Review your real estate agreements carefully to avoid losing money

An investment in real estate is perhaps one of the most substantial financial transactions that one undertakes. Whether it’s toward building your dream home or purely investment oriented, these transactions involve fairly large amounts. Imagine investing a reasonable amount of money in buying a residential plot only to receive a letter 5 years later from the real estate company who originally sold it or the local development authority saying that they will be initiating procedures to forfeit your land since you have not done any construction on the plot unless you pay up a penalty for such non-construction. Sound far fetched…well not really.

There are usually enough and more clauses in real estate agreements that most of us don’t read carefully and end up running the risk of being legally and financially out-muscled by large sized companies.

Look at other cases that have been more frequent in the last couple of years involving the sale of builder apartments and societies. There are enough and more instances where projects have been delayed for years and in some cases even indefinitely put on hold. The options available for buyers, in these cases, are really limited. A very high majority of real estate purchases are funded by borrowings from financial institutions and delays in project completion can mean additional financial burden on the buyer who, at times, may end up paying for a rented accommodation in addition to servicing the loan.

Penalty clauses for delays are actually meaningless by virtue of the amounts involved and exit clauses for a buyer mostly involve the buyer losing money. Most companies allow buyers to exit but after deducting a penalty which could be anywhere between 10-100% of the booking amount or in some cases as high as 10-15% of the value of the apartment.

There is a complete lack of any standard norms that builders are required to follow as far as cancellation of purchase agreement are concerned and it all boils down to the agreements that you have signed at the time of purchase. It is important to review these agreements very carefully and read between the lines to know what terms and conditions apply in respect of your purchase, what rights you have as the buyer, what obligations are subtly inserted such as time limits for construction on residential plots and your ability and associated terms to exit the contract.

To counter the legal lop-sidedness of these contracts there have been recent examples of the ‘power of numbers’ being used to fight the might of these large companies. For e.g. in 2009, several investors in DLF’s New Town Heights project in Gurgaon came together as a forum on the internet to build pressure on the company to either complete the said project on time or provide a reasonable exit option. DLF did end up providing an exit option.

While, the issue of high-handedness of the land barons of the country is well known, the solution to the problem probably lies in customer awareness and his ability to demand fair dealings. The first one is completely in our hands – we need to and can make sure we read the fine print in agreements. The second aspect related to fair dealings is perhaps the more difficult one to address and may end up requiring a fairly large customer forum or movement to build pressure on the industry to focus on best practices that are fair to customers.

(c) 2010