Few thumb rules for buying a flat

Aarati Krishnan

BUYING a flat in a city is not a good investment, at least, in India.

Surprised, shocked? Consider these facts: In most cities, if you buy a flat, the return, as rent, is at least 50-60 per cent lower than the monthly instalment of the housing loan.

You may think you are buying an asset. But the slump in the real-estate market over the past few years means you are no longer sure of getting any appreciation (leave alone a handsome one) by re-selling the flat.

Yet, how many of us can resist the urge of moving into your own home? I could not. And I reasoned that having decided to buy a flat, this was probably a good time to do it.

Dropping interest rates have made housing loans less forbidding than before. Further, the slump in real-estate has made housing a buyer's market, with both flat promoters and housing finance companies vying to offer better bargains.

Here are a few flat-hunting "tips" for the first-time buyer:

Should you go to a broker?

If you are willing to do a bit of legwork, you can do without a broker whether you are looking for a new or even a second-hand flat. Using a broker only means additional expense; usually they charge a fee of up to 3 per cent of the sale consideration (2 per cent from the seller and 1 per cent from the buyer).

If this does not seem much, consider that 1 per cent of Rs 20 lakh (assuming that to be the budget) is Rs 20,000. The seller will, probably, load the commission he would have to pay on to the price. Since the broker's fee is typically a percentage of the sale consideration, he has a vested interest in pushing the deal, even if it means papering over a few defects in the property, or worse, in the documents.

Locating a flat that meets your specifications - the key function of a broker - is no longer so daunting. If you have a good idea of what you are looking for, help is at hand from three (and probably, more objective) sources:

* The classifieds section of daily newspapers usually choke full of property for sale - both new and second-hand. Most often, you can get in touch with the seller directly. If you have decided on the locality, you can easily get an idea of the prevailing rates from the classifieds section.

* The Internet (Web sites such as *Indiaproperties.com and hdfcrealty.com) gives you a good listing of the deals available, city-wise and location-wise.

* Several housing finance companies are willing to help you locate property, for free, in return for borrowing from them. The advantage of this is that the finance company is also a good reference point for checking the reliability of the seller/builder and the rate.

The trade-offs

Location: This a matter of personal preference. But you have to decide whether you would prefer a cheaper flat in the suburbs or a costlier place at a central location. A flat in the heart of the city will be convenient, especially in terms of travelling to work and school, better access to amenities, and so on. But a flat in the suburbs may come much cheaper (you may be able to afford a larger flat too), with more open space (such as play area for the children), and more restful surroundings. Also remember that the cost of living in the city is higher than in the suburbs.

New or second-hand: Again, affordability may be the deciding factor. However, a couple of factors may weigh in favour of purchasing a new flat:

* A new flat (with new fittings and amenities) is bound to require much less maintenance expenditure in the initial years.

* If you book a new flat in the initial stages of construction, you may be able to change the specifications (even if to a limited extent) to your convenience.

* For most of us, a flat is a life-time investment. The flat you acquire today will probably be your home for the next 15-20 years.

Depending on the stamp duty applicable to your city, a new flat may attract lower stamp duty (on registration of the sale) than a second-hand flat. In Chennai, for instance, the builder's agreement is usually structured such that you pay stamp duty only on the undivided share of land (your share of the plot of land on which the apartment stands) and not on the cost of the flat. For a second-hand flat, the stamp duty is charged both on the cost of land and on that of the flat.

Stepping into a project

There are also a host of other decisions you may have to make. For instance, whether to enter a project at the initial stages of construction or to opt for a flat ready for occupation. Entering a project at the initial stages of construction has both its pros and cons.

On the positive side:

* You may be able to get the choicest flat in the building (say, with a good view or on the preferred middle floors).

* You may be able to substantially alter the plan for the interiors.

But on the negative:

* You may have to lock in your money for a longer period (most builders allow you to pay on a staggered basis through the period of construction).

* You assume a higher degree of risk that the builder might abandon the project or fail to provide the promised facilities.

The budget

Your budget will, undoubtedly, ultimately influence most of your decisions. Keep the following factors in mind when you plan the budget:

Extras: The rate the builder quotes often does not include: The registration fees for the sale deed; the charges towards electricity, water and sewage facilities; the cost of the fittings (electrical, woodwork, etc).

In case you plan to take a loan, housing finance companies fund up to 85 per cent of the cost of the flat, requiring you to put up the rest from your own funds. Therefore, your overall budget will depend on how much cash you can generate to meet your share of the equity.

Processing fees: Housing loan companies typically charge both processing and administrative fees for processing the loan application. This typically totals up to 1-1.8 per cent of your loan amount (these rates though, are negotiable).

Pre-disbursement interest: Though the monthly instalment on the loan (that includes both the principal and interest) will start only after you have drawn the full loan amount, you may have to pay a pre-disbursement interest on the part of the loan used before you occupy the house (and pay the final instalment to the builder).

In case you are booking a flat in the initial stages of construction, you may need to set aside additional funds to meet extra expenditure, if any, during the period of construction.

These are some of the general aspects in the purchase of a flat. You may need to check out a host of specifics once you decide on an apartment. More on this, next week.