Friday, November 02, 2007

Builder trick-o-treats

Just more pain to avoid..

Buying a house? Beware of builders' tricks

I. When do I get my house?

Most agreements do not clearly specify the date of delivery. For
instance, one says: "Completion of the building is expected to be
delivered by the date mentioned in the covering letter of this
allotment. The delivery of the possession is subject to force
majeure." What this means is that you cannot hold the developer
responsible if he does not stick to the promised delivery date.

There have been cases when the delivery has been delayed by 12 months
or more. Typically, the buyer would have paid 95 per cent of the
price by the time he reaches the expected delivery date. If he is
living in a rented house, delays will drive his calculations awry as
he would not have factored in this additional rent (see Double Bite).
Mumbai stockbroker Bhupendra M. Pitroda, 58, fought a legal battle
against Megha Property Developers for five years. Reason: delayed

Pitroda was promised delivery of the flat he booked in 1998 in Navi
Mumbai's Madhuri Cooperative Society Housing Project within 18
months. The builder later said that delivery would take another six
months. When Pitroda visited the site six months later, he felt that
the delivery would not happen soon. So, he instructed his bank to
stop payment of the balance 37.5 per cent of the apartment's cost to
Megha Developers.

The developer promptly sold off the flat. An aggrieved Pitroda then
moved the State Commission in July 2000. Three years later, the
commission asked Megha Developers to refund Pitroda the money he had
paid with 15 per cent interest. Pitroda was also awarded a
compensation of Rs 15,000 for the mental agony caused and Rs 5,000
for legal costs.

The developer appealed in the National Commission, which upheld the
State Commission order but cut the interest to 9 per cent. The
developer then moved the Supreme Court. "The Supreme Court judge
flung the papers in the face of the builder's lawyer and asked the
builder to compensate me immediately. The judgment was over in a
minute," says Pitroda. Through the legal battle, Pitroda made 25
appearances in the State Commission, three in the National Commission
and one in the Supreme Court.

Many agreements have penalty clauses for delayed delivery, but they
are without bite. For example: "If the company fails to complete the
construction of the said building/apartment within the period as
aforesaid, then the company shall pay to the allottee compensation at
the rate of Rs 5 per sq. ft of the super area per month for the
period of such delay." What this means is that for a 1,000-sq. ft
flat, you would get a compensation of Rs 5,000 per month�a pittance
(see Double Bite).

In most cases, buyers put up with the delay quietly rather
than 'antagonise' the builder. Most fear retribution, harassment and
further delays in delivery. This is not entirely baseless. For one,
agreement papers are designed to protect the builder. Two, your
intention to fight the builder may look like a joke given your
handicap in terms of financial prowess and influence. Three, there is
no industry regulator you can turn to for redressal. Suresh Virmani
of National Consumer Helpline says: "We generally encourage a
dialogue between buyers and sellers to settle disputes. If that
fails, the matter is taken to the regulatory body. But we can't even
suggest this in real estate because there is no regulatory body."

What to do. Don't just take the builder's word on the progress of
construction. Check it out from time to time, as Pitroda did. If you
feel a delay is likely, start building up pressure on the developer.
The best way to do this is to form a society, says Virmani. Usually,
builders have many projects running at the same time and they push
the ones where the pressure is higher. "The more the number of
buyers, the greater is the pressure," says Bharath Jairaj of Consumer
Action Group, Chennai.

II. Where are my papers?

A lot of builders are evasive about giving the completion certificate
at the time of handing over the flat. A completion certificate is
issued by municipal authorities and establishes that the building
complies with the approved plan. A developer would not get the
certificate if he deviates from the plan.

You cannot prove ownership over your house if you don't have the
certificate as you would not be able to get the house registered.
Also, you may not be able to get utility connections. You will have
problems selling, mortgaging or reverse mortgaging the house as it
will not be in your name. In the worst case, the unapproved parts of
your house would be demolished by the municipal authorities. Not a
happy state of affairs.

Businessman Mohammed Haroon, 45, got his flat in Tulip Garden,
Gurgaon, six years ago, but he has not got the completion certificate
yet. The same goes for the other 59-odd flat owners there. Together,
they took Sarvapriya Developers, which built Tulip Garden, to the
consumer court. "After four years, in mid-August this year, the court
directed the builder to hand over the completion certificates within
a month, or pay Rs 5,000 each as compensation to all the flat
owners," says Haroon. "But we know that none of the two will come our
way and are prepared to approach the Delhi High Court in this

What to do. Sale agreements often don't mention the completion
certificate. If yours doesn't and you notice it before signing the
papers, insist on the inclusion of a clause that you will be given
the completion certificate when the flat is handed over to you. Ask
the builder for it as soon as he announces that the house is ready
for possession. If, like Haroon, you move into the house without it,
the court will probably be your last resort.

III. What's the guarantee of quality?

Within a month of moving into his apartment in Mahagun Manor, Noida,
Rajiv Raghunath, 41, got trapped inside the house as the door lock
failed. In six months, the plaster started peeling off and the fans
stopped working. In another few months, water started seeping in as
the pipes had corroded. "I felt cheated. This wasn't worth my money,"
says Raghunath.

As of now, there is no way for a buyer to check the building
materials used or the quality of construction. Says advocate Anupam
Srivastava, who is with law firm Chambers of Law: "Quality is a
subjective matter. Buyers should enter into an agreement on the kind
of material that the builder will use."

In October 2005, Pune's Gera Developments started a trend by
providing a 5-year warranty on its buildings. The warranty, however,
is subject to the conditions that no structural changes be made to
the house and that there be no misuse.

What to do. Don't fall for the builder's glib talk. Insist on
including the sanctioned plan of the building and the specifications
of the raw materials to be used for construction in the purchase
agreement. If you are already facing quality problems, you can go to
the consumer court. Says Anand Patwardhan, a consumer activist and
lawyer: "If you want to approach the consumer court, move it within
two years from the day you take possession." Alternatively, flat
owners can form a Residents' Welfare Association (RWA) and get the
builder to fix the problems, as Raghunath, an RWA member, did.

IV. What is the price really?

Nishit Babyloni, 38, mech-anical engineer in BHEL, Bhopal, had booked
bungalow No. 105 with Ansal Housing and Constructions (AHC) in
Pradhan Enclave, Bhopal, in 2004. On a visit to the site five months
later, he found that his bungalow was not being built. He asked AHC
to give him bungalow No. 120 instead, as construction was in full
swing on that. AHC formally changed the allotment in February 2005,
but sent him a letter eight months later asking for Rs 3.15 lakh more.

Atit Arora, general manager (marketing) and project head, Ansals
Pradhan Enclave, Bhopal, says: "The bungalow's specifications were
changed. Babyloni was required to deposit the amount if he wanted the
new specifications. " Babyloni retorts that AHC did not tell him about
the additional work and the changes in specifications. "We were not
told that we would have to pay 25 per cent more for the new bungalow
till 18 October 2005." He is thinking of moving the consumer court.
But, it is not unusual for an agreement to say that a builder can ask
for additional payments if specifications are changed or there are
cost overruns.

There are legal loopholes as well. The Maharashtra Ownership of Flats
Act, 1963, protects buyers against malpractices in the sale and
transfer of flats. It gives homebuyers the right to inspect the
builder's documents such as the specifications that he has obtained
from the authorities. The Delhi Apartment Ownership Act, 1986,
however, is a different story. Although it was published in the
Gazette of India over a decade ago, brought on the statute book by
Parliament and given the President's assent, it is yet to be

What to do. The last stop is the consumer court. Says Srikumar, "Many
malpractices are offences under the Indian Penal Code, for which the
responsible party can be prosecuted." Keep checking with the builder
if any changes are being made to the specifications mentioned in the
agreement and the allotment letter. Also, try to get it mentioned in
the contract that if a sum higher than the original price has to be
paid by you, the builder would give you additional time for that. You
must also ask for a copy of the sanctions that the builder has taken
from the authorities to carry out the alterations.

V. What else do i pay for?

To make your house liveable, you will need electricity, water and
sewage connections. You will also need electrical wiring, appliances
like fans, lights and a water pump, which are unlikely to be part of
the package and generally won't be mentioned in the agreement. These
will be additional costs that you will have to bear. You might also
have to keep some speed money aside for registration so that it gets
done in a decent timeframe. In some cases, the builder may make a
verbal promise to get it done for you.

What to do. Builders generally have a take-it-or-leave- it attitude
with conscientious buyers while striking a deal. Even so, it pays to
be scrupulous and to read the agreement and its fine print. "Get a
lawyer, an architect or an evaluator to determine the correctness of
the purchase," says Srivastava. Finally, do some quick math and keep
aside some funds to get your house up and running.

VI. How big is house?

A typical home purchase agreement states: "The plans, designs, and
specifications are tentative and the developer reserves the right to
make variations and modifications. .." Simply put, in most cases, you
won't know the final area of
the house till you get it. The agreement will further state, "In case
of change in area, the difference in cost of area shall be adjusted
at the time of making final payment."

Shikhar Saxena, partner, Ace Equity Solutions, a leading housing
finance franchisee of ICICI Bank [ Get Quote], had booked a fully-
furnished, air-conditioned service apartment measuring 650 sq. ft
(super area) in Cabana Service Apartments in Indirapuram, Ghaziabad,
which was being built by Assotech Realty. He got an allotment letter
mentioning this area. However, when the builder offered possession,
the super area of the flat had increased to 671 sq. ft. "Once the
authorities approve of the floor space index, how can the builder
change it?" he asks. After holding out for over 18 months, the choice
before him now is to either accept all the terms of the builder or
seek cancellation of his allotment. Further, he was informed that the
maintenance charge, which was to be Rs 1.50 per sq. ft per month, has
been increased to Rs 7 per sq. ft per month. The agreement shields
the builder. It says "the monthly maintenance charges will be subject
to revision from time to time".

Assotech's Elegante project, also in Indi-rapuram, was to have
terrace gardens on the seventh and thirteenth floors. "There is only
a patch of green; the developer has built units on these floors too,"
says a buyer. Srikumar says there is nothing one can do unless the
size of the garden is specified in the agreement.

What to do. Builders usually follow the same practices through all
their projects. So, before buying, check out the builder's earlier
projects to see if he plays fair. Start a blog or join one to share
your experiences with others, though this doesn't guarantee
redressal. You can read about the mistakes and experiences of other
people on websites like

VII. What's the carpet area?

Most residential units in India are sold on the basis of the super
built-up area, which includes open spaces like space for lifts,
staircases and parking, among other things. But, what you really get
is the carpet area, which literally means the area that you can
carpet. This can be 15-35 per cent less than the super built-up area.
In 2005, HDFC [ Get Quote] chairman Deepak Parekh had said the
company would provide loans at cheaper rates to developers who sell
their flats on the basis of carpet area. But, there has been little
headway on this front. Some developers, especially in Bangalore, sell
on the basis of carpet area. In Pune, too, the builders' association
has decided to increase the carpet area by 25 per cent to arrive at
the saleable built-up area charged to the buyer. In both these cases,
buyers are aware of the area they will get. Though there is still a
long way to go, experts believe that soon properties all over India
would be sold on the basis of carpet area.

What to do. Buy property on the basis of carpet area, although the
builder will not like the idea. Argue with him that if the super
built-up area is mentioned on the basis of the approvals and
sanctions, the carpet area can be quantified. Says Srikumar: "There
should be a provision for termination of the contract and resumption
of the property so that builders don't have an upper hand. However,
in the absence of rules, buyers should be vigilant."

VIII. Will I get a well-managed property?

The developer may promise to maintain the building or complex in the
initial years. The service, however, may not be satisfactory.
Residents of Mahagun Manor in Noida have taken over its
maintenance. "The homebuyers cannot even use the Right to Information
Act, 2005, to their advantage because it doesn't apply to private
builders or even group cooperative housing societies," says

What to do. You are unlikely to get relief through correspondence and
phone calls. You can go the e-way to attract the builder's attention.
For months, Delhi-based developer Unitech ignored the complaints of
the residents of one of their premier offerings, Uniworld City. Then,
a resident shot a nine-minute video that captured the visible flaws
of the project, and posted it on, a broadcast site. Their
grievances were soon attended to. You can use websites like
www.consumerhelplin and www.cgsiindia. org to seek further

Though the dice is clearly in favour of the builder, the buyers can
still fight back and many of them are doing so. Now, the government
urgently needs to put a regulator in place to ensure proper
disclosures and protect the buyers.
What we need

Mostly, a home is the biggest investment of one's life. And yet, most
people buy it in a hurry. In this hurry, they sign all the papers
without even reading it, let alone questioning its clauses. It may
all seem illogical later, but it doesn't when it actually should.

The Indian real estate market does not have a regulator. The need of
the hour is to take lessons from streamlined markets abroad and
introduce comprehensive disclosure norms. For instance, US homebuyers
are entitled to receive a number of disclosures during the course of
the house purchase. These disclosures give a homebuyer a somewhat
transparent and fair picture of what he is getting into. On the other
hand, Indian homebuyers sign agreements that are not clear. What's
more, they even get surprises in terms of extra costs. Take a look at
what a buyer in the US state of California is entitled to know from
the builder.

Real Property Disclosure Statement. This document details the
condition of the property and potential hazards, or defects that may
be associated with it. While the seller is principally responsible
for the disclosures presented in this document, the agent is also
supposed to inspect the property and disclose any observable defects
detected in the process. The document also lays down any special
taxes that may affect the property's value.

Financing Disclosures. Various financing disclosures are made during
real estate transactions. They give important details about the loan
the owner may have taken for the property.

Truth in Lending Statement Disclosure. This has details about the
terms and conditions of credit, including the amount financed, the
finance charge, and the annual percentage rate.

Real Estate Settlement Procedures . This contains detailed estimates,
by the broker and the lender, of settlement and closing costs to be
provided within three days after you apply for a loan. It also
provides detailed accounting of actual disbursements and closing
costs once the loan transaction is completed.
'Check builder's credibility'

Vincent Lottefier, Chief Executive Officer, India
Jones Lang La Salle Meghraj, a real estate consultancy firm

Cause of the malady. Generally, reputed builders deliver on time and
as per promised specifications. Small developers, however, default by
stretching their projects beyond the promised delivery date. Often,
this is caused by funding issues. They may also skimp on construction
costs, banking on the buyer's ignorance about quality parameters.
Sometimes, they submit incomplete drawings to the municipal
authorities. There are also fly-by-night operators, who pocket their
clients' initial payment and then disappear altogether. In bigger
cities, most developers are established and experienced players with
a reputation to protect. Here, the incidence of gross defaulting is
less than 10 per cent. This can, however, be as high as15-20 per cent
in emerging suburban areas, where there are a lot of small
developers. Many developers who respond to sudden property booms in
suburban are as have no experience or technical knowledge and often
do not have banksbacking them. Most emerging suburbs are also defined
by unclear land titles. Navi Mumbai is a case in point.

What buyers should do. A buyer should check the developer's
credibility, past projects, performance and delivery record. He
should also ensure that the project is funded by a known bank and has
all the approvals. A buyer is entitled to ask for a copy of the
project's drawings, duly stamped by the municipal authorities.

Legal recourse. Buyers in Maharashtra can take recourse to Section 8
of the Maharashtra Ownership Flats Act, 1963, which makes a developer
liable to refund the money obtained from a customer with 9 per cent
interest if he is unable to justify non-completion of his project.
Most states have similar regulations.
Reputed developers do undertake remedial action if aclient is not
satisfied with the final product. This is unlikely in the case of
unknown one-time operators. Buyers should keep in mind that a
developer is supposed to make improvements, repairs and alterations
until a society is formed.