Towards transparent transactions in realty industry

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Vinod Behl | 04 May, 2011
The recent announcement by the Confederation of Real Estate Developers Association of India (Credai), the apex body of builders, to impose a code of conduct on some 10,000-odd members to bring in transparency in real estate transactions is a welcome step.

Though the association has made it mandatory for members to mention the actual usable area, also called the carpet area, of the property and compensation for project delays, the measure may fall well short of making much needed disclosures and empowering the property buyers to ensure they get a fair deal and their interests are protected.

This is especially so as lot of ambiguities persist among property seekers, pertaining to the rights of ownership, maintenance charges, regulations of statutory bodies and documentation modalities in general.

It is a common practice with builders to sell property on the basis of "super" built-up area, which includes open spaces like spaces for elevators, staircases and parking area, among other things. As such, the actual usable area which the property buyer gets is about 20-40 percent less, depending on the loadings which are not uniform.

In some cases, the loadings can be even more. Often builders are not disclosing the basis of calculating the carpet area. Recently the Monopolistic and Restrictive Trade Practices Commission, India's apex anti-trust authority, had pulled up a leading developer of Delhi for this.

The builders are also avoiding calculating the usable area on the basis of the norms set by the Bureau of Standards on the plea that these are not statutory. They also take advantage of the fact that there are no standardised means to measure common space value and extra cost it imposes. There is a need for introducing a new system of calculating value of property on the basis of actual usable area.

What makes things really difficult for the property buyers is the ambiguity about carpet area in the property-purchase agreements. In a majority of cases, the agreement does not go beyond stating that plan, design and specifications are tentative and the developer reserves the right to make variations and modifications.

As such, the property buyer is totally clueless about the area of his property till he or she takes possession. Taking advantage of this ambiguity, developers often make the buyers shell out additional money in the name of improved specifications.

It is, therefore, important to make mandatory for builders that their property sale agreements also carry detailed area statement to give a clear picture of the carpet area. There should be a limit to loadings and what developers can charge from the buyers for the common spaces they use.

Here, regulatory bodies like the National Housing Bank and the Reserve Bank of India can play a crucial role by way of a policy initiative, which prescribes lower loan rates for those developers who sell property on the basis of carpet area.

Besides this ambiguity about what the buyers pay and what they get in terms of area they are also often ignorant about the hidden costs like what are called development charges, parking fee, club membership fee, extra electrification charges for common areas, fire fighting charges, preferential location charges and maintenance and security fee.

There is also no clarity as to how parking, club membership and maintenance charges are calculated. In order to ensure smooth, hassle-free maintenance of the property, it must be made mandatory for the builder to incorporate these clauses in the agreement, clearly stating that maintenance charges will be taken on a pro-rata basis as per the area of the property.

A major grouse of property buyers pertains to delayed projects. Most agreements do not specify delivery date, whereas this disclosure along with clause of compensation should be a mandatory part of the agreement. Monthly repayments from buyers are an easiest and cheapest source of funding and builders can simply get away with project delays by paying a pittance -- Rs.5 per sq ft per month.

Transparency in property transactions also has a lot to do with documentation -- such as title deed, possession certificate and no-encumbrance certificate. The sanction plan, an up-to-date receipt of corporation tax, water tax and electricity charges should be also totally perfectly transparent, without ambiguity.

To get over the problems related to quality of construction, specifications of raw material along with list of fixtures and amenities, should form part of the agreement. Warranty by the developer could further prove to be a blessing.

Finally, the self-conceived code of conduct also may not achieve the desired purpose of bringing in much needed transparency in property transactions, especially as tens of thousands of developers are still out of the purview of this apex developer body.

The only lasting solution could be a regulation that could protect property buyers by ensuring transparent and safe transactions.

* Vinod Behl is editor of Realty Plus magazine. He can be reached at vbehl2008@gmail.com.
* The views expressed by the author in this feature are entirely his/her own and do not necessarily reflect the views of SME Times.