by Mr. Santhosh Kumar, JLL India
Real estate buyers are
often warned that they must conduct a thorough due diligence before investing
in any property, and that they should not reply solely on the verification
process done by banks while they are processing a home loan request.
This is sound advice,
especially in the current times when many buyers have found themselves in
troubled waters after making property purchase decisions without doing their
homework.
What does due diligence
mean with regards to property purchase?
Basically, it is a
thorough investigative process whose objective is to determine whether or not a
certain real estate option is safe to invest in.
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| Santhosh Kumar, JLL India |
The process requires
different elements to be focused on, depending on whether one is purchasing a
ready-to-occupy property or one which is under construction. A due diligence
for redeveloped properties also has specific areas to be focused on.
Due Diligence For Ready-To-Occupy
Properties..!
Get all details pertaining to the developer’s
credibility. Of particular importance is the developer’s delivery track record
of past projects. There are many aspects that directly affect the level of
risk, but are never revealed to buyers.
The required information needs to be
assimilated at a local level, preferably by someone who has been residing in
the locality for a while.
Ask the developer for the approved drawings of
the project, a copy of the IOD (intimation of disapproval) and completion
certificate and a clear land title. Ensure that the property is free of
litigation and any kind of associated debt.
Also, establish the
existence of a proper society. If one is buying a second-hand property, proper
transfer and re-registration should be done before hand over.
The documents
required for registration of a residential flat, apart from the sale deed, will
include a letter from the society that reflects the number of floors in the
building, the year in which the building was constructed, the apartment's
built-up area and the number of lifts in the building.
The buyer should have a proper check list in
place; this must include the approved usage of the property, notices of any
pending or threatened litigation or / governmental action relating to the real
estate or / seller, any applicable condominium documents, service contracts,
all construction-related documents including warranties, as-built plans and
specifications etc.
Due Diligence For
Under-Construction Properties..!
If the project is under
construction, get an accurate idea of the project’s progress. This is
especially true if the property is being bought directly from the developer.
When no property advisor is involved in the transaction, the risk of falling
prey to a deceptive projection of the project’s development progress multiplies
manifold.
The buyer needs to establish whether the
builder has free and clear ownership of the land on which the project is being
built. An agreement between builder and the original owner of the land is not
sufficient. The project also needs to have an IOD.
This is a set of
instructions that a developer needs to comply with so that he can legally
construct the project. The IOD is valid for one year and needs to be reissued
if the project has not been completed in a year’s time. The project also needs
to have a commencement certificate in place.
While considering a
pre-launch option, it is even more necessary to establish the trustworthiness
of the builder, especially in terms of his track record for transparent
dealings and compliance with legal formalities.
Due Diligence For
Redeveloped Properties..!
For a redeveloped
property, the paperwork is the same as for a new one as the project is
complete, no matter what its history is.
In the case of redeveloped properties, there are two possible scenarios:
In the first scenario,
discussions regarding redevelopment are ongoing between the society and
developer, but no agreement has yet been signed. In such a case, buying into
the project is as good as buying into a normal resale property.
In the second scenario,
an agreement is already in place between the society and the developer. If one
of the society members wishes to sell his property and has found a buyer, there
are three parties involved in the transaction – the seller, the buyer and the
developer.
The developer in
question needs to be kept in the loop so that the rights of the existing
society member who is selling his property are properly transferred to the
buyer, with the knowledge of the society.
In case the agreement
is signed between society and developer, there are two situations possible. In
the first, the building has yet to be demolished, in which case the process is
simple - the buyer moves into the property, to vacate along with other society
members at the time of actual redevelopment.
However, if the
building has already been demolished, the old flat no longer exists and the new
one is yet to be constructed.
In this case, the
permission of both the society & developer are required since, though money
has changed hands, the transaction is incomplete until the property has been
reconstructed and registered in the new owner’s name. The agreement needs to
mention this appropriately.
In the case of a
redeveloped property, apart from the usual due diligence, the development
agreement between society and developer must be checked on.
The new buyer must
ensure that the seller is surrendering all rights and claims after the property
is reconstructed.
About the author
Mr. Santhosh Kumar, CEO – Operations &
International Director, JLL India
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