By Dr. Sanjay Chaturvedi, LLB, PhD
The cost of construction is almost covered under 20% of the sale price which is been paid upfront by the buyer. For example if 1000 sq.ft. flat is booked for Rs.10,000/- the 20% would be 20 lakhs. The cost of construction in Mumbai or in any urban area is not more than 1500/- per sq.ft. hence the builders and developers are taking the construction funds from you in advance and rest 80% is on the completion.
The builders insist on sanctioned letter before taking 20% advance. The bankers release the housing finance to the developers on completion of plinth level construction.
The catch here is; what is the security of the housing finance on fund released? If the project is not completed? Or delayed for a year or two, who will pay the interest? Almost 70% of the projects in MMR and in NCR are delayed by one year already and likely to default further one year. Pune is worst hit where in entire month, builders are selling only one or two flats that too ready to move in.
The security and mortgage is applicable only when the flat is ready and OC received from the Local Self Government. In Noida and unique fraud case was detected by a Financial Institution. The Builder is having two adjoining plots. He offered mortgage on one plot and shown that the development will be done on the same plot. But in really he did all his construction on second plot which was not mortgaged. The builder defaulted and when the Financial Institution went to recover the mortgaged property, it was found that no construction was done on the mortgaged plot and mere plots was handed over to the bankers.
The default in possession is rising and will continue. Many builders have not yet started their project even after fully sold in pre-launches. In fact they utilize the pre-launch booking amount to pay land lord and clear the project and after that they refund the pre – launch funds to the investors and purchaser saying that project not got the clearances from environment or some other dispute in land which never is the case. The simple tactics is to enjoy purchaser’s hard earned money and return them after a year and two with interest. But who will pay the appreciation?
Builders are offering mortgage on property which is not yet constructed. Bankers pay hand in glove with builders and start charging pre EMI. And for 20:80 scheme where developers say your EMI starts only when you get possession but with this 20% he completes the construction and returns the booking amount on pretext or other. Banks gives construction finance to these builders under 20:80 scheme. where 20% is paid by the buyer and 80% paid by the bankers on the words of builders even before the construction starts as construction finance which later converted in housing finance by the builder and banker. In catching the transaction before it origin, bankers are under severe risk and under fraulent practice to loose funds in under construction and going slow projects.
To save Service Tax and VAT one must purchase flats with OC and do not become party to frauds under 20:80 schemes.