.”

He further says that Mumbai presents a rather unique case in point, since the project clearances pipeline has narrowed considerably on account of the new development norms.

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A project requires different kinds of approvals and sanctions from various civic agencies and government departments.

These include the city development authority, land department, Airports Authority of India, the National Monuments Authority, defence ministry, power and water departments and so on. There would be as many as 40 to 50 clearances.

Sachin Sandhir, managing director, Royal Institution of Chartered Surveyors (RICS), South Asia  says, "A developer by law is not allowed to take any amount from prospective home buyers before getting all the clearances for a project.

However, often, it is seen that money is being collected from prospective buyers via a channel of brokers and investors.

The practice is usually prevalent in north India. Haryana and Punjab have already put a ban on this practice, by licensing the brokers and dealers and introducing amendments within the Apartment Acts." 

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RICS covers all aspects of property, construction and associated environmental issues.

One reason for this is the absence of an operational real estate regulatory authority, says Anuj Nangpal, managing director (investor services) at DTZ International Property Advisers. "In the existing framework, a builder can accept bookings even before commencing construction on the project. However, before commencing construction, the developer is required to obtain the necessary approvals and clearances from the respective authorities."

In cases where the developer has begun construction without obtaining necessary clearances, the authorities may put a stop-work notice.

Sometimes, the developer may also be required to pay a penalty for initiating construction sans clearances.

These can lead to delays in completion of the project, says Nangpal.

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What should buyers do?
Look into the record and reputation of the builder. In the case of a reputed builder, even if the project gets delayed, at least you can be sure of getting the flat, says Ravi Ahuja, executive director at Cushman and Wakefield India.

Before booking any flat, buyers must ask for the Intimation of Disapproval (IOD) and the Commencement Certificate (CC).

IOD will have the list of approvals from various authorities such as the pollution control board and the departments of traffic, fire and environment; it also lists the reasons why the project has been disapproved or approved.

CC is the proof that the builder can start construction. Sometimes, these certificates come in phases such as IOD and CC up to plinth level or up to the eighth floor and so on. As construction progresses, the builder will get it for higher floors.

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Sometimes, the builder might have clearance up to the plinth level or up to say, eight floors, but offers flats at a higher floor, in anticipation that clearance for higher floors will come.

However, there is no such guarantee. So, while booking your flat, it is advisable to book only up to the level for which the project has received the IOD and CC.

"In some cases, the builder might say you can shift to a higher floor when the clearances come through. By then, the prices may go up. That is a risk the buyer has to take," says Ahuja.

If you are buying the property through a bank loan, then you can rely on the diligence done by the lending bank to a large extent, says Puri of JLL.

But it might still fall short of complete accuracy, for various reasons. So, it is advisable to ask the developer for all documents related to his rights on the plot, as well as legal permission to construct and market the project.

For this, you can consult lawyers who specialise in property-related matters.

Ideally, unless you are an investor, it is advisable to avoid investing in pre-launch projects.

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Says Sandhi of RICS, "It is often seen that projects may take at least six months to a year for its official launch. In such a market, where project delays are now a common phenomenon, it is advisable to invest in a project, where one can see some construction on ground."

Despite such precautions, there might be regulatory changes mid-way through the project, which could lead to cost escalation or delay. In such cases, there is nothing much one can do.

"Builders prefer to raise funds through pre-booking because the cost of funds works out much lesser than bank loans. That is why the prices of such properties are much lower. But in the absence of a single-window clearance system, it can take up to 18 months before the builder can actually start construction.  

However, once the new housing bill is implemented, such practices (of builders accepting booking before clearances) will stop," says Ahuja.

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Step by step

*Pre-launch booking is a way for builders to raise cheaper funds

*Such properties are 25-30 per cent cheaper than market rates

*If clearances get delayed, construction will be delayed and project cost will go  up

*In extreme cases, project can get cancelled

*Always ask for IoD and CC as proof that builder has got clearances

*Consult a property lawyer for due-diligence of the project