Advantages/Disadvantages
The primary advantage would be that an under-construction property will invariably come cheaper than a ready-for-possession property. Depending on the stage of construction and also the response that the project has already elicited from other buyers/investors, the rates can be from anywhere between 15-30% lower.
Also, its value often appreciates even if it is not completed. It is incorrect to assume that property value may not appreciate while it is being developed. It has been observed in a number of cases that property prices usually appreciate once they are nearing the phase of completion. This aspect is usually inherent to the property, and is attributed to the stage in its life-cycle. The market is likely to read a lesser risk in a project nearing completion. Consequently, it may be willing to pay a slight premium on account of this aspect. Therefore, it can make a lot of sense to invest in a under-construction property by a credible and reputed developer.
The primary disadvantages would be that the property cannot be immediately used for occupancy or renting out, that one’s money is locked into a non-performing asset and that there may be delivery delays or sometimes even defaults. that can have serious financial repercussions.
What To Check Before Buying An Under-Construction Property
To begin with, if one is buying into an under-construction project, the developer’s bona fides and market standing should be carefully researched and verified
- A buyer is entitled to ask for a copy of the project’s drawings, duly stamped by the municipal authorities
- Locations should be chosen for future appreciation potential
- Check on option to choose a construction linked payment plans, which are usually structured on a project-to-project basis
Changes In The Original Development Plan
Certain necessary changes are usually permitted and also mentioned in the agreement. Once actual construction begins, there may be grey areas on the blueprints that come to light only later. Sometimes, this may involve new regulations with regards to parking space or other aspects beyond the developer’s control.
Failure To Hand Over The Property On Time
There are certainly such incidences, as can be expected in a largely disorganized market. Generally, reputed builders deliver on time and as per promised specifications. Small developers, however, often default by stretching their projects beyond the promised delivery date – sometimes by as much as a year or more.
Often, this is caused by funding issues. They may also skimp on construction costs, banking on the buyer’s ignorance of quality parameters. Sometimes, the drawings they submit to the municipal authorities are not sufficiently detailed, leading to non-approval of their projects. There are also fly-by-night operators who pocket their clients’ up-front payment and then disappear altogether.
Most developers operating in city centres are well-established and experienced players with reputations to protect. The incidence of gross defaulting on promises there is less than 10%. It can, however, be as high as 15-20% in emerging suburban areas because there is a fairly large incidence of small developers. Many developers who respond to sudden property booms in suburban areas are simply traders who are putting up the only project they ever will in their entire lifetimes. They have no experience or technical knowledge and often do not have banks backing them. Most emerging suburbs are also defined by unclear land titles.
- A prospective buyer should check into the developer’s credibility, past projects and performance and delivery record
- The buyer is perfectly entitled to ask for copies of all necessary permissions prior to making a financial commitment
- He should also ensure that the project is funded by a known bank and that the project has all the correct approvals.
If there is any reason for initial doubt, conducting a property purchase through an attorney qualified and experienced in handling real estate-related issues is certainly advisable.
The author, Santhosh Kumar is CEO – Operations, Jones Lang LaSalle India
