Home Buying Guide – Part 02: Under-Construction Home
One of the pertinent questions that often troubles most of the home buyers while making an investment in residential segment is whether to invest in an under-construction home or in a ready-to-move-in flat. This is one of the most common questions which generally bothers almost most of the prospective home buyers.
The Indian real estate market offers you both the option of under-construction houses and ready-to-move-in flats. Both these property types serve and suit different purposes and intents. Therefore, it would be wrong to say which one of the options is better than the other before understanding the purpose of buying a home.
First, decide it whether you are an end-user or an end-user looking for immediate possession of the house or an investor. If you are an end-user, you can go for either a ready-to-move-in or under-construction property. But, if you are looking for immediate possession and have required funds, opt for the ready-to-move-in property. But, if you are an investor and looking for a return on investment, investing in under-construction property makes more sense as you will get higher returns on investment.
If you are planning to buy a house and can’t make up your mind whether to go for a ready-to-move-in flat or an under-construction apartment then Home Buying Guide Part – 2 helps you in making your buying decision much easier and simple.
In fact, both of the above-mentioned options have their own advantages as well as disadvantages. So, let’s analyze the pros and cons of both the options first and then decide what could be a better option for you:
Advantages Of Buying An Under-Construction House
Cheaper: An under-construction home is cheaper than a ready-to-move-in home if location, area, builder and property type are the same. On an average, there is a big difference in pricing and it ranges in between 20-40 percent.
Better returns on investments: Buying an under-construction property usually yields a higher return on investment. The launch price of an under-construction property is comparatively lower than the market price of ready-to-occupy properties in the vicinity. Besides, during the initial stage of construction, the capital value of an under-construction house remains lower but increases as construction progresses. Normally during this period, investors and speculators buy these properties at a lower market prices. Therefore, investors may get a higher returns on their investment as there is a good scope of price appreciation due to future development.
Investors usually sell the property when they feel that the valuation has reached its peak or when there is a good chance of earning a reasonable profit. However, this kind of higher returns on the investment is not possible in the case of a ready-to-move-in home. Therefore, under-construction apartments are a better choice for higher returns.
Flexi payment options: The best part of an under-construction property is availability of flexi payment options. Under this category, you have several payment plans like construction-linked, down payment or time-linked plan to make the payment procedure easy. Also, the payment process for under-construction homes is more convenient, as you start paying slowly at different stages.
Unlimited Options: The selling and booking process of the under-construction properties starts even before the construction starts. Under this category, you have a large number of availability of the properties in the market. Therefore, you get the unlimited number of preferences and can select your property on the basis of unit size, floor rise, the direction of the apartment, etc. So, under this category, you get plenty of options in terms of locations, prices, amenities and so on, as compared to the ready-to-move-in homes.
RERA Compliance: According to the provisions of the RERA, all the projects which were under construction had to be registered under their state’s RERA, and thus become liable to comply to fair trade practices such as quality and timely delivery. Now, developers have a committed timeline to develop and deliver their projects to prospective home buyers. Due to this, developers are rushing to complete their held up projects faster to avoid getting caught by this act. Moreover, buyers can now avail information regarding their properties on their respective State’s RERA website and can even seek speedy grievance redressal under it.
Disadvantages Of Buying An Under-Construction House
High risk due to project delay: The proposition of buying an under-construction property involves certain risks of delay in completion of projects and default.These incidents have increased tremendously in the past few years mainly because of litigation related to the property, lack of financial resources, or late approvals from the concerned authorities. In certain cases, the developers could not complete the project in a stipulated time because they had started the construction before getting all the requisite approvals.
In some cases, an under-construction project miss its completion deadline by 12 to 24 months. Besides, some unprofessional builders without having adequate work experience and financial resources have jumped into this sector and they are largely responsible for project delays. Moreover, there have been some instances where few builders could not complete their housing project on scheduled time because they siphoned-off the money collected from a new launch project for some other project. Sometimes, even in the case of reputed builders, you carry the risk of delay due to reasons beyond their control.
However, if there is a delay in completion of projects for any reason, your EMIs for a home loan will start immediately once the entire loan is disbursed. In case you are staying in a rented house, your expenses on rentals will continue. Therefore, as a home buyer, you would be incurring a double loss.
Sometimes you get something different from what had been promised: In some cases of an under-construction property, the major issue is that you get something different from what had been promised to you as there is no end product. The builder shows you a sample flat which may be well-furnished with all the amenities and specifications. But when you get the possession of your flat, the final product may not be similar to sample flat.
Sometimes the layout is changed, while sometimes no adequate storage space is provided to you once the home is constructed. However, the most distressing fact for the home buyer is that, in some cases, the buyer gets the carpet area of only 65-70 percent of the super-built up area.
Price Factor: The price difference between ready-to-move houses and under-construction houses is not big in the last stage of construction of the property. The difference will be more in the initial stage, but in such a case the risk will also be higher. Also, an under-construction property is not as liquid as a ready flat. So, it is not easy to sell this as soon as you want and at the price you want.
Transfer Charges: The ownership of units in under-construction projects often changes multiple times before the end-user gets the possession. Some developers charge a fee for transferring property from one party to another. Some developers do not charge anything for the first transfer or if the transfer is to a family member.
The Risk in Tax Benefits: Generally, people take housing loan for the purpose of buying a house. Income Tax laws allow you to get tax deductions up to Rs. 2 Lakhs on the interest payments made in a year under Section 24 (b) of the I-T Act and up to 1.5 Lakhs towards any principal payments made under Section 80C of the Income Tax Act.
With project delays a norm for an under construction property, you carry the risk of reduced income tax benefits in case the construction is not completed within three years. The interest paid during pre-construction period can be deducted in five equal installments beginning from the year in which you take the possession. Besides, until possession of the house, the borrower will have to just pay interest on the loan amount to the lender.
Goods and Services Tax (GST): Buying an under-construction property comes with the liability of Goods and Services tax (GST). The GST rate of 12 percent will be applicable on under-construction properties. This rate with input tax credit is all set to remove the inefficiencies of dual taxation in the form of value added taxation (VAT), service tax and puts an end to multiple taxes. Under GST, the effective tax on under-construction projects has gone up to 12%, which is an increase of 6.5%.
So, from July 1, GST is applicable on under construction properties at the rate of 12 percent but not on completed, ready-to-move-in apartments. The affordable housing sector will not be impacted by GST as there is no tax under GST for this segment. According to some real estate experts, stamp duty and property taxes may continue to be levied on immovable properties.
Risk In Capital Gains Tax: If you plan to buy an under-construction property by selling off an already existing asset, there may be some tax complications. Income tax laws also allow you tax exemption on the capital gains from the sale of a property that has been held for more than three years only if the amount is reinvested in a property within two years or used to construct a house within three years. So in case of an under-construction property, if the builder fails to complete the construction in the stipulated period, you again carry the risk of paying a huge amount as capital gains tax which you had planned to save.
However, there is a win-win situation for both buyer and seller in the case of an under-construction home as the seller gets customers even before laying the foundation while the buyer gets cost benefit. So, if you are ready to wait, do not have enough funds and you can take a medium to high risk, an under-construction home from a reputed builder with a good past record is a better option.
Home Buying Guide – Part 02: Under-Construction Home
Ajay Verma, founder, and writer of The Housing World, a real estate and mortgage news website. He has over fifteen years of rich experience in the above-mentioned industries.