The good and bad decision of buying a house

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Buying a house property is one of the most delighting experiences in life. However, it could be both a good or bad decision. I would like to draw your attention into other dimensions related to purchase of house/flat. It is touchy still you can question – do you need to buy a house? Any individual and especially couple dream of owning his or her house and live in a dream home. In the process they lock up substantial money in constructing or buying the house. Many justify it as a secured investment, tax benefit, a shelter for any eventuality etc. But in the euphoria of owning a house, we often forget to check certain nitty-gritty. It is a big decision with large investment. Therefore a clear understanding is very desirable before going ahead.

Let me first deal with why buying a house is good.

# 1 Owning a house give you the mental satisfaction, a feeling of pride and choice of setting your house as per your wish.

# 2 You get a permanent address which is required to mention in many places like school, passport, voter id etc.

# 3 You can avoid conflict with owner in case of rented house and you can set your own rules.

# 4 Yes, it is a big investment. The return is impressive, especially in metros.

# 5 If you let out the house, you earn a good amount of money as rent.

# 6 In case of any eventuality of the bread earner of the household, own house comes as a great relief to start new life for the family.

Now let’s look a hind side.

# 1 Buying a house on loan increases liabilities. Until the loan is repaid, the house is actually owned by the lender/banker. Technically it is not your property.

# 2 The property value might have increased over a period. But if you consider cost of the house including interest paid thereon it might have equaled to the appreciated value. So it is a zero sum game. If you adjust the return for inflation, all probability it will be a negative return.

# 3 Many buy with a hope to recover the EMI through rental income. However, rental income from residential property is always lower than EMI, if major part of payment to acquire the house is through loan. Then again your rental income is taxable though after some deduction. You get tax benefit on home loan, only if its self-occupied.

# 4 Owning a house entails maintenance cost like society expense, repair, upkeep etc.

# 5 Once you have your own house you are nailed to one place. Leaving the house for long time is a difficult choice as it requires double effort to set it up again.

# 6 Many thinks that they can book profit once property value appreciates. But selling a house property is not easy. Finding the right buyer at right price, negotiation, interference of broker, handling payment …. there are many issues. And in many occasions, emotional attachment let you think differently at the time of sale.

# 7 Even if you sale the property on price appreciation, you are subject to capital gain tax. You cannot use the proceed as per your wish. Either you pay capital gain tax which is 20% or deposit the proceed in a capital gain schemes which yield a meager return or invest the money to buy another house property.

# 8 We think children will inherit the property. Is it a truth or illusion? In modern way living, choices of houses, location are changing very rapidly. One cannot guarantee same choice by children 10-15 years down.

Then what should we do? In my opinion, we should think of owning a house a) if we are planning to settle down for life or want to stay in a place permanently for business or other reason, b) if we have surplus money, c) If intention is to book capital gain or generate rental income then major part of investment should be from own source, high expected capital gain, lucrative & sustainable rental income. Otherwise, it is better to stay in rented house with use and leave terms and create a good corpus by investing in Mutual Fund for buying a house at appropriate time.

In fact house purchase should be part of your overall wealth creation process. You can read my post on wealth creation at http://healthywealthywise.in/financial-planning-for-wealth-creation/

If you have decided to buy a flat in any case, I urge you look into the following points while signing the agreement with the developer. It is a huge investment decision and therefore we should be utmost careful while signing the dotted line so as to avoid complicacies at a later stage.

 # 1 As a part of state RERA Act https://www.indiacode.nic.in/handle/123456789/2158 a draft agreement is provided that the buyer enter with the developer. One must compare the agreement that he has been offered to sign by the developer with the draft agreement as per the state RERA Act.

# 2 Look closely on penal interest provision. Most of the time, developer impose penal interest for delay in payment but no penal interest clause for delay in delivery. It should be both way. Further the interest rate should be uniform for both the event and linked to base rate plus spread of a nationalized bank.

# 3 The delivery or possession clause should be clear. Generally, it is mentioned that flat possession will be given after 36 months from the date of construction. Later the date of construction becomes a matter of dispute. All dates and timeline should be specifically mentioned along with recourse if timeline is missed.

# 4 The provision for changing building plan clause should be read thoroughly. In actual practice, building plan can be changed only with the approval of 2/3rd buyers then the regulatory authority.

#5 The price clause should be clearly mentioned covering cost of super built up area, carpet are, parking cost etc. There should not be any open ended clause to escalate price. There should be clear mention on which kind of event could trigger price escalation.

# 6 There should be clause on contract termination under certain circumstance such as inordinate delay, faulty construction, frequent change of building plan, unjustified price escalation etc. This clause will give an exit route to the buyer in the event of unfavourbale circumstance.

# 7 It will be great if the buyer could get the document vetted by a lawyer before signing to avert unfavorable terms and enforceability of the document.

# 8 Last but not least, register the agreement to sell with sub-registrar. It will protect your rights as per the terms of agreement.

There are different schools of thought, you can choose yours.

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