Year: 2005. The property market is booming. The spending power of middle-class Indians is at a high. Real estate prices are soaring. Owning a house suddenly seems not just easy but inevitable. From your neighbourhood grocer to your colleagues, friends and family–everybody’s buying a house. And everybody warns you to hop on to the bus before interest rates start climbing again, before prices shoot up higher. It’s housing fever and it’s running high.

It’s hard not to get infected. In Bangalore this February, 28-year-old Prithviraj U.K., associate, Perot Systems, succumbed. A small builder he was acquainted with was developing a project on Bannerghatta Road. Knowing the builder made Prithviraj confident enough to bypass regular due diligence processes. He booked himself a Rs 18 lakh flat, paying Rs 1.5 lakh as booking amount. It was a heady feeling. It didn’t last. When he approached HSBC for a home loan, bank officials discovered that the construction contravened sanctioned plans. HSBC denied the loan, as did other financiers. Prithviraj wants out, but his booking money is stuck.

It could happen to you. In the rush of home buying, are you sure you are doing all the right things? Or are you too sorely tempted to take short cuts? Face it, it’s hardly the easiest decision to take. You are going to be making what could be your life’s biggest financial investment. You’ll be pulling the plug on your savings to make the down payment. Repaying it will be a drain on your resources for perhaps the better part of the next decade. It’s the place where your children will grow up and you’ll grow old. This buy is a big decision. And it should involve a commensurate amount of committed planning and mindspace from your side.

As we have reiterated time and again, there’s no time to buy like now. Most experts predict a steady growth in capital values of residential property, and interest rates and tax breaks are still good. So, buy by all means but buy with caution.

Choices, Choices...
There are way too many crossroads to negotiate in this journey before you can say home sweet home. Given here is a road map that tells you just where each of those crossroads leads so you can take the right turns.

City or suburb. This is possibly the first point you’ll have to settle once you have decided to buy a house. Where to buy? Upcoming projects in the suburbs are typically cheaper than those within the city. For instance, capital values in Bellary Road or Bannerghatta are Rs1,800/sft and Rs 2,350/sft, against about Rs 3,800/sft on MG Road in Bangalore. Developers also charge extra for preferential locations such as corner apartments or those with a view, on higher floors, etc. "Preferential charges could range from Rs 50 to Rs 150 per sq. ft," says TarunMehrotra, head (retail and residential), Unitech.

 That’s a big difference but before you buy, assess the surrounding area. The population around will determine the number and quality of local area amenities. And how the surroundings develop could affect the resale value of your house. That nice, vacant plot next to you won’t stay vacant for long. What plans have been submitted for its development? Will it house a high-end complex, which will increase the value of your property, or will it become a dirt strip ultimately taken over by slums? Your developer will be able to describe the area’s master plan but it’s a good idea to check it out for yourself from the local municipal authority.

There will be cost considerations as well. For instance, in areas not fully developed, there’s always some artificial inflation as local vendors jack up prices of green groceries and commodities.

Then, if you live in the suburbs but work in the city, it will mean much higher commuting costs and time. And if other amenities like supermarkets, schools and pharmacies are not nearby either, you will run that extra mile in an emergency. Something KapilMathur, 33, discovered to his dismay, after he moved into his three-bedroom apartment in DLF Wellington Estate,Gurgaon, in August 2003. With his office on Mathura Road, New Delhi, and no amenities close to home, he spends around Rs 4,000 per month on fuel alone. "There are no markets around; even for small chores, I drive about threekilometres. Worse, the public transport system is virtually non-existent," saysMathur.

Rather than risk this, Parimal Goel, a Bangalore-based consultant with MindTree Consulting, chose to spend a little more for an apartment within the city. Last November, Goel found a 1,900 sq. ft. apartment in Sarjapur Road costing Rs 29lakh. However, when he heard of a lake-facing flat in Ulsoor, in the heart of the city, he decided to explore. Including a preferential location premium of Rs 4lakh, this flat cost Rs 35 lakh. That meant Rs 6 lakh extra but Goel calculated that the advantage of an established infrastructure, with restaurants, shopping complexes and hospitals next door, was ample compensation.

New or resale. Ideally, of course, we all want to move into a spanking new apartment built to our specifications. But if you’re smart, you could well get a great deal on a resale property. Both have pluses going for them, so see what your budget allows(See Sideshow: Building a Budget) and then decide.

A new property will, of course, have no obvious problems like leaky roofs, cracked plaster etc. If it’s still under construction, you can be more sure of the quality of construction than you will be with an old house. Also, the paperwork in closing a deal on a new flat will be slightly easier. With a resale property, the background check and paperwork can get quite tedious because it can often go back many years and will involve your digging out ancient records.

There are some precautions you must take before settling for a resale property. One, deal with the owner directly, or you’ll end up paying a large brokerage. Also, dealing directly with the owner lets you be sure of the paperwork. At least ensure that the seller has the original title deed of the property and the right to transfer it.

Second, incidental expenses–and we all know what they are–can push up your home cost. SwetanSagar, 32, a senior executive with EDA Rural Systems in Gurgaon, bought a resale property for Rs 26 lakh–including brokerage and suchlike incidental expenses. "I also ended up paying Rs 23,000 to smoothen the registration process, besides a stamp duty of Rs 1.6lakh," says Sagar.

Other points to check are that the resale flat has no tenants and that it is not mortgaged to any lender. Check that dues such as the property, society and water taxes and electricity bills have been paid in full. Take possession of all relevant documents, including the original allotment letter, completion certificate, occupation certificate and other documents given by the original developer.

Ready-built or semi-built. Your next major decision will be whether you want to move into a house that’s fully built and ready to occupy, or whether you would rather select a flat in a complex that’s still under construction.

The problem with ready-built homes is that you only have the developer’s word for what went into the construction, and you could be in for a rude surprise. This can happen even with reputed developers. Kapil Mathur moved into his dream home in Gurgaon in August 2003. Within a year, he found to his shock that the marble flooring he had spent a fortune on was turninggreyish-black. The estimated cost of changing the flooring in his three-bedroom apartment is around Rs 1.5lakh. Besides, he will probably have to move out into rented accommodation while repairs are on. That makes for an additional cost.

In a home that’s still under construction, you know you are paying for what you see, whether flooring, woodwork, paint or interiors. In case you feel clueless about details like quality of material, call in an architect friend, and call the developer to account. There’s always the Damocles’ sword of pending payments hanging over his head.

Also, once a house is ready, you cannot make small changes like adding extra kitchen shelves or a walk-in closet, which would have been done for free had the flat been semi-constructed. In fact, most developers also allow you to change interior layouts, like substituting a wall with a breakfast counter, while the flat is still under construction. Says KunalBanerji, senior vice-president, marketing, Omaxe Constructions: "Minor changes are possible and can be done free. But changes in structure may not be possible as those depend on whether the builder can get permission to amend the sanctioned plan."

Moreover, once a flat is complete or nearly complete, you lose the cost advantage. Says Maj. Gen. JayantVerma, executive director (north), Knight Frank (India): "From the time the project is announced, prices move up by 25-30 per cent a year on average."

Down payment or construction-linked. When buying a house, you have two payment options: down payment or construction-linked. Under the down payment plan, you pay the entire cost of the property within a stipulated period that is usually within 30-45 days of booking the flat. These plans typically come with a 7-12 per cent discount on the cost of the property.

On the other hand, a construction-linked plan does not offer any discounts. The finance company releases the payment intranches, with the last payment made when you take possession.

Apart from losing out on the discount, you also pay more on a construction-linked plan because although you start paying the EMIs only after taking possession, banks charge you simple interest on the tranches released during the construction period (See Sideshow: Up with Down Payments).

The advantage of a construction-linked plan is that in case there is a dispute with the builder, you can hold back payment. Typically, for instance, the last tranche will be 5-10 per cent of the total amount, which makes a significant bargaining chip. "However, in the down payment option, your entire money is blocked in case of a dispute," says Renu SudKarnad, executive director, HDFC. So, decide if you want to take the risk for the sake of the savings.

Pre-approved or tempting deal. Many institutions have started the practice of pre-approving certain properties and developers. This places both the developer and the homebuyer at an advantage. The former gets a stamp of approval from the lender, which he can leverage in his marketing. And, as S. K.Mitter, CEO, LIC Housing Finance, points out: "The homebuyer can be secure since a thorough due diligence on the legal and technical aspects of the property would have already been conducted by specialists on behalf of the institution."

Pre-approval, naturally, also means lesser paperwork and time for the loan to be granted. Says RajivSabharwal, COO, ICICI Home Finance: "Since the project is approved, there’s no need for clearances from individual borrowers. Loan disbursements are thus faster." The Rs 26.6 lakh property that Sachin Kulshrestha selected inVaishali, Ghaziabad was an ICICI Bank pre-approved project. Kulshrestha’s loan was approved in three days flat. Most home finance companies have a list of pre-approved properties and developers, so ideally start your search here.

On the whole, it’s far more sensible to settle for a pre-approved property even if other developers offer tempting discounts, since you don’t want to end up likePrithviraj, whose loan was ultimately not sanctioned at all.

The Paperwork
We can’t stress this enough. Buying a house involves a complex paper trail–see it through to the bitter end.

The contract. Devour it. The contract or the development agreement details the agreed price, payment and construction schedule, apartment plans, delivery date and the developer’s liability in case of delay in handing over possession. Remember that the developer has no liability after he has handed over possession to you. However, there are signs that builders are recognising the need to commit themselves to quality construction. For instance, some developers in Pune have started offering a 5-year warranty on the building and construction material. Industry analysts believe this trend will catch on.

Attached with the contract is a spec sheet, which is part of developers’ standard marketing material. It details the quality and grade of materials that will be used. To that extent, it’s as important as the contract itself. In fact, as TarunMehrotra, head, (retail and residential), Unitech, says: "The spec sheet can be made a part of the contract." Ensure that your developer sticks to this spec sheet so that you are guaranteed a minimum quality of material.

Delays and cost over-runs. Ensure your contract has clauses that cover these two eventualities. In case of delayed construction, the developer should compensate you at the rate of Rs 4-6 per sq. ft per month, calculated on the super-built up area. But given that you’ll be paying rent till you move into the new flat, the compensation doesn’t amount to much. To illustrate, say, your rent is Rs 15,000 per month, and you’ve booked a 1,500 sq. ft apartment, and the project is delayed by five months. Assuming the compensation you get is Rs 6 per sq. ft, you get Rs 45,000 for those five months. However, your total rent outgo is Rs 75,000 over the same period. If the delay is more, it could wreck your budget.

Likewise, the contract should cover you against cost overruns–for instance, when raw material costs go up during construction–by stating clearly who bears the burden and in what proportion.

Crucial documents. Apart from the contract, be sure to obtain the allotment letter and completion and occupation certificates. Documentation includes background checks on the builder/developer to ensure he has clear title of the property. Check if the building plan is sanctioned and that the builder/developer has all the necessary approvals from the corporation, area development authorities, electricity board, water supply and sewage boards, etc.

Lenders usually have an in-house panel of lawyers and valuers who have good liaison with the local municipality and sub-registrar’s office, and are, therefore, better equipped to deal with this. Companies charge Rs 700-3,000 for this verification, a small price to pay for the reassurance. SaysMitter: "The borrower usually spends a lot of effort comparing prices of various financing companies, but when it comes to this crucial aspect, it is frequently overlooked."

Ratings. Realty ratings are a handy tool since they are essentially a report card of the builder and his past projects. CRISIL and ICRA rate developers in association with National Real Estate Development Council(NAREDCO). While assessing projects, they take into consideration a host of factors including the track record of the developer, extent of legal compliance and documentation, past project track record, adherence to the specified time line, risk of insolvency of the developer etc. Ask for ratings for the property you intend to buy.

The Pitfalls
Watch out: there are many traps you can fall into.
Carpet area. Advertisements for properties under construction usually carry the super built-up area, not carpet area, so understand what you are paying for. "Carpet area is supposed to be 15 per cent less than the super built-up, which includes common areas like staircase, lifts, lobby etc. However, developers may even give you a carpet area that is 25-30 per cent less than the super built-up area," warns Jayant Verma of Knight Frank (India). Also check that the amenities the developer has promised are actually given.

In February, HDFC announced that it would offer lower interest rates to builders who sold property on carpet area basis. It also announced lower rates to builders who give a warranty. Experts say this is a good precedent but it’s too early to tell if other finance companies will follow suit, and if builders will take the bait. As and when they do, be sure to ask your builder to pass on this discount to you.

Track record. Check earlier projects the developer has worked on to see if they were completed on time and if the construction has stood the test of time. "See if he has any cases pending against him," addsMehrotra.

Spot sanctions. "A ‘spot sanction’ is loaded with fine print and conditions," warnsMitter, so beware of ‘loan melas’.

The Redress
There is definite legal precedent to protect you in case your builder does not compensate you in case of a delay. The Supreme Court in has ruled that housing construction activities come under the the Consumer Protection Act, and that a delay in handing over possession amounts to denial of service. Also, if a builder uses sub-standard material or makes misleading representations, the consumer is entitled to compensation. Similar legal redress is available for cost overruns.

Of course, you won’t really need to go to court if you’ve done your due diligence. That–and the decisions you make on those critical choices–is perhaps the strongest foundation for that bit of brick-and-mortar that we love to call home.;

With Vishal Chopra in New Delhi