5 things buyers must understand before investing in real estate

With land, input and labour costs soaring, home prices are inching upwards across all markets, making realty a popular investment avenue. But lack of transparency and tight regulations means buyers are making investment decisions without properly understanding the risks.

The rule of thumb is to buy when the market is low and sell when the prices are on the up. Watch out for signs like rapid sales, aggressive advertising by realtors and fluctuations of interest rates, but most of all you must understand the various ownership costs, which include the hidden and evident costs, while purchasing a property.

Here are 5 things buyers must take into consideration before buying a house.

1. Understanding the perils of hidden costs: As a prospective buyer, one must know that apart from the price and deposit paid to the developer and the home loan provider, property taxes, insurance for your home, stamp duty, registration costs and maintenance costs should be accounted for. But over and above this, hidden costs like interest and opportunity costs due to delays in delivery, increase in developmental charges by state governments, other levies like service tax and VAT can knock one's budget and finances. Recently home buyers in Maharashtra have been crying hoarse over the sudden VAT being proposed on flats bought between 2006 and 2010 in the state. Says Dilip Shah, Senior Counselor and Analyst for Redevelopment of Housing Societies, the best way to tackle this is by going through the fineprint of agreements between the builder and the home loan provider to ensure that the builder does not include any extra price clauses where the buyer will be entitled to pay for any future levies, taxes etc.

Reuters

"The devil lies in the detail. Buyers should be doubly careful of clauses that gives builders blanket powers to pass on the costs, whether it is up-gradation of specifications or infrastructure facilities like power-back up pr car park area," Sandeep Lal, a Kolkata-based advocate told Firstpost.

According to the layman's guide to buying a house, "buyers should make a provision for 25 percent of a ready-to-occupy-house and keep an allowance in excess of 40 percent for a flat that might be ready for occupation one year later."

2. Do not believe in advertisements blindly: Going by simple economics, an entry and exit barrier is meant to ensure fair play. But in realty there are no such barriers. So when the going was great and prices shot through the roof during 2006 and 2008, many players, big and small, entered the market with promises that were never to be kept.The end result? Many investors fell prey to unscrupulous companies, especially in towns where small developers lured buyers through low-cost projects, but disappeared completely after the downturn began. Says Kishor Pate, CMD of Amit Enterprises Housing Ltd & Secretary for CREDAI Maharashtra, "buyers must deal only with an established developer who has had number of successful projects in the same city, especially while opting for an under-construction flat.

According to Pankaj Kapoor, MD at real estate research firm Liasas Foras, most investors are penny wise and pound foolish who like dirt-cheap deals by little-known companies, rather than investing in projects by a reputed builder who is probably more transparent and likely to comply with regulations. The best way to find a sound builder is by researching through newspapers, periodicals, interaction with real estate agents and lending institutions.

3. Location is key to a good investment: Properties that are in close proximity to schools, hospitals, shops and other facilities will stand in good stead at all times but also demand a higher price than those in far flung areas. This is why it is important to be to identify locations likely to see appreciation in the near future. Says Kapoor," The biggest mistake investors make is invest in properties without visiting the site. Default usually takes place when the area under consideration is not habitable."

For example, in Mumbai far flung areas in Panvel, Karjat, Virar are often recommended as good investment destinations. But here too one needs to be sure of the infrastructure around it. Mere promises of future infra projects should not be used as a measure of investment, only invest if you spot a region that is in the stages of development, Kapoor warns because if the infra project is delayed or does not come up, the value of the property will remain stagnant or even fall. Moreover, the area should have employment 'catchment' as job creation is what drives demand for residential real estate.

4. Check clearance of land titles: One of the foremost factors to ensure that the title is in the seller's name and he holds absolute ownership of the land. Get hold of a professional and make sure that all the legal property documents are up to date. Check for hidden clauses or any irregularity to avoid any hassles. The lack of clear land titles means the transaction are is risky. If you are buying land, you must trace past ownership to avoid any dispute in the future. Says Kapoor, " If a buyer can pay Rs 50 lakh for a flat, why can't he hire a solicitor for Rs 5,000 to ensure that he has the appropriate land title. By opting for such kind of savings, the buyer pays a high price for these mistakes later in case of dispute or default.

5. Valuation: And finally, how do you know whether you are paying the right price for your flat?

The best way of arriving at the right valuation for your property is by comparing the price with the area's density, explains Kapoor. If the area is habitable or has potential and within your budget, the valuation is right, but if the house is not habitable at least till the next 1 year, but is still commanding the current market value, means the cost is inflated.

Secondly, talk to a handful of agents and get an appraisal from a certified professional appraiser. In the current conditions with the current inventory, how long would it take the market to absorb, or sell, all the houses on the market? If the supply is much larger than the demand, you are likely to get a discounted rate or at least some freebies with the flat.

Third, look at comparables for similar houses. Study prices and sales from one year ago, six months ago, three months ago and current numbers. Does the current price reflect market reality? Here a qualified professional valuer who looks into valuation, costs, building defects, future profits etc will help in making the right deal.