Property Purchase – Five Blunders to Avoid

A property purchase is a mixed feeling for the buyers. Normally, the buyers are super excited at the time of first property purchase. They just want to close the deal asap. Therefore, the probability of blunder is high during first property purchase. Recently, i asked one of my clients to share some property related documents. He emailed me 2 documents. He told me that he received only these 2 documents besides a copy of sale deed and couple of other documents submitted for a home loan. Now he is struggling to sell the property as he bought it 8 years back. I casually asked him, was this his first property purchase? I guessed it right :).

When i was finalizing the title of this post i replaced the word “Mistake” with “Blunder”. The reason being, the points discussed in this post are careless mistakes but may cost heavily. In my posts, i keep cautioning the buyers on various aspects of property purchase. During my recent interaction with some of the clients, i realized that there is a lot more to be covered. Therefore, as usual, i decided to share my learning with the readers. These blunders are a mix of both from the buyer and the seller perspective.

Also, i would like to clarify that in small cities, most of the property transactions are between individuals known to each other. The trust factor is very high. Such queries put me in a fix. Like in one of the recent case, for a property transaction of 1.75 Cr, the buyer only paid 50L at the time of registration. The buyer promised balance payment in a staggered manner over a period of one year. When i suggested against this approach to the client, she told me that buyer is trustworthy and will definitely pay balance 1.25 Cr within 12 months. She wanted me to say YES for this approach. I am sorry but i always share what is right and what is wrong :). Finally, they went ahead with the deal. In my opinion, a property purchase is a high-risk transaction. Any careless mistake can make it a painful experience. Let’s check some of the blunders by the buyers and the sellers.

Property Purchase – Five Blunders to Avoid

1. Tenant: This point is from buyer’s perspective. A property is either self-occupied, rented or vacant. In case the property is vacant then you should enquire about the same i.e. reason. If it is recently vacated then you need not worry. The problem arises when it is occupied by tenants. This is the biggest blunder at the time of property purchase. The buyer allows the tenants to vacate after the property registration. Please note that as a buyer, you don’t have any legal agreement with current tenants. In some cases, the buyer signs fresh rent agreement with the tenant after property purchase. Based on my experience, i can say that in 10% cases, the seller sells the property because the tenant is not vacating the same. In another 30% cases, tenant keeps delaying the possession to the buyer. Blackmailing is also common in case the title of the property is not clear or buyer is not staying in the same city. This problem is common in small cities and towns. The most common reasons given by tenants are on humanitarian grounds like old parents, small kids etc. All said and done, as a thumb rule, you should accept vacant possession at the time of property purchase.

2. Payment Due: This point is from seller’s perspective. As i shared in the example mentioned above, any payment due after property registration is riskier. Though you may include clause related to cancellation deed in case of payment delay/default. Normally such scenarios are observed when the seller is in very urgent need of money. Keeping the legal system of the country in mind, the resolution of the legal dispute over the property may take even a decade. As a seller, you should receive 100% payment at the time of property registration. The possession should be given only after the receipt of 100% payment. Alternatively, it will be a blunder to handover possession before property registration. A buyer may give an excuse to get furnishing done or he would like to shift earlier. All these may lead to dispute and should be avoided.

3. Indemnify Seller: From buyer’s perspective, indemnifying the seller against the title of the property is suicidal in nature. This clause is normally included by the builders. A buyer should not agree to this clause at any cost. The entire risk of property purchase rests with the buyer. A seller should indemnify buyer against any defect in the title of the property including builders. If you observe this clause in sale deed then it is a red flag. Be assured that title of the property is either doubtful or not clear.

4. TDS: This point is relevant from seller’s perspective. A TDS of 1% is deducted from seller’s contribution u/s 194IA in the case of resident Indian Seller. In case, the seller is NRI, the rate of TDS is 20% u/s 195. In some of the cases, i observed that the TDS is deducted by the buyer is not deposited. This is true, especially for NRI sellers. After property purchase, the buyer has some time in hand to deposit the TDS. The buyer thinks that NRI’s will not follow up on TDS part. It’s a cool gain of 20% for them. Therefore, it is important to include a separate clause in sale/conveyance deed. Depending on TDS u/s 194IA or 195, this clause should clearly mention the TDS calculations. It also includes the timelines to deposit TDS and by when the buyer will share the TDS certificate with the seller.

5. Documentation: Last but not the least. A buyer should ensure that documentation is completed at the time of property purchase. After you paid the full amount and conveyance deed is signed, a seller will not listen to you. Normally, the buyers are clueless on documentation part. I have shared a general checklist of property documents. This list may vary from case to case basis. Therefore, it is important to understand the local rules and regulations. It is important to hire a good property lawyer, who can help in this regard. Generally, i fail to understand, a buyer is willing to spend 50L on the property but think 1000 times to pay few thousand rupees to a lawyer. It is always advisable to take professional advice. Always remember, if you miss any document then it may cost you heavily in future.

Words of Wisdom: As a buyer or seller, you should always note down the process of property purchase/sale. A little bit of internet research can help you in formulating this process. The points shared in this post are generic in nature. There is a list of large no of important points specific to each property transaction. You should not miss and always include the critical ones in sale deed like TDS.

Copyright © Nitin Bhatia. All Rights Reserved.