A recent report on real estate in India indicated that 7,112 developers in the country had a high default probability. The top 54 developers in the Northern and Western regions of India ran the risk of defaulting on loans due to the gap between operating profits and interest obligation. The total debt of these developers was 10 times their earnings before interest and depreciation (EBDIT) leading to an inability to remain solvent.
With these startling figures, it is important for investors to follow these five steps to ensure their developer is trustworthy and will deliver the promised results.
- Check the ratings for the developer: CRISIL assesses qualitative and quantitative factors to arrive at the resultant rating for a developer. The quantitative factors include delivery and financial strength, legal records, and the size of projects in the past. The qualitative aspects are crucial as they assess safety standards, market reputation, and the quality of the management team. The ratings consider the past track record in line with specified standards and the ability of the developer to transfer clear titles within the prescribed time. The developer is allocated a rating from DA1 (Excellent) to DA5 (Poor). A higher rating provides confidence for investors to expect on-time delivery within specified quality standards.
- View the past records of the developer: As an investor, you should evaluate your real estate developer on the basis of the size of commitments and project delivery. A few indicators to verify a developer’s credibility include the number of years in business, the projects delivered in time, reasons for delays in projects, pending projects, and provision of occupancy certificates. You can view this information on the online portal of the Ministry of Corporate Affairs that provides details on the names and addresses of developers, any charges against them, and their authorized or paid-up capital. It is key to review the board of directors and the developer’s website to ensure an experienced management team. With land aggregators increasingly entering the space, you should avoid inexperienced teams and individuals.
- Review information on the developer’s financial health: To ensure due diligence in the selection process, you should review the developer’s annual reports. If a developer is not listed, it might be difficult to access data related to their financial health. In this case, you should ask the developer for the reports on cash flow and debt levels. However, it is recommended that you opt for developers listed on a stock exchange as their financial reports are available in the public domain. Another point to keep in mind is that developers can often use funds for a project to fund another development. This is often done to avoid strict regulations that govern the real estate market.
- Check financial backing for the project: Banks and housing finance companies practice due diligence in providing loans to potential buyers. They review project-related approvals and the developer’s profile and can disapprove loans for customers if there are any potential challenges in on-time construction or charges against the developer. You should check if lending agencies are supporting buyers in purchasing homes in the specified development before making a decision. Reputed home loan providers such as the ones on Finserv MARKETS ensure thorough validation of your developer’s property documentation before approving the home loan amount.
- Review the terms and conditions of the agreement: You should obtain a written commitment for the date of delivery, penalties in case of delays, and overall payment terms. In case of any doubts or confusion, you should verify the clauses by speaking with the sales team. In addition, ensure that you maintain a copy of the agreement in case of disputes to be able to take legal action against the developer.
In addition to these points, you could also visit previous projects and speak with the homeowners in the development and real estate agents in the area. You can also speak with a lawyer to validate the property title and other documentation.
In order to make a prudent decision regarding purchasing a new home, you should check the encumbrance certificate, building plan and occupancy certificates. If it is a ready-to-move property, ensure that all the dues such as the property tax and water bills have been paid in full.
While purchasing a new home can be a thrilling experience for a potential homeowner, it is important to practice due diligence before selecting a real estate developer in this endeavour. By following the five steps provided above, you can safeguard yourself against unreliable and inexperienced developers and take the right steps in purchasing your new home. You can also access expert advice on online portals such as Finserv MARKETS to know more about available home loan options.
Also read ways to reduce your home loan only at Finserv MARKETS.
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