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Loopholes in the Real Estate Sector



The Indian Real Estate sector is considered by many to be most the most corrupt sector. Currently this sector is largely unregulated and opaque, with consumers often unable to procure complete information or enforce accountability against builders and developers in absence of effective regulation. This sector has also emerged as a source of black money and corruption over the past years.   

Due to the lack of regulation, there are many cases of unfair practices that are being followed in the real estate sector. Firstly, the home buyer is often a mute signatory to agreements, which are framed by sellers for their own advantage, thus lacking transparency. Secondly, the buyer is obligated to pay an exorbitant penalty interest in case of any delay in payments to the seller. The reverse is generally not true. In case there is any delay in the possession of the property, the seller deems it to be due to unforseeable conditions as mentioned in the agreement even though this may not be the case. Also the buyer is required to pay an exorbitant price for square feet, while the usable square feet is generally much lower and not mentioned in the agreement.

While making payments, the buyer is required to pay part of the payment in cash and part of the payment in cheque. The reason for the prevalence of this practice lies in the fact that it is advantageous to both the parties. The seller can then show less income while filing for income tax, thus requiring him pay less income tax. The buyer has to pay a lesser amount as stamp duty, a payment made to the government, which is generally around 10 percent of the cost of the property. This practice is responsible for the generation of black money in the economy.

This pathetic situtaion of the real estate sector requires redressal, which can be brought about by putting into place a regulatory authority thus improving transparency for the buyers. The Real Estate (Regulation and Development) Bill, a bill aims to establish a regulatory authority as an oversight mechanism to enforce disclosure, fair practice and accountability in the real estate sector and to provide adjudication machinery for speedy dispute redressal. This bill is yet to be passed by the parliament. It is of utmost significance that the parliament pass this bill.

According to the draft submitted, the developers would have to declare legal title of the land and approvals and sanctions from the authorities. This prevents real estate developers to advertise and market the project to buyers without receiving approvals and clear land titles. The compliance on declaring legal title to the land and legal valid authentication of title in case land is owned by another person would refrain developers from launching projects before the land acquisition process is complete. Also, the developers  would be required to disclose  all details of projects, including layout plans, carpet area of each unir on the authority's website, which would create a lot of transparency and information symmetry for buyers.

Developers would be required to deposit 70 % of the amount realized from customers with a scheduled bank within fifteen days of collection, which would be exclusively used for the propsed project only. This prevents the mis-utilization of funds by developers by acquiring other land or funding other projects affecting the pace of completion and delivery of houses. Also, the developers would have declare the completion of project in accordance with the term and conditions of registration with the authority, which will be renewed at most for two years, however not exceeding the period extended by the competent authority. This will curtail unnecessary delays in the completion of the ongoing projects. In cases of false representation or cancellation of the sale or failure to hand over an apartment to the buyer, developers would have to compensate buyers with the amount collected from customers and interest charges where the latter would be decided by appropriate the government, which will not be less than the rate chargeable to buyers by developers.

And last but not the least, homes will soon come with a one-year warranty around structural defects, whichwould have to be rectified by developers without any charge to customers within a reasonable time frame, apart from appropriate compensations. This simply means that quality will not be a matter of compromise when it comes to giving timely delivery. Given the many risks involved in the real estate sector and the ill-fame that it has earned in recent times, lending and exposure to the real estate sector has been a matter of deeper monitoring and prudential norms by the Reserve Bank of India (RBI), which considers the real estate sector to be ‘sensitive’. But with transparency creeping in, the perception towards the real estate sector could change with debt financing gradually becoming relatively cheaper and less elusive.







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