Do’s and Don’ts of Real Estate Investments

do-and-dont

Real Estate investment has always been a lucrative option. It attracts a lot of investors for building on wealth as it promises good returns. Real estate covers housing, retail, hospitality and commercial sector.

The decision to invest in real estate requires a careful analysis of the

  • economic conditions
  • investment policies 
  • availability of funds

People invest in real estate for various reasons like:

  • Stable income (rental)
  • High Returns
  • Portfolio Diversification

Like all other investments, e.g. stocks, shares, mutual funds, etc., real estate investment has its share of risks. The risks can be minimized by taking reasonable precautions beforehand.

Read more: Increasing Benefits of Real Estate Investment in India

There are some dos and don’ts which can help to take the decision prudently to invest in real estate: 

  • Investment in real estate takes time to generate income and is highly illiquid. It is essential to ensure that there is enough cash to survive the lock-in period. The property should not become a liability. One should have sufficient savings required to deal with hidden expenses like government dues, taxes, maintenance charges etc.
  • It requires careful planning to ensure availability of funds for real estate investment. Unlike other forms of investment like stocks and shares, the risk is more. There is much more to lose than the amount invested. 
  • It is advised to understand the property where one intends to invest. For example, it is good to know if the investment is fruitful in residential or commercial real estate. 
  • It is better to go for investment in various properties than to concentrate on a single one. A person can distribute the investment in multiple properties as per the budget. A mix of residential and commercial real estate is better if finances permit.
  • It is not uncommon to find that real estate investors prefer to take professional help and legal assistance as the amount involved is huge. It also helps to handle the risk appropriately. 
  • Do not expect quick returns in the real estate market. The benefits are reaped in the long term.
  • Miscalculations and myths are common in the property market. Always collect the information from reputed sources. It is better to approach the professionals or business analysts or financial advisers, who are well informed and knowledgeable about the property market. The expected change in the market price of the property has a lot of influence on the decision of investment.
  • Do not invest simultaneously in various properties unless there is sufficient backup. Cash flow is restricted once the money is invested in real estate. It is significant to be wise before we chose the properties. One should invest in the second property only when the first one has started generating income. 
  • Always talk to property dealers or regular investors if you are a novice in the field. Taking legal advice and professional assistance proves fruitful.

Read more: NRI investments in Indian real estate sector

NRIs Alert! Buying property in India? The guidelines

NRIs-Alert-Buying-property-in-India-The-guidelines-1

What can be better for an NRI than having a hand in the growth and prosperity of his motherland? 

Perhaps nothing is better than it. It motivates NRIs to invest in India.

NRIs buy property in India as 

  • It helps them to stay connected to their roots
  • It is an investment opportunity 

Investment decisions are generally guided by profit motives and regular returns besides sentiments for some.

Buying property in India always involves a good understanding of the market conditions and the current economic scenario in the country chosen for investment.

Still, the decision is not easy. There might be a series of questions/queries in mind before deciding to invest in India, like:

Read More: HUF property and its partition by Coparceners

Where can you invest?

NRIs can buy any immovable property, whether residential or commercial. No permission is required to be taken from the Government of India or RBI. There is no need to intimate RBI about this transaction. There is no restriction on the number of residential or commercial properties which NRI can buy.

However, special permission of RBI is required for buying agricultural land, plantation property or a farmhouse in India. 

How to make the payment?

NRIs buying the property can make the payment

  • By remitting through proper banking channels from abroad.
  • By availing home loan for buying residential property, for the renovation of an existing property or construction on a plot– the loan amount will be transferred directly to the seller’s or developer’s bank account. The payment is made in Indian currency. 
  • By using funds in the NRE/NRO/FCNR accounts. Even housing loan if availed is repaid using funds from these accounts.
  • No payment by travellers cheque or foreign currency

Read More: Protection of inheritance rights of women and varying succession laws

What documents are required for buying a property?

Documentation part has become very easy to facilitate investment by NRIs. You need to have:

  • A valid passport
  • PAN card 
  • Latest photograph 

Other documents that are prescribed by RBI from time to time. 

Whether any loan is available for NRI for buying a property in India?

RBI has issued general permission to all banks to provide loan facility to the NRIs for purchase of property in India. 

Generally, a home loan is availed for purchase of the residential property.

In case of purchasing a house, general precautions like the title is definite, and property is free from all encumbrances etc. should be taken.

Can the property be purchased through power of attorney?

Property in India can indeed be purchased through a power of attorney if an NRI cannot be physically present in India. There is a proper prescribed procedure to authorize someone through the POA. It is routed through the office of Indian Embassy in the country of residence of NRI. 

Read More: Opening an NRO Account – steps, details, requirements

Can a property be purchased jointly?

Yes. An NRI can buy a joint property with another NRI. But not with any person who is not authorized to invest in India.  

There are no specific guidelines issued under FEMA for purchase of property by NRIs jointly with resident Indian. It depends upon case to case. 

What are the taxation rules for NRIs buying property in India?

NRIs can earn income from investment in the property either in the form of rental income or capital gains. (Capital gain is income earned by sale of property in India). This income is taxable. 

Under DTAA (Double Taxation Avoidance Agreements), an NRI can claim the tax credit in his country of residence, for taxes paid in India.

Tax benefits on purchase of the property are the same for both NRIs and resident Indian. Deduction of Rs 1.00 lac u/s 80C of the Income Tax Act as available to a resident is also available to an NRI.

Read More: Sale deed: What you should know!

The income tax rate is 1% (TDS) of the value of the property if the value of the property bought is more than Rs 50 lacs. The rate is higher if the seller of the property is also NRI. 

If NRI avails home loan to buy a property, the interest paid on loan is deductible from the taxable income.

Last but not least: Buying a property in India by NRI does no longer remain a difficult task. It has become lucrative to invest in India these days. RBI and FEMA guidelines and policies are supportive. 

Saving yourself from fraud while buying or selling a property

Saving Yourself From Fraud While Buying or Selling A Property

It is a bitter fact that there is an occurrence of frauds while buying or selling the property. Misinformation or Ignorance or lack of information on procedures and documentation is the main cause.  However, one can easily avoid these complications. 

Some of such common frauds are:

Imperfect Title – For a buyer, it is significant to ensure that the seller has a clean title and can transfer the ownership rights in the property to the buyer. The title should be free from defects. The imperfect title means there is any encumbrance on the property or the property is disputed.

Multiple mortgages: The seller has mortgaged the house to different banks before selling the same.

Read More: How to obtain probate of a Will

Delayed possession by developers – In case of buying house/flat constructed by a builder, possession of the flat is often delayed. The buyer’s money gets blocked.   

Building not as per the approved plan– The builder does not construct the building as per the sanctioned plan. Necessary approvals from the Government are not taken. The property is not as per the description/advertisement. Sometimes the location of the property may also differ.

Fake Documents– There is also a practice of preparing fake title deeds. Either the signatures are forged or the document (property document) is not valid i.e. proper stamp duty not paid or document not registered as required.

Fraud by Impersonation: The person presenting himself as the owner of the property is not the actual owner. The documents are signed forging the signatures of the actual owner.

Home equity frauds– In simple words, home equity frauds means a fraud where the fraudster hacks the information about the true owner and reroutes the loan amount to his account by forging the signatures of the actual owner.

Read More: Transfer of Property on the basis of Registered or Unregistered Will

Misuse of power of attorney: A POA granted to execute a sale deed can be misused. It is better to get the same verified from a lawyer to avoid any dispute later.

How to avoid them:

Information and knowledge is the key to avoid any property related frauds. Some steps can be:

To verify the Credentials of the developer/builder:

If the builder/company is reputed, it can help to ensure that necessary approvals have been taken and promises made are not fake. Possession will not be delayed as the developer has maintained a good track record.

Checking the revenue records:

There is a mention of the lien/mortgage over the property in the revenue records. The same can be verified to ensure that property is free from encumbrances and title is clear.

Buying a resale property:

Collect the encumbrance certificate from the office of the Sub Registrar as it helps to verify that the title is clear. EC also contains the name of the previous owner. Also, check the tax payslips. Try to verify that all dues have been paid.

Read More: How to file a partition suit for a property in India

Buying a house in a society:

Check that the society is registered and there is a resident welfare association in place.

Buying a house from a builder:  

It is better to check that the project is registered with RERA. It helps to ascertain that all necessary approvals are in place and construction is as per norms. Moreover, possession will be granted as per promise.

From Seller’s point of view certain precautions are:

  • Buyers generally ask for original ownership documents. Sellers must possess the same
  • Seller must have Approved building plan or occupation certificate from the local authorities
  • Sellers must ascertain the identity of the buyers especially if the buyer is executing the conveyance deed using a power of attorney
  • Proper valuation of the property to quote the correct price

Taking legal advice:

Property transactions are complex. To avoid the occurrence of fraud, the parties must take legal advice and ensure proper documentation.

 Investment in the property must be taken seriously. The casual approach may land you in trouble.

Importance of Due Diligence and Title Search before Property Purchase

Importance of Due Diligence and Title Search before Property Purchase

Due diligence and title search play an important role in real estate/property transactions.  People approach us and often have the following queries.

What is due diligence and Title Search before property purchase?

It means taking all precautions and ensuring that investment in a property is safe and secure.

By exercising due diligence:

  • The buyer identifies and evaluates all types of risks involved in investment
  • The buyer tries to rule out/minimize these risks

How do we go about it?

Due diligence implies:

  1. Scrutiny of title:

Title Search relates explicitly to the search of ownership and the rights of the owner to sell the property. Two kinds of title search reports are there.

  • Full Search – The title of the property is searched for a period of previous 30 years.
  • Limited Search – The title of the property is searched for a period of previous few years (less than 15 )

The search report is prepared depending upon the nature of the transaction. The title search is a very crucial part of due diligence as the defective title leads to no transfer at all.

Also Read: What is a Sale Deed? Legal Importance and Registration Process

B. Search for the right of the owner to sell the property:

The owner must be capable of transferring ownership. The buyer has to ensure that there is no restriction to the power of alienation of the owner. The limitation can be there:

  • If the owner is a minor or a person of unsound mind. Such a person can sell through guardian or a person so authorized.  
  • The owner is not having an absolute right in the property.
  • The owner is a lessee or a tenant.
  • Statue does not permit sale of the property.

Which records are searched?

  1. The records maintained
  2. at Sub Registrar’s office
  3. with Tehsildar (mutation and Jamabandi)
  4. records maintained by Registrar of Companies
  • Title deeds – Gift deed, Will, Lease Deed, Sale Deed etc

 What is the significance?

There are many reasons to exercise due diligence before purchasing a property:

Also Read: How to cancel Illegal Registration of ancestral property

  • Increase in the number of frauds – There has been an increase in frauds related to real estate. Due diligence involves verification of documents, title and ownership rights to ascertain the authenticity of the same and therefore, helps to prevent fraud.
  • Cost of investment – People invest hard-earned money or a huge amount of loan in real estate. Due diligence is required to safeguard the funds being invested. As stated above, risks are identified, evaluated and minimized by due diligence.
  • Disputed property – Before buying a property, buyer has to ensure that the property is not involved in any litigation. If there is any court case pending concerning the property or the rights of the owner, it can pose hardships later for the buyer. The buyer is bound by the decision of the court, which may or may not be favourable. 
  • Encumbrances which affect the value of the property– The property intended to be purchased must be free from all types of encumbrances like
    • Mortgage
    • Lien
    • Charges due (utility bills, tax payment or any other statutory payment)
    • Litigation

A certificate in this regard is issued by the Office of the Sub Registrar. The buyer must inspect the original title deed as it is deposited with the Bank if there is any loan against the property.

Also Read: What To Do If Your Property Possession Has Been Delayed?

  • Easement Rights/ Acquisition process affect the interest of the purchaser: The property might be having
    • an easement right (right to have a passage through the land)
    • covered under acquisition scheme of the Government.

The buyer must check for the same. It affects the returns from investment.

  • Necessary Approvals – A buyer must ensure that the owner has obtained necessary approvals from the authorities. Approval is granted if the statutory requirements have been fulfilled. 

LEGAL ASSISTANCE

It is advisable to get legal assistance for the search of records and verification of documents.

What If Buyer or Seller Breaches Sale Agreement

What If Buyer or Seller Breaches Sale Agreement

Sale Agreement contains terms and conditions agreed to between the buyer and the seller for effecting the sale.

When the buyer or the seller acts in violation of these terms and conditions or does not act or refuses to act as required, there is a breach of sale agreement. There can be numerous examples of such breach such as:

  • Payment not made in stipulated time
  • Delivery of product not made as promised
  • Seller refuses to repair within the warranty period

Options with the party when other party breaches the sale agreement:

Also Read: How to save title of your property from illegal occupants?

When one party violates the sale agreement, the other party may give notice to the defaulting party to act as per agreed term. If the defaulting party fails to perform, the other party can

  • Cancel the sale agreement – as per the cancellation clause of the agreement, if any or through the court
  • Approach the court seeking directions to the defaulting party to perform as per the agreement – suit for performance
  • Approach the court to direct the defaulting party to compensate for the loss/damages caused to the party by the defaulting party – suit for damages
  • Ask for a refund of the advance payment made to the defaulting party – suit for the price
  • Retain the advance payment made by the defaulting party
  • Seek directions from court if warranty clause benefits not provided by the seller- suit for breach of warranty

Depending upon the nature of the agreement and its terms and conditions, all or any of the remedies mentioned above can be availed. It is the discretion of the court to grant a specific remedy as per law.

Read: Rights on mother’s property after her death

Specific remedies – (Governed by Indian Contract Act and Sales of Goods Act)

Remedies of Seller against buyer:

  • When the buyer refuses to pay – seller can file a suit for payment
  • When the buyer refuses to accept the goods – seller can file a lawsuit for damages, i.e. seller can recover loss caused to him based on the market price of the goods. The amount taken for calculating the loss is the price existing on the date of delivery of goods.

Remedies of Buyer against seller:

  • When the seller refuses to deliver – the buyer can file a suit for loss/damages caused to him by non- delivery of the product
  • When there is a breach of warranty by the seller-buyer can file a suit for recovery of purchase price or can seek damages. Buyer can also reject the goods but not always.

Remedy to seek interest for the loss – It is available both to the seller and the buyer to recover interest on the monetary loss, especially in suits for recovery of price.  It is the discretion of the court to allow or not. 

Read: Land Kabza- What to do?

Remedy if before the performance as per the agreement, one party clears its intention not to perform – Here the non-defaulting party can either consider it as a breach of the agreement and seek proper remedy or can wait for the defaulting party to perform on the due date.

If the buyer is in breach, the seller can

  • cancel the agreement
  • sue for damages
  • sue for price
  • Sue for claiming the goods if they are in possession of the buyer.

If the seller is in breach, the buyer can

  • Cancel the agreement
  • Sue for damages
  • Sue for performance
  • Reject the goods when delivered by seller if they are not in conformity with the agreed terms

Agreements are meant to be performed. The parties, however, are free to provide remedies in the agreement itself in case one party fails to perform its obligations. The remedies can be:

  • Cancellation Clause
  • Notice to be given or not
  • Advance to be retained or returned
  • Compensation/Damages –payment