Pros And Cons Of Buying A Flat In A Building Without A Registered Housing Society
July 24, 2012 2 Comments
There are many flats available in buildings where the developer has not yet handed over the building to the flat owners despite its completion many years ago. These flats are often in mint condition and available at a discount.Bank loans for such flats is also a possibility.So it is always tempting to buy one of these.But do proceed with caution.
First find out why the builder has not transferred the possession legally to the registered housing society.There could be various reasons for this, the simplest being that no registered housing society has been formed yet.In such a case it is a fairly simple case of buying the flat and taking the initiative to form a housing society and registering it.
However,often the situation is not so straightforward.The developer may not have received the occupancy certificate (OC) from the civic authorities. He has to take permission for 40-45 things from 30 departments and this takes time.But don’t take the developer’s or seller’s word for this. It is also possible that the developer is not getting the OC because he has indulged in illegal construction or not met municipal or other norms.To ensure that this is not the case, due diligence on the part of the buyer is crucial.
Sometimes a the developer might not want to hand over the possession to buyers till he sells his entire inventory.This is because he wants to discourage secondary market sales,especially by early investors who wish to exit.Every builder would like to sell each of his flats at the highest possible price.In other cases,the builder might not yet have used up the authorized floor space index and might be unwilling to hand over possession till he has done so.Or he might be anticipating a rise in FSI and holding out till he can acquire and use it.
When a housing society exists, you can typically source the information about a property from its members.A buyer can find out if the house is mortgaged or has outstanding dues by contacting the housing society. However, in its absence, one has to rely entirely on the word of the developer and/or the seller.So the first thing to do is to have a good lawyer do due diligence.Then talk to some real-estate agents/brokers to find out about the builder and whether he might have any interest in delaying the handing over of the building to the flat owners.In this way you will get some idea about how long you might have to wait before things are sorted out.Obviously the due diligence is going to cost you.
Then understand that in a registered housing society, the members are in control of all the expenses of their property. When the property has not been handed over, the developer controls the maintenance expenses and the members have to make a lump-sum payment in advance to the developer. There will be no monthly break-up of maintenance charges as offered in housing societies.Often, the developer doesn’t spend this money on promised welfare activities or provide common services to the satisfaction of the flat owners, but there is little that the owners can do.Often builders keep the tax bills pending.So make inquiries about what municipal ,electricity and maintenance dues might be owed by or to the developer.And figure that in the estimated expenses while a housing society is in the process of being registered.
Also, in case the developer has not transferred the property due to the denial of the OC for not adhering to municipal norms etc., you will have to pay to regularize the building.There is always the danger that in the worst case scenario a part or the whole of the building might be demolished.
If conducting a due diligence seems too tough,you could opt for a housing loan. In such a case ,the bank will conduct due diligence and the risks involved will be minimized.However in this case you will require an NOC,NOC stands for a No Objection Certificate to mortgage the property. The NOC certificate covers five main clauses viz., (1)Property being free from any encumbrances,(2) Property being free and marketable, (3)Permission to mortgage the property, (4)Acceptance of lien on the property and (5)the owner not being allowed to sell the property to anyone else without the consent of the housing finance company.Now the maximum that a housing society is known to charge for it is around Rs 25,000.However, if the society is yet to be registered, the investor will have to get the certificate from the developer, who can charge 4-6% of the value of the transaction.Sometimes, the fee charged by the developer runs into a couple of lakh rupees.Work this into your calculations.
If ,after taking all these points into consideration you buy the flat,then kick-start the process of registering the society. Even if the builder is not being very cooperative,remember that if more than 60% of the flats are sold in a project, the residents can form the society on their own.Following is a description of how to get a housing society registered:
How to get a housing society registered
The residents will first need to conduct a general body meeting of all the flat owners to elect the chief promoter. Typically, a 14-day notice is given to call such a meeting.
As the developer has the first right to act as the chief promoter for registering the society (under the flat owners type of cooperative society), if he hasn’t done so, the registrar will first issue a notice to him for non-cooperation. If he does not respond, an ex-parte decision will be taken for registering the society. This additional step makes the process longer.
After electing the chief promoter, the next step is to propose a name for the society. The proposal should be signed by at least 10 promoters who have attended the meeting. If the number is less, the flat owners will have to take special permission from the state government. They will also have to form an ad hoc managing committee, electing members to function as chairman, vice-chairman, secretary and treasurer.
The registrar will allot the name and also grant permission to the society to open a bank account. When this is done, the chief promoter has to collect the share capital and entrance fee from the promoters and deposit these in the account. Where the developer takes on the role of the chief promoter, this amount is collected when the property is sold. The money cannot be withdrawn from the bank till the society is registered, except with the prior written permission of the registrar.
Lastly, the chief promoter should submit the registration proposal along with the supporting documents (see box) to the registering authority within three months of the Letter of Reservation (for reservation of the name) being issued in the name of the proposed society. Once the society is registered, it becomes a legal entity and its running is in the hands of the elected managing committee.