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Register Under Construction Property for Home Loan

Register Under Construction Property
Register Under Construction Property

“Register Under Construction Property to avail Home Loan,” a Bank Employee told to one of my clients. My client got confused. She was under a notion that under construction property can only be registered at the time of possession. Off late, banks are insisting borrowers to Register Under Construction Property before possession if you are availing a Home Loan. Though it is mandatory to Register Under Construction Property under subvention schemes, it is at the discretion of the bank. From a buyer’s perspective, it’s a mixed bag. Depending on case to case basis, to Register Under Construction Property may or may not be beneficial. We will discuss this in a later part of the post. Moreover when you are availing home loan, then borrower does not have any choice but to oblige the directions of the bank. As a borrower if you are not comfortable to Register Under Construction Property then you should discuss the same before availing Home Loan. Once you sign on the dotted line, then nothing much can be done. Let’s check

Register Under Construction Property – Modus Operandi

Typically the buyers are confused how the deal will be executed in case bank insists on registration. Any property transaction is very risky especially if you are buying under construction property. I highlighted critical points in my post, Under Construction Property – 7 Imp Points. In one of the cases, a buyer has registered the property that is in Pre-Launch phase. It means that all the approvals to start a project are not in place, but the registration is completed. In this case, both the builder and the bank has safeguarded their financial interests, and entire risk is on buyer’s shoulder. When i suggested against any such arrangement, then buyer counter-argued that bank is approving the home loan. I mention this point in almost all my posts that Home Loan is like any other personal loan. A property is mortgaged like a bank guarantee/surety against a loan. Approval of home loan does not mean that project is RISK-FREE. Let’s check the process to Register Under Construction Property. Before that let me clarify that there is no standard process for this. I am only sharing what i feel should be the right way to safeguard interests of a buyer.

(a) As this is a very risky transaction, therefore, the buyer should first approach the banks to check whether the bank is lending for the shortlisted project/s or not. In such transactions, you should always trust banks instead of HFC’s. Reason being, HFC’s are lenient in loan approval compared to banks that i discussed in detail in my previous posts.

(b) As a next step, you should pay the booking amount of 1 lac/2 lac to the builder. After that, you can sign 2 agreements with the builder i.e. Sale Agreement and Construction Agreement. Normally, if it is pre-decided to Register Under Construction Property, the sale agreement value is equivalent to Circle Rate/Guidance Value. Sale Agreement is executed on UDS (Undivided Share) of a buyer on the property. In layman terms, if there are 100 buyers of 50,000 sq ft common area then UDS of each buyer will be 500 Sq ft though the super built-up area of the flat including UDS is 2000 sq ft. In short, UDS is the ownership of a buyer in common area/land.

(c) Based on Sale Agreement and Construction Agreement a buyer can apply for Home Loan.

(d) Once the Home Loan is approved, you can Register Under Construction Property on the sale agreement value.

Now, you must be wondering how the risk is high in such arrangement. Reason being, normally the Sale Agreement value is 1/2 or 2/3rd of the total consideration value. A bank may disburse the amount equivalent to registration value after adjusting seller’s contribution of 20%. A builder will get almost 2/3rd payment during initial stages. A project may get delayed in such cases. Another possibility is a defect in the title of the property. In other words, if anything goes wrong then the buyer will be in big trouble. Therefore, if you are going to Register Under Construction Property then tread with extra caution.

Why banks insist to Register Under Construction Property?

Gross NPA’s of a bank is now the biggest concern for any bank. The performance of a bank is judged by NPA’s during bad times. A bank faces maximum defaults while lending for under construction property. The reason being, uncertainty is HIGH compared to re-sale property. A buyer buys with certain assumptions like completion period, an increase in income, clear title, etc. If anything goes wrong, then buyer stops home loan EMI. In the case of resale property, a bank can attach the physical property and auction the property. Whereas, in the case of under construction property there is no such option and bank’s money is stuck. Have you ever heard of an auction of under construction property.

The biggest problem arises if the property is not registered and the bank has to deal with the builder. The chances of fraud are also high if the builder is not reputed. A bank may request builder to cancel booking & builder may sell it again without the knowledge of a bank. Therefore, bank insists to Register Under Construction Property. In this case, a bank has formidable option to recover the money. Once the property is registered in sub-registrar office, the bank will put a lien on same so that it cannot be sold again without bank’s knowledge. A bank can explore options to auction such properties or at least bank can claim legal ownership on the UDS of the property.

Do’s and Don’t to Register Under Construction Property

I am listing down certain imp points that a buyer should keep in mind before he agrees to Register Under Construction Property.

(a) Construction Agreement Value: In the case of a home loan, you should clarify from your home loan provider on construction agreement value. Some of the PSU banks do not consider construction agreement value to calculate home loan eligibility. Though it depends on case to case basis, it is a possibility that should be ruled out. If you come to know about this after you Register Under Construction Property then as a buyer, you are STUCK. In this case, buyer need to arrange additional funds equivalent to construction agreement value.

(b) Home Loan Approval: You should not Register Under Construction Property before home loan approval. In few cases, a buyer Register Under Construction Property from own contribution and the home loan was rejected after registration. A bank may insist to Register Under Construction Property before home loan approval. You should not fall into this trap. Once the home loan is rejected by one bank, it is next to impossible to avail home loan from any other bank.

(c) Prefer projects near completion: As i mentioned in this post that to Register Under Construction Property, which is in pre-launch is suicidal. You should always prefer the projects that are near completion. The risk is very low in such cases.

Words of Wisdom: As the real estate sector is in bad shape, therefore, it increases the risk factor. You should evaluate all the factors before you agree to Register Under Construction Property. Each transaction is different and unique. I have tried to cover all the important points, but a buyer can judge better. If you Register Under Construction Property, then you are hedging the risk of a bank and the builder. As the life is zero sum game, therefore, you are increasing your risk in the same proportion. My intention is not to discourage buyers to Register Under Construction Property but to caution them for right decision making.

Copyright © Nitin Bhatia. All Rights Reserved.

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shiv
shiv
8 years ago

Dear Nitin Ji,
I am really found of your articles , blogs . these are really very informative.

I have a query towards purchasing of resale under construction property.

1. I purchased a resale under construction property where sale agreement was not registered, it was only on stamp paper with notarised by advocate.

2. All papers builder buyer agreement, allotment letter and other papers on seller(male) single name.

3. After paying him almost half of the agreement Vaue , his wife making claim on property and saying as her name was on loan as coapplicant .so she is also a party whose consent is required for selling the property.

4. My real state agent , seller both says that I should not worry and close the deal by paying full amount. However as he is having dispute with his wife and her wife reached to builder as well.

5. Builder is ready to transfer the property but said all responsibility lies with me and asked me to write on paper.

Please suggest what I should do, can seller’s wife claim on seller’s single name property. Precautionary what steps i should take.

I would appricate your help in this regard.

Thanks,
Shiv

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  shiv

Legally a Home Loan Co-Applicant has NO CLAIM on the title of the property but as she is a WIFE of the seller therefore as per the ruling of supreme court of India & Indian laws in this regard, any property acquired by husband after marriage, WIFE HAS EQUAL SHARE in the Property even if the property is solely in husband’s name. If the dispute arises between husband and wife then court is normally sympathetic towards the claim of Wife. Though i have not seen property documents, don’t know the reasons of dispute and moreover dispute arises before the sale of property therefore in my opinion, you should not go ahead with this deal.

shiv
shiv
8 years ago
Reply to  Nitin Bhatia

But then this is applicable to all property deals where single name property is getting sold and whether wife is part of loan or not she is equally owner of property.

Hence it is applicable to all married people to get consent from his wife before selling the property. As nobody knows whether internally husband wife are indulged in dispute before the deal.

What is your opinion.

Thanks ,
SM

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  shiv

A consent is required when there is a DISPUTE. Legally, all my class I heirs have stake in all my assets. I don’t need their consent to sell my assets but if someone decide to claim his/her stake then the title becomes disputed. In your case, the wife of a seller has raised a DISPUTE and buyer/builder has complete knowledge of the same. Therefore technically TITLE of the property is disputed.

The opinion is my personal opinion based on information shared and i have not checked complete background. You may consult a lawyer.

Arvind Sanghvi
Arvind Sanghvi
8 years ago

Hi, I bought a underconstuction property valued rs. 15lacs in Jan 2012 and executed agreement to sales. The agreement is silent about who will bear service tax and vat. Now builder is asking me to pay service tax else he said he will not make sales deed. I understand from my friend that since value is less than 20lacs there is court ruling that if agreement is silent builder will bear the service tax. Pl confirm and also let us know the details of the court ruling

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Arvind Sanghvi

In my opinion, VAT and ST will be borne by the builder in your case.

Arvind Sanghvi
Arvind Sanghvi
8 years ago
Reply to  Nitin Bhatia

How should I justify what u suggest. Any case law on this subject

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Arvind Sanghvi

As per the ruling of supreme court of India the VAT and ST is borne by the builder until unless it is specified in the buyers agreement. As there is NO mention of same in your agreement therefore you need not pay. Please check following news article

http://www.dnaindia.com/mumbai/report-builders-can-t-pass-on-vat-to-flat-buyers-supreme-court-1894455

Sumit
Sumit
8 years ago

Dear Nitin,

I don’t know if I am asking a question on the right post but it it related.

We have identified a underconstruction 3BHK property in Pune and the negotiated property value is 65Lacs. Builder says that possession will be given by May 2016. I am planning to take a loan of approx. 55lacs for 20 yrs.

1. I want to know if there is a way out to save 1% VAT and 3.67% service Tax if I am ready to do late registration and wait till builder receives completion certificate. In such a scenario…..can Bank provide loan w/o doing registration? Does builder agree for such cases.

Or is there any other way out to save the tax (VAT/Service Tax)?

2. My Carpet Area is 1000 sq.ft and Saleable area is 1300 sq. ft (30% loading). To save tax; builders will be doing registration on builtup area approx 1100 sq.ft. Is it legal? Will there be any problem for me in area during resale?

3. I checked on EMI calcualtor; my interest component for next few years will be in the range
of 5 lacs :(( and tax benefit i can show is only 2 lacs. But i have seen that there is no limit for
tax bebefit component if we show that flat is NOT self occupied. I may get a rent of 12000 in that area. I also have one more house in Pune in my name but for this i have never taken loan (it was a cash buy). How can I make use of this situation to save more tax?

4. Will I get any future tax benefit if I register the property in My Wife’s name OR joint name? Can I get a loan in that case and claim also tax benefit? She is housewife.

Thanks a appreciate your help earliest possible as we want to finalize the property in this week!!

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Sumit

1. No. You can save VAT and ST if you purchase after the CC/OC is issued for the project.
2. This is done only when the builder retains 100% rights on the common area/amenities. In short, your UDS will be NIL. You should register either full area or UDS in the property. Please clarify from builder. I am not comfortable with registration of built up area till proper reasoning is provided by builder.
3. You may declare this new property as let out and existing property as self occupied
4. Please check my following post
https://www.nitinbhatia.in/home-loan/home-loan-co-applicant/

KT
KT
8 years ago

Dear Sir,

I have purchased flat 1 year ago, we have registered the agreement too,
but My name is still not added in local municipal authorities for property and various local body taxes, my locality is comes under Gram Panchayat and not in Municipal corporation limit. please guide me what to do for that.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  KT

Municipal authority only keep record of properties under its jurisdiction limit. For gram panchayat property, you may approach gram panchayat office.

Ganesh
Ganesh
7 years ago

Hi Nitin,

I have shortlisted a property in thane W which is under construction and status is 85% ready (all slabs, plastering, flooring, one coat painting etc completed). Presently plumbing, electrical wiring work and lift installation is in progress. Commencement certificate is obtained. Builder is promising possession in Dec’16. But he also mentioned that obtaining OC is not in his hand and might delay one or months. But he is guaranteeing for soft possession (furniture work etc) 100%.

I did search for resale properties in nearby areas but they are quoting very high and not much choice on floor and view. Since the property is nearing completion I feel that I can go with my decision to buy this under construction property.

Can you help compliment my decision.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Ganesh

There is no straight forward answer. I suggest you to go through all my posts on under construction property. It will give you complete perspective on the same.

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