When we book an under-construction property, the only outcome that we think of is getting possession of the property in a few years as promised. You either plan to set up your home there or bet that the price will go up quickly. Have you planned for any other eventualities? Likely not. In other words, we do not see any risk anywhere. Unfortunately, it does not always work like that. Many things can go wrong. In this post, I will try to highlight such risks.
Risk means more things can happen than will happen. — Elroy Dimson, London Business School
Do note this is not to dissuade you from purchasing a house. I have often stated that, before you retire, you must purchase a house at a place where you would want to retire. I stay away from Buy vs. Rent when it comes to purchasing your first house. However, it is still important to understand the risks when purchasing a property. It helps you appreciate what can potentially go wrong and helps you plan better. Let’s put down some of the risks involved.
- You may not be able to reside there.
- Your work or family situation may take you elsewhere.
- You may have to leave the house vacant or put it out on rent.
- Local issues can prevent you from occupying the property or renting it out.
- The quality of construction may not be to your liking.
- You may not want to stay in such a house.
- You may have to shell out more money to bring the house to your liking.
- Poor quality of construction may also affect potential capital appreciation and rental prospects of the property.
- There can be undue delays in construction.
- Think of the mental and financial agony. What if the developer simply gives up and has no plans to (or cannot) deliver your property? Not only do your payments till date go waste, but you also have to keep paying loan EMIs. Rubbing salt into the wounds, isn’t it? By the way, this scenario is not my fancy. Many buyers are in this unfortunate situation these days.
- Pre-EMI feature (interest-only) may be there for a few years. Subsequently, you have to pay full EMIs. Paying rent and the full EMIs can be a problem.
- Tax benefits also come down if the construction is not completed within 5 years. Tax benefit on interest payment goes down from Rs 2 lacs to Rs 30,000 per annum if the construction is not completed within 5 years.
- Remember you do not get tax benefits on principal repayment and interest payment till such time you get the possession. For interest payment, you can at least take benefit for interest paid before possession in 5 equal annual instalments, after you get the possession. There is no such relief for principal repayments before possession.
- Your loan EMIs can become unaffordable. Loss of job/decrease in income/ increase in expenses may make your EMIs unaffordable. What will you do then?
- Envisaged infrastructure (roads, parks, schools, utilities etc) may not come up around the area.
- May prevent you from the using the property as own residence.
- Such projects may also have low occupancy rates. This could be one of the reasons for you not to stay there.
- Will affect capital appreciation of the property.
- Will affect rental income from the property too. Do note rental yields in India are already ridiculously low.
- To sum up, you can’t use it. Makes for a bad investment. Does not provide you good rental income. Remember, you can still be paying EMIs at a much higher rate of interest.
- If you opted for a fancy scheme from a builder, you can find yourself in a big mess.
- Developers keep coming with innovative payment structures. The Reserve Bank of India keeps clamping down on such structures but not before many have fallen for the deals.
- Do note many such structures depend on the builders’ ability and intent to keep making payments either to you or to your lender. I wouldn’t trust most builders’ on either of these. Recently, a Bangalore based builder reneged on such a contract leaving buyers hapless. For more on this, go through this post.
- The introduction of Real Estate Regulation Authority (RERA) has made purchase agreements a level playing field. So, you may get some relief in case of delays. However, even RERA can’t do much if the builder is under some financial stress.
- Always remember, no matter what the deal is, you are the borrower for the bank. If no one pays, they will catch you.
Whenever a new project is launched, it is advertised as if the property will become the new city centre. “Airport is coming soon. Your society gate will open into the next national highway. A prominent school chain or hospital is coming in the vicinity.” It does not work like that. Most of the times, you get things cheap for a reason. Under-construction projects are cheaper than constructed properties for a reason. Projects on the peripheries of the city are cheaper than those in-town centres for a reason. Projects from new or unreliable builders are cheaper than those from reputed builders.
By the way, there is nothing wrong in purchasing an under-construction property. In fact, given the level of property prices, purchasing an under-construction property is the only option available to most of us. Just that, we need to appreciate the risks involved. With a better understanding about the risks involved, you will be able to make a more informed decision and be better prepared, if something goes wrong.
I am sure there are many investors who amassed great wealth by investing in such properties. Moreover, I can safely say there are millions of people who purchased under-construction properties and can now say (in hindsight) that it was one of the best financial decisions they made in their lives. At the same time, that the risk didn’t materialize does not mean that the risk was not there. Appreciate the risks involved.
This is not an exhaustive list but a good starting point. Do let me know other potential risks in the comments section.