Under-construction or ready-to-move-in house: How to make a choice

Regard the lower price of an under-construction property as compensation for betting on a riskier asset

Residential real estate prices are once again galloping. According to the Magicbricks Propindex report for the quarter ended December, prices across the top 13 cities increased at the rate of 18.8 per cent year-on-year. The escalation was especially high in Gurugram (32.1 per cent), Greater Noida (31 per cent), and Noida (26.1 per cent). Many potential buyers are now thinking of buying an under-construction (UC) property instead of a read-to-move-in (RMVI) property, as the former allows gradual payments.
 

Under-construction property

Pricing: Pricing is usually more attractive in a UC property. “In comparison to a finished project, you can get a discount of up to 30 per cent. As the value of the property rises over time, you can expect a larger return on your investment,” says Santhosh Kumar, Vice Chairman, ANAROCK Group.  Developers often offer incentives.

Quality: The quality of construction can at times be better. “Construction technology has become faster, more efficient and environment-friendly. Newer homes also incorporate a lot of automation,” says Ravi Shankar Singh, managing director, residential transaction services, Colliers India.

In a UC property, the buyer has some control over the property’s layout, style, and finishing and can get them done according to her tastes by paying a small premium to the builder. Renovating the apartment himself would cost more.

Financials: The financial burden is staggered in a UC purchase. “The entire amount does not go from your loan account in one shot. You can pay a pre-EMI during the construction period, which is essentially interest on the amount disbursed to the builder (which in turn depends on the stage of construction in a construction-linked plan),” says Adhil Shetty, chief executive officer (CEO), Bankbazaar.

He adds that the pre-EMI comes in handy especially to those paying a rent.

Vishal Dhawan, chief financial planner at Plan Ahead Wealth Advisors, says the staggered payments allow buyers to purchase a larger house.

Delay and other risks: The biggest risk one faces in a UC property is that of delay in completion and delivery. “The risk becomes pronounced in the case of smaller, less financially strong developers. Their projects could face issues due to lack of funding, delays in regulatory approvals, or even legal disputes,” says Kumar.

Delays in environmental and other clearances, getting the occupancy certificate, and multiple other factors can delay the final possession.

The property that is finally delivered may not live up to the buyer’s expectations. “The finished product may not match the promised specifications, design, or features. The construction quality may also be compromised,” says Kumar.

In a UC purchase, the buyer effectively finances the developer. “But you do so without having an insight into his balance sheet, except in the case of listed developers,” says Dhawan.

A buyer who lives in a rented house would have to keep paying rent. “Those who wish to replace an existing property with a new one do not have the flexibility to sell it until they have received possession of the UC property,” says Dhawan.

Paying only the pre-EMI to the lender has a flip side. “The pre-EMI includes only the interest on the loan. No money goes towards repaying the principal,” says Adhil Shetty.

No tax benefit can be availed until the buyer has received possession of the property and got it registered.

 

RMVI

The buyer avoids the risk of project delay. Moreover, what he sees is what he gets. “Buyers can avoid quality issues, as the property is ready and can be thoroughly inspected. They can also get a realistic view of the property and its features, and thereby circumvent the risk of false promises by the developer,” says Kumar.

Location: According to Singh, one can get a better, more central, location compared to a UC property, which typically come up in peripheral locations. “The carpet area you get for the stated super area might also be higher in an older property,” he adds.

Financials: Since the buyer can move into the property right away, she can avoid paying rent. By renting out the property she can help pay the EMI.

Taxation: Buyers can claim tax benefits on home loan right away.

Higher pricing: The buyer invariably has to pay a premium for purchasing an RMVI property. “The premium can be between 10 and 30 per cent over the price of a UC property,” says Kumar. The price gains that occur during the construction stage go to the person who buys a UC property.

Someone who buys an apartment in an older construction may have to spend on renovating the property. The cost of renovation can at times push up the total acquisition cost substantially.

Singh points out that the amenities and facilities could be outdated or of a lower quality.

Kumar adds that buyers may have fewer options to choose from as the inventory of RMVI property is limited currently.

How to decide

Buyers should decide to buy a UC or an RMVI property based primarily on their risk-taking ability. “When you go for a UC property, you take a bet on the developer being able to deliver the house according to the promised timeline and of the promised quality. But his ability to deliver on time depends not just on his execution skills but also on multiple other variables, including regulations and approvals,” says Dhawan.

People often take the risk of investing in a UC property thinking the underlying real estate provides a margin of safety. “But when something goes wrong, selling the property becomes very difficult,” says Dhawan.

He adds that while the buyer does get a more attractive price in a UC property, that should be viewed as compensation for the higher risk choice he has made.

UC property: Bet on a quality builder

The key precaution a buyer should exercise is to go for a reputed developer. “The chances of the project getting delivered on time, and the quality being as promised is much higher in case of a reputed developer,” says Singh.

Get the land title checked by a property lawyer. Also check whether the approvals and clearances are in place.

Singh also suggests checking the proposed infrastructure development in the area — the road network, Metro connectivity, and other means of public transportation.

There is a tendency to overstretch the budget when going for a UC property. “People make a lot of assumptions about salary growth, bonuses, etc. They should be conservative in making such assumptions,” says Dhawan.

Buyers also assume their outflows of funds in a UC property will be evenly spread out. That may not be the case. “The bulk of outflows may happen in the earlier stages when the superstructure is being built and then slow down in the later phases while the interiors are being done. Try to get a sense of the timeline of payments from the developer,” says Dhawan.

Those who have taken a loan to purchase a UC property should know that they can start their regular EMI even while the property is under construction. “If you have the funds, start the regular EMI. By the end of three years, you will have only 17 more years to pay (in a 20-year loan),” says Shetty

RMVI property: Check state of construction 

Before purchasing an RMVI property, factor in the age of the building and the amount you may have to spend on renovating both the exteriors and the interior. Also check the building infrastructure (lift speed and quality, and so on).

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Know the tax norms
 

Under-construction

Taxpayer can claim tax deduction on stamp duty and registration fees under Section 80C (annual limit Rs 1.5 lakh)

Principal of the loan can be availed as a deduction under Section 80C

Interest component cannot be claimed as deduction during the construction phase

If the borrower pays a pre-EMI during this phase, the interest paid can be claimed as a deduction in five equal annual instalments from the financial year in which construction is completed. GST has to be paid

Ready-to-move-in

Taxpayer can immediately start availing tax benefits on both principal and interest paid; latter has annual limit of Rs 2 lakh under Section 24(b)

No GST has to be paid

Source: RSM India