Buying resale property? The pros and cons

There has been a definite buzz in the residential property market in the last six months. Buyers have started coming in again after a lull. In fact, capital values are already on their way up.

Home loan interest rates, too, are expected to rise. This is, perhaps, a good time to go for that house to live in.

Typically, you have two choices -- buy an under-construction house far away from the city limits, or buy one from the secondary market, of course at a premium. The advantage with the latter is that you get possession as soon as you make the necessary payments.

"Also, in a resale property, there are no surprises like there is no difference between typically what you get and what is told to you," says Samarjit Singh, managing director, Agni Group. The procedure of buying a house in the two cases is, however, slightly different.

The roadmap

The procedure of buying a property from the secondary market varies with the source from which you buy it as well as its status. Whatever the case, do keep in mind a few things:

Preparation Phase. The process of buying a house starts much before you begin your search. Among the first things that you need to do is decide your budget. Identify the locality where you want to buy a house.

Get an idea of the prevailing capital values there. For this, you can take the help of listed properties on property portals.

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The next step would be to start arrangements for the margin money, typically, 15-20 per cent of the sale price. It's advisable to organise a little more than the mandatory requirement. While doing so, don't dig into your emergency funds or your retirement kitty.

"Remember that while liquidating your investments, you are not left with only illiquid ones," says Manish Jain, an NCR-based financial planner.

At the same time, start your hunt for a lending institution for a home loan. "You may well benefit from some basic research on the housing finance company (HFC) before deciding to take a loan from it. You will need to find out if the HFC can simplify the complexities of home buying and help you tackle every aspect of the process," says Renu Sud Karnad, managing director, HDFC.

Confirms Manju Srivatsa, president, retail banking, Axis Bank, "As home loans are for a longer tenure, that is, 20-25 years, the services being offered by the HFCs play an important role. You must select the lender who is offering better services."

Once you zero in on a lending institution, approach it for a pre-approval loan letter. This would give you an idea of how much loan you are eligible for. To increase your loan eligibility, you could make your spouse a co-borrower.

Check the website of the lending institution to ascertain the documents you need to furnish. Armed with all this information, it's time to begin your home search.

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The home search. Start your search on property portals. Enter the location, the type and price of the house you want. The price you enter should be 10-15 per cent lower than your budget, as later, you will need to pay for brokerage -- if you take the services of a real estate broker -- and renovation.

Make a note of properties that are within your budget. Among other details, make a note of how old the property is, the reason being, that lending institutions are hesitant about lending for properties that are very old. It is advisable to stick to properties around 5-10 years old.

Once you have made a list of properties, contact each of the advertisers and fix up a time when you can go and physically check the property.

Don't forget to make a note of the house's proximity to schools, markets, hospitals, and so on. Also, check the condition of the house, both from inside and outside. After your visits, further shortlist the properties.

While dealing with a real estate agent/advertiser of the property, be blunt in stating that you want a 'white' deal if you are not in a position to arrange for a huge amount of cash -- this could be as high as 50 per cent in secondary market sale transactions. Surely, if you go the extra mile, you will find white deals even in the secondary market.

Says Aditya Verma, business head and vice-president, makaan.com: "You can also take the help of online groups in selecting the property. You should join a group that is closest to your requirement. This would bring you up to speed with the latest happenings pertaining to the property,".

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On the negotiation table. Before you negotiate with the seller, ask for property papers, especially the allotment letter and registry papers.

Check that the seller has full rights over the property. If the property is fairly new, ensure that the seller is the original allottee. Also check if there are any outstanding dues against the house.

It helps to get the property evaluated by an independent evaluator. This will give you a fair value of the property and also make your loan approval process easier.

At the negotiation table, stick to your budget. If the seller is desperate, you might be able to bring down the price by anything between Rs 1 lakh and Rs 1.50 lakh. Once you arrive at an agreed sale price, pay the token money to the seller. This could be anything between Rs 50,000 and Rs 1 lakh.

Also, get a rough agreement made by the real estate agent detailing the sale price, the date of the deal, time to pay the balance margin money, and so on.

Ensuring financial assistance. If all your papers are in place, the lending institution will send you an in-principle loan approval letter in 7-8 working days of your applying for the loan. It will then send a technical team to evaluate the property.

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"The lender will have its own valuation parameters, irrespective of the price you plan to pay for the house," says Karnad. The final loan amount will be a percentage of the price it assigns to the property.

That will depend on the loan-to-value (LTV) ratio of the institution. (LTV ratio is a lending risk assessment ratio that financial institutions examine before approving a mortgage.)

This is where it pays to have got the property evaluated earlier. For example, if the agreed sale price of the property is Rs 30 lakh and the LTV ratio of the lending institution is 85 per cent, then it would fund you to the extent of Rs 25.50 lakh.

However, problems could arise if the technical team views price of the property to be only Rs 25 lakh. In that case, they will fund only 85 per cent of Rs 25 lakh.

Once the technical team submits its report, a final figure for the loan is arrived at. On your part, you will need to pay the balance down-payment to the seller. Once the seller completes the formalities at his end, the lending institution will pay the balance amount to the seller.

After that, you start servicing the loan and, most importantly, get the property registered in your name. You will also need to pay the real estate agent his brokerage fee.