Late Extra: Scrutinise realty proposals well

It was in the summer of 1996 that some Dubai-based NRIs fell into a real estate trap. It wasn't that they were not money savvy, it was not that they wanted to throw away their money; it was just that they fell for an emotional appeal by a group of Indian bureaucrats from their home state of Uttar Pradesh.

A real estate exhibition was being held in Dubai and one of the participants was the Lucknow Development Authority (LDA), a Government of Uttar Pradesh department. The problem of the LDA authorities was that as the exhibition was drawing to a close, they had not been successful while the private builders had.

Farmhouse scheme

The result was that some influential individuals were approached to help out the bureaucrats who would have had a hard time explaining why they had failed. The delegation leader, a top bureaucrat, then floated a Farm House Scheme in one of Lucknow's prime real estate development areas — Gomtinagar.

The bureaucrat's appeal bore fruit. The terms were attractive, the location was good and the booking amount was just Rs 100,000 (the exchange rate prevalent then was about Rs28 to the U.S. dollar) for a property which would cost Rs2.5 million.

The payments were made by bank drafts and bureaucrats heaved a sigh of relief. More than 36 investors had filled in the application forms. On their return, the bureaucrats told their government that they had been successful in netting foreign exchange worth a huge amount. The proof that the funds would come into the government exchequer was the bank drafts for the down payment.

Unfortunately both for the bureaucrats and for the NRI investors, the Uttar Pradesh government did not approve the scheme.

After two years, the LDA informed the NRIs that since the farm house scheme had not been approved they could either buy flats worth the same amount or take a refund of their deposit.

Some of the investors acted fast and got their refund. Others were a wee bit tardy and they are still chasing the refund. Dreams of owning a farmhouse vanished.

It is now seven years since 1996. The Indian rupee is now worth about Rs47 to the greenback.
The lesson — check out any real estate proposal either in person or ask your trusted friends or relatives to find out more before you part with your money.

I have chosen the illustration because these days real estate is not just one of the basic needs (that is a home) but has become or is being touted as an investment avenue.

Roads leading to the city from any international/domestic airport in India are lined with advertisements of all sorts of financial institutions offering what is termed as 'home loans'.

So why are you being wooed. The home loan interest rates are at a record low and, in fact, within the next few weeks are expected to fall further. The financial institutions are flush with funds but are not being approached for loans in what they term as creditworthy projects.

According to an officer of one of the leading financial institutions, 'home loans' are most secure because in case of a default the collateral is a tangible asset. Good for the lenders.

What the buyers must ensure is that they understand the terms and conditions of the offer very thoroughly.

Some pointers

1. While the interest rate may be low, what is the charge being levied as documentation fee. Add that to the Equated Monthly Instalment (EMI) of the term of the loan and you will come to a figure which is eventually going to be the real interest you are paying.

2. Ask if your contract is under the 'variable interest' umbrella. An additional 'processing fee' is charged for that. It is in your interest to borrow with a variable interest scheme in place, if borrowing for a maximum of five years. If your repayment extends beyond that, the chances of interest rates rising are very real.

3. Do not fall for what is known as a 'balloon payment' clause. Suppose you borrow one million rupees and agree to a balloon payment after one year. Remember your EMI (interest plus principle) is calculated on the full amount for the full term while having agreed to a balloon payment you would be repaying half the principle after a year. So you end up paying for a million rupees, while in fact you have been lent only half a million.

Ask questions

These are just some of the points not easily explained by the lenders. For you it is imperative that you ask. Don't be afraid of being turned down just because you asked too many questions. You are in demand as an investor/borrower. The lenders are not doing you a favour. Unlike a decade ago when only a few specialised financial institutions were offering 'home loans', today there are at least a hundred operating in India. But while there are so many lenders one still needs to be cautious whom one is borrowing from.

Lastly, it is widely expected that the interest rate on home loans is expected to fall by about one percentage point more within the next few weeks. So if you are not in a hurry, just hold on for that period before you sign on the dotted line.