Red Flags to Help Spot Property Scams

8/12/2019 Red Flags to Help Spot Property Scams

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Red Flags to Help You Spot Property Scams

Property investment though attractive, there are risks and restrictions involved. Know them

before you buy.

Home buyers are always looking for the best home they can buy with the resources andtime available with them. Now, more than ever, real estate prices are subdued and buyers

are again active in the market. Buying a home or making a real estate investment is the

most exciting and at the same time, tedious task for people. While the excitement of owning

your own home pushes you harder to expedite the process, the tedious task of going

through enormous amount of details frustrates you. Going through the process is a

necessity. Though the process is tedious and demanding, any negligence on the due

diligence can cost us big in the future. An unusually attractive offer should make you extra

cautious and prompt you to cross-check details

Consider this property advertisement: A 2-bedroom-hall-kitchen apartment in Chennai for

just Rs.10.72 lakhs. And not just that you will get a home loan of 80% for the property.Sounds attractive, doesnt it? No wonder thousands, including non-resident Indians (NRIs),

fell for it. Unfortunately, it turned out to be a huge property scam and investors lost close to

Rs.350 crores, according to various newspaper reports. The advertisement posted by a

Chennai-based developer promised apartments in OMR at attractive rates. What went in

favour of the developer were a couple of completed projects.

This particular property scam broke in 2011, but property buying, especially for NRIs,

remains challenging even now, considering that the real estate market remains largely

unregulated and cases of fraud abound. Here are three red flags you should watch out for

before putting in your money.

Red Flag One: Sounds Too Good To Be True

An inherent characteristic of a scam is that it will promise unreal returns or exciting

offers. Instead of getting excited about it, become extra careful. Take the example of the

offer mentioned earlier. All those who paid the Chennai developer the money to book their

apartments are still fighting to get it back. So remember that a good offer doesntnecessarily mean that you should opt for it. As it is in the case of all investments, quick and

big returns should always be looked at with caution.

Red Flag Two: Builder Is In a Tearing Hurry

Is your builder in a hurry to close the deal? A developer or builder who has intentions to

cheat will show an urgency to sell the property and will encourage you to make the downpayment right away. Some may even offer a price that is below actual market prices.

Shankar Nambiar, an NRI from Dubai, paid Rs.10 lakh to this Chennai builder as the initial

amount for an apartment that cost Rs.20 lakh. He is now fighting to get his money back.

This is common among most scams. Would-be victims are warned of dire consequences or

the loss of a good deal if they dont respond right away or take too long to read paperworkor even fail to send money, says Vinod Sampath, a lawyer.


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Red Flag Three: No Clarity on Documentation

In a genuine transaction, you will have to sign a set of documents, including title deeds,

agreement of sale and so on to legitimatize the deal. Fraudsters, however, will urge you to

go ahead and send them the money without signing any paperwork. They will tell you thatthe paperwork will get processed in due time. However, they will never appear, says

Sampath.

Inspection of the records of the builder is equally important and that can happen only if

you insist on the paperwork. One should check if the property is mortgaged or any kind of

loan has been taken against the property. If the developer shows signs of apprehension in

showing you the papers related to the property, then it should be a signal for you that there

is something amiss. There are letters of approval from local authorities, clearance

certificates, registration certificates and so on to check the authenticity of a project. You

should also check if there is any past litigation against the builder. Many small developers,

especially in suburbs, may not have the necessary approvals or documents for the property

that they are selling. Physical distance puts you at a disadvantage since you may not be able

to check the property site or visit the developers office. So it bodes well to do a thoroughcheck: carry out the required due diligence and undertake a bit of research, focusing mainly

on previous projects and current online commentaries about the developer.

Signals That Indicate Delay in a Project

Project delays are common in the Chennai real estate market. With a spurt of large project

over the last two to three years, news of delay are now trickling in with the possession

dates nearing. While it is difficult to predict a project delay, a closer look may give you

warning signals. If you are able to detect these, you may save yourself from getting stuck in

a delayed project.

Initial Authentication

If you are investing in a project, your developer should share all relevant documents about

the property and the project. These include approval of your builder for construction, land

title papers and sanctioned building plans of the project. So make sure you enquire about

these when signing the builder-buyer agreement for an apartment. Also, the developer

should be ready to share these details.

For any project, construction approval number, land title papers and sanctioned plans are

the most important documents. Ask for these at the time of investing. If the developer

shows his sanctioned plan at the start of the project and at the time of the booking, it meanshe has all the necessary papers and approvals for construction as per the plan. But if he

fails to produce this even during the course of the construction, consider the project to be

unapproved, says Ravi Kumar, a leading developer in Chennai. If you have alreadyinvested in the project and you want to check on the approved plan, visit the development

authoritys office or website. If you find any discrepancy in the details furnished by the

developer, you can consider exiting the project. Other than the authority office, you can

speak to real estate brokers in the region to find about the projects status as local real


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estate consultants are often invested in the project. They always keep a check on the status

of the project.

Change in the Proposed Building Plan

In practice, developers usually start digging for construction based on the approval tobuild. At this stage, they also start taking advances for booking apartments that are yet to

come up. While homebuyers are shown a proposed site plan, the builder applies to the city

town planners office for getting the proposed plan sanctioned. An approved plan mentionsdetails of the sector roads, address of the property and the name of the developer. But at

times, owing to certain regulatory hurdles, the proposed plan is not sanctioned. The builder

then applies to the town planner with a new plan that is acceptable to the authority. If the

second plan is sanctioned, the first site plan shown to you at the time of booking does not

apply. The builder will now reformat the project as per the new plan. However, this may be

revealed to you at a later stage. The new plan may simply add another apartment on the

same floor increasing the population density per floor. The new plan may simply reduce or

increase the size of your apartment. Here you may want to exit the project if the new plandoes not fulfill your requirements.

Construction Stages

Most houses are bought either through a construction-linked or flexi plan. Here, the money

is paid to the builder in tranches either through a bank loan or personal funds. At every

predetermined stage, the builder demands a certain amount of money, which either your

bank will pay or you will pay. Along with the demand letter, the builder sends the details

about the progress of the construction. In case, the demand becomes infrequent, you may

want to check with the builder and may also need to personally visit the site. For example,

on completion of the basement slab, the builder may ask for 10% of the property value. Butyou have no word from the builder for another six months or a year. There can be various

reasons for delay at this stage: there could be a dispute regarding the land. The court may

pass a stay order on the construction. Your developer should also send you actual

photographs of the site at regular intervals during the construction and send mails for

respective payments for each stage.

Every project is built in stages. Each stage has a timeline for its completion. Every builder

keeps 21-30 days for the completion of each small stage within the bigger stages. The

developments at each stage are monitored by preparing a progress chart. For example,ideally it takes three to four months from the stage of excavation to the stage when the

basement is completed. Within this period, there are various stages such as beginning ofthe excavation work, completion of the excavation work and building of the foundation

followed by laying of the basement floor. If the work that was supposed to begin on a

particular date gets delayed, later stages also get delayed. Each stage within the bigger

stages, if delayed, delays the overall development of the project.

You can ask the developer to provide the progress chart of each stage since it is not

published separately and is basically for internal use. Once you have the chart, you can see


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the development of each stage and the completion date mentioned in the chart. The civil

engineers prepare the chart and give their comments for each date. If the construction is

behind the schedule by a particular number of days, progress chart will mention this. Every

builder who follows a good practice has such a progress chart.

If you really find out that your project is getting delayed and want to exit, be prepared tolose some money. Builders charge a fee for early exit: it is usually 10% of the earnestmoney paid. In the secondary market, there may not be many buyers for a delayed project.

Property Deals That Need Extra Thought

The real estate market witnessed a buying/selling frenzy in 2006-07 and the beginning of

2008. Foreign direct investment, introduced in 2005, had settled in by then and prices were

up 40-50% the actual values. In some cases, prime properties were sold 10 times in a

month. For buyers, any property became worth buying. An upcoming apartment in a

distant suburb, a vacant plot, a redevelopment project or commercial or agricultural plots,

buyers saw investment opportunities everywhere. However, there were lessons to belearnt when the tables turned by 2008-end. Average residential capital values fell by 18-

20% in March 2009 from the highs witnessed in the first half of 2008 and indiscreet

investors burnt their fingers.

Like any other investment, you need to be careful when investing in a property. With prices

stable at present, there is renewed buying interest. Here are three deals you should be

cautious about.

FARMLAND

Owning a farmland in a distant suburb of a city has become fashionable. There are partiesto be organized and holidays to be spent; add to it the rural flavour to busy city lives. For

instance, Chennai has such plotted developments along ECR, OMR, GST and Kanchipuram.

Sensing the trend, realtors are opening new investment opportunities in this category. But

there are certain checks you need to run before buying.

Wet land: If it turns out to be an agricultural wet land (Nanjai), you wont be able toconstruct any structure on it and getting it converted is a tedious task. At the maximum,

you can build a small hutment. Such investments involve a higher degree of risk as most of

these plots come under the agricultural domain and may not be authorized to build any

kind of permanent housing.

Area restrictions: A small piece of land that you buy cheap cant be a farmland. Every statehas an area specification that makes a land eligible to fall into the farmland category.Moreover, in most states, you cannot build on more than 5% of the total farmland.

High price points: Though these are in far-flung areas, they dont come cheap. Says

Pradeep, a Chennai-based real estate consultant: A comparison between the rates offered

by the realtor selling these plots and the prevailing rates in the same area suggest that the


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plots are pitched at slightly higher prices. For instance, farmlands across ECR and OMR areavailable in the price range of Rs.70 lakh to Rs1.5 crore an acre.

Partial selling not possible:If at a later stage, you need quick money and want to sell the

farmland, you will have to get rid of the entire land. In fact, if a realtor is selling small pieces

of land next to each other, check with the local land records department of the village aboutthe authenticity of the plotted development.

SENIOR CITIZEN HOUSING

Theres something for everybody. If there are studio apartments for youngsters andbachelors, there are projects to cater to senior citizens, too. Complete with facilities such as

24-hour hospital care and spa, meditation and fitness centres, these are sure tempting.

Services at a cost: Do not associate affordability with the senior citizen tag. With features

of hospitality, healthcare and lifestyle, senior citizen homes come at a premium. Though the

basic cost of apartments is comparable with other housing projects in the same area, theoccupants are required to shell out extra on a monthly basis. And this adds to the total cost

ultimately.

Ankur Gupta, Ashiana Housing who runs such senior citizen homes, says these houses are

higher in value since there are services associated with them. Basically, it is a lifestyleproduct and has a business angle too. These are meant for those who can afford the

services along with the housing cost, Gupta adds.

Restrictive clauses: Unlike regular projects, there are some constraints in these. In some

of the projects, there is a mandatory stay-in period. For instance, some projects have a lock-

in period of four to five years. Exit before this period and pay extra, yet again. If the buyerexits the project, the occupant will get back his money after deducting a few lakhs from the

initial deposit.

What happens after owner dies: Though the senior citizen home concept comes from

developed markets such as the US, India does not have any regulation on the title

ownership after the senior citizens demise. In other words, 15-20 years hence after the

demise of the occupants, the project may not be inhabited by senior citizens at all.

Moreover, the person who inherits the property may not want to pay for the extra lifestyle-

associated expenses.

Location disadvantage: Most of these projects are situated in the suburbs of metros andtier II locations. Being far from the main city, the location may not offer you other amenities

apart from what is available within the apartment complex. Also, even if a senior citizen ishappy staying put, the heir or the caretaker may not like the idea.

RETAIL SPACE


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Retail space promises regular rental return and decent appreciation. Driven by huge

consumer demand, there is increased construction activity in the retail industry. But fornow, you should stay away from retail space, especially malls.

Stagnant Rentals: Data suggests shop vacancy would increase in the near future owing to

oversupply since retail space is concentrated in a few areas. According to a recent report byproperty consultants Jones Lang LaSalle, at the end of the first quarter of 2014, retail space

in Chennai CBD and Chennai South together constitute 70% of the total retail space.

Demand from domestic apparels, footwear and food & beverage (F&B) retailers remained

strong for existing shopping malls in Chennai-CBD I and Chennai-South submarkets. Since

the first quarter of 2014 did not witness the influx of any new shopping mall, the overall

vacancy levels dipped by 0.2 percentage point over the quarter and was noted at 6.24%.

However, Chennai-CBD II submarket witnessed the exit of a couple of luxury retailers due

to a change in their location strategy. Availability of quality retail spaces in Chennai-

Western and Chennai-South submarkets resulted in a 4.8% and 2.2% increase in rentals

over the previous quarter. What this means for the investor? It depends not just on the

location of retail space but also a host of other factors such as parking, footfalls etc.

Revenue sharing model may not work for you: After the 2010 downturn, participants in

the retail sector changed their strategy to a revenue sharing model. Through this, the

tenant shopkeeper would share the revenues from his business instead of paying a rent.

However, the expected oversupply situation in the metros may get you in trouble. Says

Subhranshu Pani, joint managing director (retail), Jones Lang LaSalle: Revenue sharing

may not remain consistent for the occupier as it primarily depends on his business. Buyers

and investors in the retail space should be cautious while investing in retail compared with

other asset classes.

RESALE PROPERTIES

Buying a house isnt an easy task. There are a million things to look into and this stands

true not just for new properties but also for properties on resale. Here are three costs you

should keep in mind while deciding on a resale property.

Lawyer Charges

Resale real estate market is full of cases where a single property is sold to multiple buyers

at the same time. For this it is advisable to run a check on the property title before you

enter into an agreement. For the job, you can hire a property lawyer who would check

records of the past 12 years verifying the authenticity of the seller. For this, he wouldcharge you between Rs. 5,000 and Rs. 10,000. The lawyer would also help you complete

other paperwork related to property registration and stamp duty.

Repair and Renovation Cost


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Rarely would you find a resale property that does not need some amount of repair or

renovation work from your side. There could be a leaky roof, or peeling paint that needs tobe fixed. At times, you may need to renovate the entire house, from scratch.

Structural Engineers Cost

Properties on resale are sometimes old structures. While the structure may look strong

from outside, only a technical expert like a structural engineer would be able to confirm its

stability. Keep in mind that getting a good report card from the structural engineer is

important, especially if you are taking a loan to fund the property purchase. Usually, the

lender ensures that it recovers this cost somewhere or the other via your loan. If you plan

to buy the property with your own funds, you will have to pay for this survey cost out of

your own pocket.

Pending Dues

Make sure that the past owner of the property has paid all bills. These could be electricitycharges, water tax, property tax, society charges, parking space charges and the like. If the

previous owner hasnt paid any of these bills, you have no option but to settle the sameonce the house is in your name.

Other Costs

Some residents associations charge a hefty sum to transfer the ownership of a property. So

do include this cost as well. The real estate agent who helped you locate the property will

need to be paid once the entire transaction has gone through. This could be a percentage of

the buying price of the property.

Documents

Red Flags to Help Spot Property Scams