Sunday, February 17, 2008

Buying Property – Part II: Key Steps

This is the second post in the series on buying property. In the previous post, I talked about the key players in the property buying process. In this post, I’m going to start talking about the key steps of buying a house. On a high level, these steps include:

  • Selecting a broker
  • Selecting your property
  • Negotiation and Deal Finalization
  • Property Due Diligence
  • Entering into an ‘Agreement to Sale’
  • Getting a bank loan approved
  • Property transfer to buyer
  • Getting possession
  • Execution of the Sale Deed and Registration

This post covers the first three steps of the process.

Selecting a broker: Your broker is the key person in the whole process that can make or break your house buying experience. Therefore, it is extremely essential to have a broker who is very competent, honest, and straight forward in his dealings. My recommendation is to go through references when selecting a broker. Looking up property ads and randomly calling a broker is a strict no-no.

After you have selected a broker, be sure to clearly state your expectations and the key terms under which he will provide his services. Usually these are:

  • All paperwork and formalities will be done by the broker
  • All dealings with the seller’s broker should be done by him (You will, of course, have to interact with the seller / seller’s broker during the negotiations and deal closure)
  • The brokerage, which is calculated as a percentage of the total deal value
  • Agreement on what constitutes the total deal value
  • When the brokerage should be paid i.e. after which milestone. Usually, the brokerage is paid either after the sale deed is executed or after the registration of the property is done.

If you have any specific expectations please state them upfront. These expectations and terms are generally verbal and I have never heard of any agreement between a buyer and broker.

Selecting your property: While selecting the property is a matter of personal choice, there are some steps that should be a part of the due diligence you do while zeroing in on a house.
For properties under construction, you should definitely go and physically inspect the location.
Confirm with the builder’s project or maintenance office that the house that your broker is showing you is indeed the house that the seller is selling. This is especially important for properties under construction where the house numbering has not been finalized or displayed. Your broker might have found the property through a sub broker, who in turn got it from the actual seller’s broker. In this long chain, it is not uncommon for brokers to make mistakes and show you the wrong house.

Negotiation and deal finalization: After you have finalized the property you want to buy, you will then get into a price negotiation with the seller and his broker. The total price of the house will have several components. They are:

  • The basic price of the house. The basic price may have two components - a declared price (also known as the white value or the price at which the property will be registered) and a cash amount (which is not declared).
  • Car parking charges
  • Preferred Location Charges (PLC)
  • Interest Bearing Maintenance Security (IBMS)
  • Extra Development Charges (EDC)
  • Utility Charges
  • Club Charges

The items on which negotiations happen are:

  • The basic price
  • Break up of the white and cash value
  • Car parking charges

The other items are more like pass through items i.e. you pay whatever the builder has mentioned in the documents without any premium paid on it. Also note that the list of charges mentioned above is a standard list that most properties will have. However, the exact list of charges will vary from builder to builder.

Once the price is finalized, you (the buyer) will need to pay a token amount to the seller. This token amount is mutually decided between the two parties. Besides the price, the other aspects which need to be discussed and agreed upon are:

  • The time frame to close the entire transaction. Generally, a 30 – 45 day period is a standard time frame that people agree to for deal closure. If possible agree on the dates of the cash transaction and the final transaction.
  • A receipt for the token amount paid. The receipt should clearly mention the name of the seller, the price at which the property has been sold, and the date by which the whole transaction should be completed. The receipt should also mention what happens in the event that the transaction is not completed by either party. Usually, if the buyer is not able to come up with the funds by the end date, then the token amount is forfeited. If the transaction is not completed due to reasons attributed to the seller, then the seller has to pay double the token amount to the buyer.
  • Inspection of the original property documents. Please tell the seller or his broker that you would like to inspect the original property documents during the meeting to finalize the deal. What you need to see in the property document is whether the seller is the actual owner and whether he has the right to sell the property or not.
  • The documents required from the seller. The following are the documents from the seller required by the bank to process your loan application and disburse the loan:
  • 1) Photocopy of the Flat Buyer Agreement, which is the agreement that the seller would have entered to with the builder. This is the property document that the seller would have since he has not got possession yet.
  • 2) A copy of the latest account statement from the builder. The account statement will mention the total amount paid by the seller and what is still due to the builder.
  • 3) Transfer permission or NOC (No Objection Certificate) from the builder. This NOC is required by the bank to ascertain that the builder has no issues in transferring the property from the seller to the buyer. Some builders require a copy of the bank loan approval document to provide the NOC.

This is only the beginning! There are other steps to follow, which I will detail in the next post in this series.

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