By Roopen Roy Mar 01 2016
The average Indian saves for a dream home. A large part of his lifetime income goes into the purchase of a roof over his head. The pradhan mantri awas yojana embodies the assurance of the government to address housing needs of all in a timebound manner. In his latest Budget speech for 2016-17, the finance minister has provided several tax incentives. For the ‘first-home buyers’ he has proposed deduction for additional interest of Rs 50,000 per annum for loans up to Rs 35 lakh sanctioned during the next financial year, provided the value of the house did not exceed ₹50 lakh.
But is first-time homeowner’s dream fraught with risks that he does not understand? What happens when an unscrupulous real estate developer operating in a relatively unregulated industry raises money, but fails to deliver the promised dream home? Are nightmares common or do they happen in very rare cases? Well unfortunately, it is rather widespread prompting the government to consider stepping in.
At the beginning of 2016, the promoter of the realty firm PACL Shree Nirmal Singh Bhangoo landed up in jail for cheating crores of people through a network of 30 lakh agents. He collected around Rs 49,100 crore. Earlier, Unitech chairman Ramesh Chandra, along with his two sons, Sanjay and Ajay, was sent to judicial custody for three years. Unitech was an iconic real estate company and the news came as a shock to many. They neglected to refund the money after failing to deliver apartments despite the court’s warning.
Next came the Mantri Group. The Bombay high court has directed an official liquidator to take physical possession of all assets, books and records of real estate company Mantri Realty.
This is how unscrupulous developers generally mislead homebuyers and investors:
They print glossy brochures and create enticing websites. They hire foreign models who pose before swimming pools, furnished apartments, lobbies, clubs and green areas. Most of the photographs are taken in either 5-star hotels or other plush properties abroad or are presented as ‘artists’ impression’. There is never any intention to meet the specifications presented in the sales collaterals and sometimes the fineprint says so.
The terms of sale are invariably loaded against the buyer. A large part of the purchase price of the flat is taken upfront or in quick successive instalments. This money finances the real estate operator at zero cost, therefore, there is no incentive to complete the project on time or obligation to pay a penal interest if there is a delay in construction. In some cases, against a seemingly attractive discount, the entire price of the flat is taken as down payment leaving the buyer with very little leverage or recourse. The pitch to an investor in flats is somewhat different. He is lured with imaginary capital appreciation on sale or promised assured rentals from the property.
The most common complaint of consumers against builders is the delay in handing over flats. In a recent judgement, which went in favour of flat allottees, the national consumer disputes redressal commission ordered Parsvnath Developers to pay monthly penalty to buyers for delay in handing over flats in Parsvnath Planet, a residential project. The complainants with flats up to 175 sq metres will get Rs 15,000 per month and those who paid for bigger flats will get Rs 20,000 each month.
Apart from delays, there are other risks that can turn the dream of a sweet home into a pure nightmare. The first risk is the absence of a clear title. Small investors or first time homeowners do not check whether the builder has a clean and perfect title. A common ploy is to show, but not hand over, a search report by a small-time local lawyer claiming that a search on the title has been performed and the title is clean.
The second risk is the change of horses mid-stream. The original developer-builder sells his interest to a third party without the consent or knowledge of the investor/ apartment owner and vanishes from the scene. It is not unusual for the new developer to complain about the shenanigans of the original developer and ask for more money to complete the project. Faced with the prospect of delays, the homeowner reluctantly agrees.
There is urgent need for regulation in this sector. We need clear and transparent rules of the game. We also need an umpire who will ensure that the rules of the game are interpreted and enforced in a manner that is fair to both sellers and buyers. In this session of Parliament, it is expected that the real estate (regulation and development) bill, 2015 will be passed. It calls for the establishment of an umpire to be called “The Real Estate Regulatory Authority” in states or Union territories to regulate real estate transactions.
The bill also makes it compulsory for builders to deposit 70 per cent of the amount raised from buyers into an escrow account in a scheduled bank within a period of 15 days to cover the construction cost of the project for timely completion of the project. Another major provision is the inclusion of the same rate of interest to be paid by the promoters and buyers in case of default or delays. Currently, the builders charge a higher rate.
The bill has also proposed a jail term of up to three years or penalty or both, in case of builders. It also includes one year of jail term for real estate agents and buyers if they violate the orders of the appellate tribunals. Most importantly, it envisages the establishment of fast track dispute resolution mechanisms for settlement of disputes through adjudicating officers and the appellate tribunal.
The real estate industry is crucial for India. Our country needs millions of new homes for its citizens. It is an industry that can create millions of jobs and have a multiplier effect on our economic development. But it needs to be regulated in a fair manner so that it can achieve its full potential.
(The author is founder and CEO of Sumantrana,
a strategy advisory)
Chez Roopen >