Invest in land, but don't forget the fencing

Investing in plots can be lucrative as well as cheap. But, Sandeep Bagchi, recently offered a plot of land at Rs 5 lakh on the outskirts of Mumbai, is not sure whether to go for the deal.

The broker’s pitch, “Five years from now, this plot will be worth Rs 25 lakh. It can also double up as a weekend home if you go for construction.” Given the small amount of initial capital required, Bagchi is even considering investing.

There are several hitches, though. One, he has to pay an initial amount of Rs 1 lakh. The balance can be paid when the builder gets all the necessary clearances.
 

PROFITING FROM LAND

• First-time investors should opt for plots from reputed developers
• Buying from reputed builders could be 10-20 per cent expensive 
• Keep track of land title, zoning norms and encroachment issues
• Banks offer lower loan-to-value and charge higher interest rates

 

However, Bagchi’s main concern is completely different. “Since the plot is located a good 80 km away from the city, I can seldom visit it to see the progress. What if encroachers take over the property?,” he asks. Buying plots has been a popular investment choice for many. In good times, they are multi-baggers at a low cost. However, it is fraught with dangers as well.

There could be lack of clarity about the land title, zoning changes, agriculture/non-agriculture land disputes, apart from encroachment issues. The title can be the most crucial of the lot, especially if the land was inherited by the seller under the Hindu Succession Act. In case of any of these problems, the buyer is likely to get stuck in litigation. Clearances from municipality may also take a really long time.

For first-time investors, a safe way is approaching reputed builders selling such plots. The latter provide assurance that these plots have all the necessary clearances. Also, when exiting, buyers are more willing to purchase plots owned by established players. But, there is a premium of 10-20 per cent one will have to pay.

“Typically, those interested in such investments can either opt for plotted developments, whereby developers sell individual plots as part of a large project, or invest directly in individual plots.

The former is favoured, especially for first-time investors,” says Balaji Raghavan, president (real estate practice), IIFL.

Even with reputed developers, one needs to do some due diligence in terms of ensuring the builder had acquired the necessary clearances and there were no zoning clashes, he adds.

Investors may have other headaches as well. Selling the plot can be a pain at times. While builders from whom the property was purchased may help, one could get badly stuck in the absence of buyers.

This can happen if the land is purchased in remote areas. “Many times, people fall prey to marketing gimmicks by developers and end up buying in some unknown, far-flung location. Though they purchase it at throwaway prices, they find themselves stuck when looking for exit options,” says Rajesh Mehta, chairman, Raha Realtors. Such plots often lack basic necessities such as connectivity, availability of electricity, water and other utilities.

Obviously, financial planners caution against such investments. Malhar Majumder, a certified financial planner, feels it is advisable only for individuals with lump sum investible surpluses and those who can stay locked-in for extended durations without their finances getting stretched. Borrowing for such investments is a strict no-no, he adds.

Even banks and housing finance companies give a lower loan-to-value and charge higher rates for plots.