How to Decide to Rent and Buy a House

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How to Decide to Rent and Buy a House

Fools build houses, and wise men live in them’. This British proverb is often used in arguments against buying a house. Investing in a house is a very important decision, as the amount needed takes up almost all of one’s savings. In my opinion, the question should be: ‘When should you buy a house and when should you stay in a rented accommodation?’ rather than arguing about the rationality of owning a house.

Why and when should you stay in a rented house?

Banks, normally, do not give more than 80% of a property’s cost as home loan, while the buyer needs to shell out the balance 20% of the margin money, from one’s own funds. Looking at the prevailing cost of residential houses in cities, you have no option but to stay in a rented house, till you are able to save enough to fund the margin money.

If you are an employee who has been posted in a place for a short duration, or you are working in a place where you do not intend to settle, renting a house makes better sense, until you decide on the city where you intend to settle. Real estate transactions have some costs that cannot be recovered, like stamp duty, registration charges and brokerage for sale and purchase of the house.

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The size of your family will also affect your decision. You may need a bigger house, in case you are planning to expand your family. In case you have enough margin money and have already decided to buy a house, but you are unsure about the locality, then, you could take a house on lease in that locality to experience the stay, before making a commitment.

Why and when should you buy a house?

It is definitely a good idea, to own a house. So, in case you are able to arrange the margin money and are confident that you will be able to service your home loan, you should buy the house. However, even if you have sufficient funds, you should take into account, whether you intend to stay in the same locality or the city.

To base your decision to buy a house merely on the cost-benefit analysis of rental versus cost of funding the house, does not make sense because the rentals generally vary from 2% to 4% of the capital value of the house, whereas, the cost of borrowing is generally around 10% for home loans, thus, leaving a gap of 8%. Nevertheless, this comparison does not reveal other tangible and intangible benefits of owning a house.

You should never defer the purchase of your first house, in the expectation of a correction in prices. This is evident from the fact that everyone has been expecting a major price correction for the last five years. People who postponed their decision to buy a house, have probably missed the bus for good. Over the long-term period, property prices on an average increase by around 9%. You should take this appreciation into account, while doing the overall cost-benefit analysis. Owning a house also provides a certain mental and psychological satisfaction and creates a sense of security.

Tips – Verify Your Flat Purchase Documents Without a Lawyer

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Tips - Verify Your Flat Purchase Documents Without a Lawyer
Tips - Verify Your Flat Purchase Documents Without a Lawyer

Due diligence and awareness of your rights can certainly protect you against unscrupulous practices by developers. In an industry that still lacks transparency, it is best to physically inspects all documents before buying any property. First and foremost, drafting a sale agreement should be done with the utmost care. A property buyer should fully understand its contents; if necessary recruit a lawyer, and make a clear note of all the deliverables the developer has agreed to.

Anuj Puri, chairman and country head of JLL India, cautions that “Developer’s sales teams will usually present a buyer with a readymade agreement, and a buyer must ensure that this captures every relevant detail.” He continues, “If it does not, the buyer is fully entitled to ask for missing details to be included and potential grey areas to be clarified. A copy of the final agreement must be retained under any circumstances, as this will serve as the primary evidence in a legal action filed for agreement violations.”

Here is what you need to watch out for when checking purchase documents:

1. Personal details

The agreement must capture the seller’s complete details. This includes father’s name, address, PAN number and bank account information. It must also provide exact details of the property’s location and municipal, tehsil (administrative division) or collector’s land record number. The agreement ought to be witnessed by two people, each from the buyer’s and seller’s side.

2. Title documents

“The seller must confirm the authenticity of the title documents and ownership transfer in the agreement,” explains Puri. “He must also state clearly that the transfer and handing over of possession, is happening in a legal and fully-attested manner. The agreement must reflect the fact that all dues related to the property, have been cleared up to the date of transfer.” Further, the agreement must fully indemnify the buyer from any disputes related to title and possession of the property.

3. Date of possession

“The date of possession of a flat is important to the purchaser, for the purpose of transfer of the flat from the builder. It is the date on which the purchaser is to get possession of the premises and binds the developer to hand over possession by the date set out in the agreement. If possession is not given by such date, the purchaser has a right to sue,” informs Anirudh Hariani, solicitor of Hariani and Company.

The ‘time of essence’ clause in an agreement lays down the contractual deadlines for the parties to perform their due obligations.

4. Payment schedule

“The clause which sets out the payment schedule, lays down the total amount to be paid and the time frame within which it is to be paid,” details Hariani. “In cases where the payment is made in instalments, the payment schedule specifies details of each instalment. This helps avoids any ambiguities which may arise in the future,” points out Hariani. The agreement must provide complete payment details by the buyer, including that of the mortgage, if any.

5. Termination

The termination clause defines the consequences imposed on the parties in case of deviation from the code of conduct expected to be adhered by them. The agreement may contain either a ‘termination by convenience’ clause where either party can end the agreement.

6. Dispute resolution

The dispute resolution clause sets out the mechanism by which the parties can resolve their disputes. This is alternative to settling the matter through litigation. Besides this, other processes used to settle commercial contracts include adjudication and mediation.

7. Amenities

The amenities clause helps the purchaser know the additional benefits he will be entitled to and mentions the supplementary amount towards maintenance charges. In case of any default on the amenities sought to be provided, the purchaser may consider it as a breach of contract.

8. Penalty

A penalty clause should be incorporated in the purchase agreement, clearly specifying milestones and the penalties in case of failure from both, seller and buyer.

Finally, registering a legal purchase agreement, is of benefit to the buyer, since it offers protection from legal complications at any stage of ownership or eventual resale. No change can be made once the purchase agreement is drafted and registered. If any change needs to be made, the consent of the buyer must be obtained and an addendum will be made in the agreement.

Investing in Land Prospects and Consequences

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Investing in land: The pros and cons

Land as an investment option has always been popular in India. Its popularity has not receded, despite the availability of various financial products such as mutual funds and equity shares. However, you should be aware of all the pros and cons of investing in land.

Limited supply

Other than a few reclamation cases, the supply of land is limited and the possibility of creating more, is quite impossible. Due to its limited supply and the ever-increasing need, the demand for land has only been going up. However, this continuous demand has ensured that the price of land hasn’t experienced volatile changes like with other assets like gold and equity.

See also: Why you Should Thoroughly Read your Builder-Buyer Agreement

Big ticket and illiquid investment

The amount of money required to invest in land is substantial. Those with less savings, cannot afford to invest in land. Instead, they should opt for financial assets such as units of mutual funds, shares, recurring deposits or even gold. Moreover, investment in land is relatively illiquid and you cannot dispose of this investment as and when you want to encash it. In some cases, the time taken for the sale to actually happen, may run into years, thus, defeating the purpose of making the investment in the first place.

Risk of acquisition and encroachment

We have all come across stories of encroachment of land causing investments to sink. In some scenarios, your legal right over the land gets jeopardised, resulting in litigation and unnecessary legal costs. These auxiliary expenses can sometimes outweigh the appreciation in the value of your land. There’s also the risk of the land being taken over by the government by way of compulsory acquisition. The compensation received, may not always be satisfactory. A prime example of such a scenario is the acquisition of land in the Noida Extension case.

Non-availability of finance

In order to buy or construct a house, loan seekers can only get up to 80% of the value of the property. In case you want to construct a property on a plot of land, you can get a composite loan covering the cost of the plot and cost of construction. However, no bank will generally lend money to buy a plot of land, unless the same is purchased from an endorsed and reputed government development authority like DDA or MHADA.

Tax benefits

In the event of a home loan, you can claim tax benefits with respect to interest payment as well as principal repayment, under Section 24 and 80C of the Income Tax Act. No such provision exists for the interest paid on money borrowed for investing in land.

Can Resident Indian Buy Property Abroad

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Can Resident Indian Buy Property Abroad

The provisions related to owning of an immovable property outside India by a resident Indian, are governed by the Foreign Exchange Management Act (FEMA).

Owning an immovable property

The FEMA restricts Indian residents from owning any immovable property outside India, without a specific or special permission from the Reserve Bank of India (RBI). However, this restriction is not applicable to two types of resident Indians, who are allowed to own an immovable property. The first category consists of people, who are not Indian citizens but reside in India and own an immovable property outside India. The second category includes residents of India, who acquired the property on or before 8th July 1947.

Fresh acquisition of immovable property by an Indian resident

The RBI has given permission to certain categories of people to acquire immovable property outside India. The immovable property can be acquired either through gift or inheritance, or it may be purchased for a consideration. All residents of India are allowed to receive the immovable property, either through gift or by way of inheritance, from a person who has purchased it on or before 8th July 1947. Similarly, a resident is also allowed to receive an immovable property from a person, who had either acquired such property while he was resident outside India, or had inherited the same from a person who was resident outside India at that time.

Indian residents are also allowed to purchase immovable property outside India, subject to certain conditions on the payment of the consideration. The consideration for the purchase can be paid by the Indian resident, from the balance held in his Resident Foreign Currency (RFC) account. A resident Indian is also allowed to buy an immovable property of any value outside India and remit the consideration, within the limits laid down under the Liberalised Remittance Scheme (LRS). The quantum of remittance under the LRS should not exceed USD 2.5 lakhs, every year. This limit is applicable to all the transactions taken together, like overseas education, travel, maintenance of relatives outside India, expenses on medical treatment outside India, etc., and includes the purchase of immovable property.

See also: Dos and don’ts for NRIs Investing in Indian Realty

Lease and other avenues

A resident of India is also allowed to acquire an immovable property outside India under a lease, for a period that does not exceed five years at a stretch. The property so acquired by a person who is resident in India, can be gifted to any of his relatives, including spouse, brother, sister and any lineal ascendant or descendant of the person. If your case does not fall in any of the above categories, you can still buy an immovable property outside India by taking a special permission from the RBI.

Who is a resident of India?

The definition of a ‘resident’ under the FEMA is different from that in the Income Tax Act, 1961, where the period of actual stay determines your residential status. In the FEMA, the intention to stay is the determining factor. A person becomes a non-resident on the day he leaves India, if he leaves for the purpose of employment, business, or for any other reason with an intention to stay outside India for an uncertain period. Likewise, a person coming to India will become a resident, irrespective of his citizenship, if he comes for the purpose of employment, business or for any other reason with an intention to stay for an uncertain period.

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