fundamentals-of-real-estate-min

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FUNDAMENTALS OF REAL ESTATE


Real Estate Operator types 1. Developers & Builders Developer: The activities of real estate developers are quite broad and usually include buying the land, sourcing the funds, obtaining planning permissions, building on raw lands and leasing the property. The developer may construct the project in - house or might hire a builder for constructions. Examples: DLF , Godrej Properties, TATA Housing

Builder: A builder is engaged in the physical construction of a project and its infrastructure. They work in association with a developer or as an individual entity. Example: L&T construction when working for another developer, Ahluwalia Builders

2. Information & lead generation portals Websites or web portals act as a search engine for customers to shortlist properties. These platforms inform a buyer about the developer, the projects on sale, location of project and helps generating leads for the project. Example: 99acres.com, makaan.com, commonoor.com


Real Estate Operator types 3. Local brokers Local brokers have an expertise in a speciďŹ c location and are generally restricted to one micro market. They deal in primary, residential or commercial property of a particular area.

4. Organized brokers An organized company comprising of multiple people that operates on a larger space such as on regional level or National level. They generally have different divisions for residential & commercial sales. Example: Investors Clinic, India homes

5. International Property Consultants (IPC) International property consultants are global companies with international presence. These companies provide real-estate services such as research, project management, and property identiďŹ cation. Example: JLL, CBRE, Knight Frank, Square Yards


Real Estate Service Types Residential Primary: New launch project Secondary sales: Resale of property Leasing services: Renting

Commercial OfďŹ ce & retail (primary & secondary), leasing & facility management.

Capital & Asset Services Consulting, project management, valuation, land services.

Research SpeciďŹ c reports, data mining & analytics, advisory.


Real estate inventory classification Residential Apartments/Flats, Plots, Villas, Row House.

Villas

Apartments

Row House

Commercial Office, Retail shop / Mall / Multiplex, Industrial, Land.

Offices

Industrial

Institutional Large Third party managed investment portfolios, Special Economic Zones (SEZ).

Malls


Inventory type Residential Studio Apartment - Single room including sitting area, bed & kitchenette & washroom.

1-2-3 BHK – Bedroom, Drawing / Living / Dining & kitchen (can come with separate study or servant room).

Duplex - 2 living units connected by internal staircase.

Penthouse - Top oor apartment, more luxurious facilities like pool, gym, terrace garden, barbeque space.

Villa - Individual up-scale/luxurious house with front & back yards.


Inventory type Commercial Office - Ranging from single tenant space to complete floor plates, can be serviced, fully furnished, semifurnished & bare shell.

Retail - Shop space in malls or standalone commercial centers, space ranges from small ATM / milk booths to large multi-format retail stores.

Industrial - Manufacturing space, warehousing or distribution centers; usually restricted by land use defined by the concerned civic/development authority.

Commercial – Virtual & lockable Virtual – is an undivided space which is a part of a larger space leased out by developer to a tenant who needs large space like Big Bazar. The unit sizes start from 250 sq. ft. onwards. The owner does not possess a right to use this part of the property.

Lockable – is specifically allotted space which is mostly offered in office space only. The unit sizes start from 500 sq. ft. onwards. The owner may use the area.


Zoning Categorization It describes the control by authority of the use of land, and of the buildings thereon. The Area of land is divided by appropriate authorities into zones within which various uses are permitted.


Zoning Categorization Cont... Defined zones by various Authorities Residential – Based on population density (Hyper, high, medium, low), seismic activity, underground water table, proximity to conservation areas. Commercial – Shops, professional services offices, eateries, banks, trading. Industrial – To have manufacturing units, service industry, SEZ (IT, ITES, hosiery). Agricultural – Earmarked for agricultural activities. Mixed Use - combination of residential, commercial, cultural, institutional, or industrial uses, where those functions are physically and functionally integrated. Forest – Reserved for maintaining wild life & forest cover. Transport – Bus bays, transportation offices, cargo terminals. Public & semi-public – Public distribution systems, schools, places of worship, burial/cremation grounds, educational colleges, playgrounds, exhibition centers. Public Utilities - energy, water, telecommunication, sub stations, gas and gas lines, transformers, and microwave towers and solid waste management such as landfills.


Important Terms Carpet Area: The Area between the walls that is actually usable space in a house. Carpet area is calculated by multiplying dimension of room, i.e. length x width. Total carpet area is calculated by adding carpet areas of all rooms.

Built up Area:

+

Carpet Area + area occupied by walls, doors of the unit. Generally built-up area is not calculated separately, it is included into the loading factor.

Super built up Area:

+ +

Carpet area + terrace + balconies + areas occupied by walls + area occupied by common/shared construction (e.g. lift, stairs, club house). Generally builders use loading factor on carpet area to arrive at super built-up area. For example, if carpet area is 500, and loading factor is 1.3, then super built-up area is 500 x 1.5 = 750.


Important Terms Saleable Area: Generally super built-up area is saleable area.

FSI: Floor Space Index= (Land)/(Carpet Area)

TDR: Transfer of Development Rights: (TDR) means making available certain amount of additional built up area in lieu of the area relinquished or surrendered by the owner of the land, so that he can use extra built up area either himself or transfer it to another in need of the extra built up area for an agreed sum of money.

Metric units: Universally used & recognized - Foot, Yard, Acre, Hectare, Kilometers, Mile.

Conversion: 1 square meter = 10.76 square feet 1 square yard = 9 square feet 1 square hectare = 2 square acres


Important Terms Registration: Agreement between the buyer and seller should be registered with the sub-registrar of assurances under the provisions of the Indian Registration Act. Stamp duty should be paid prior to the Registration. It is always advisable to register the document s at the time of purchase of immoveable property. The charge that a buyer pays for registering the immoveable property is called registration charges. Sale Deed: The sale deed transfers the ownership of the property/properties in exchange for a price paid or considered. The document is required to be registered compulsorily.

Stamp Duty: The stamp duty is usually a percentage of the transaction value levied by the state government on every registered sale. The agreement to sell clearly states the stamp duty, which is paid by the buyer and he gets his name registered in the land revenue records. It ranges from 5 % of the transaction value to 14% in some states.

Circle rate: Circle rate is the minimum rate deďŹ ned by the state government at which a property can be bought or sold. Every locality has its own circle rate depending on its category as prescribed by the civic agency depending on infrastructure and other parameters.


Certificates Freehold property In freehold property the owner enjoys full and unconditional right over the property. There are no restrictions on the right of the latter to further sell and transfer the ownership of that property. In case of a standalone property, the owner owns the property as well as the land on which it stands. In case of a multi-level property, land ownership is usually divided in proportion to the floor area of each owner. The ownership of a freehold property is transferred to another buyer through registration of sale deed.

Leasehold Property The land is given on lease to a lessee for a stipulated period. The land ownership remains with the lessor. After the stipulated period gets over, allotters have to renew the lease by paying the lease rent once again which is usually after 90 years.

a.No Objection Certificate Possession Letter

NO OBJECTION CERTIFICATE

This is a letter handed over by the developer to the customer stating that the property is complete and ready for occupation. This letter also indicates the final dues payable by the customer before the key is handed over to the customer.

b.Completion Certificate (CC) & Occupation Certificate ( OC) This is an important document given by the municipal corporation to the developer. It is issued only after the developer completes all the required formalities. Some of these formalities include getting water connection and electricity connection for the project and the construction being completed as per the permissions given in the commencement certificated and the approved plans.

Certificate of Completion


Pricing & charges Basic Selling Price (BSP) Calculated by multiplying the super area of the apartment with the rate speciďŹ ed in the developer's rate card.

Preferential location charge Preferential Location Charge is a premium levied for certain oors/direction/unit numbers that are high in demand because of their location.

Floor Rise Charge This cost is similar to preferred location charge, where a prospective buyer is charged a particular sum of money per square feet for every increasing oor.

EDC - External Development Charges & IDC - Internal Development Charges While IDC are levied by the developer on the buyer for developing infrastructure within the complex, EDC are levied by the government on the developer and, in turn, passed by the developer on to the buyer. This charge includes development charges for water supply, sewerage, storm water drainage, roads, street lighting, community buildings, horticulture, public health, road maintenance, and street lighting maintenance. Electricity and water connection charges are levied by the developer on the buyer for availing of electricity and water connection on behalf of the buyer.


Pricing & charges Interest Free Maintenance Security In most of the situations, the maintenance charges are paid by the possessors after the local authority is elected or society is formed which generally happens after 2 years following possession. Therefore, the builder charges this amount for the ďŹ rst 2 -3 years in the account where he is responsible for the maintenance of the entire society.

Car Parking Charges This charge refers to the charges for the parking space for cars. It could be either covered or open parking. In few locations like Mumbai it is not legal for developers to charge extra for car parking, this is generally shown under a different heading.

Fire Fighting Charges The ďŹ re department charges the builders to grant a No-Objection certiďŹ cate. The money collected is used for purchase and upkeep of the department and equipment.

Club Membership Charges This charge is levied by the developer for construction of the club within the residential area. The services provided by a club could range from spa, sauna, and recreation centers


Payment Plans Down Payment Plan In a down payment plan, the buyer would be required to make a payment of 10% of the purchase price upfront with another 85% within 30 days of the booking date. The remaining 5% has to be paid at the time of possession, which could take several years.

Construction Linked Payment Plan In this plan, payments are made to the developer in instalments over a period spanning the time taken for construction of the building. The buyer pays 10% at the time of booking and another 10% after 30 days from the booking date, and thereafter instalments of 8 to 10% at each stage of construction. This is the most practical payment plan as the instalments are linked to stages of construction, and therefore the buyer's capital is not blocked if the developer delays construction.


Payment Plans Time Linked Payment Plan This plan is also based on payment in instalments, usually with payments being made approximately every 2 months over a period of 20 to 24 months. However, the payment schedule is decided by the builder and is structured based on time and not the stage s of construction, and the buyer would have to pay the instalments on schedule irrespective of whether the construction is proceeding on schedule or not.

Flexi Plan The flexi plan includes features from both the down payment and the construction linked payment plan. Under this plan, the buyer would, as in a down payment plan, have to pay 10% at the time of booking and another 30-40% within 30 days. Thereafter the payments are structured as with the construction linked payment plan. A flexi plan can earn a buyer a discount of 5 to 6% of the purchase price.

Subvention Scheme Subvention Scheme is a new form of bank financing for home loans. According to this scheme, after an individual applies for a loan for a property under construction, the concerned person need not pay any Pre- EMIs till fixed period or possession i.e., all the interest till fixed period or possession will be paid by the developer.

What is a subvention plan?

Disburses money according to progress of construction

Purchase Buyer Pays

Bank

3-4 years Construction Period

10-20%

Possession Pays interest till the time of possession

Developer

Buyer’s EMIs begin I

EM


Taxation Short Term Capital Gain Tax If a property is sold within three years of buying it, it is treated as a Short Term Capital Gain. This is added to the annual income of seller for the year of sale and taxed according to the IT slab

Long Term Capital Gain Tax If property is sold 3 years after purchase, then the proceeds from the sale are termed as Long Term Capital Gain. The Proceeds from the sale are taxed at 20% flat of the appreciated property value

Claiming Tax Exemption Section 54 – Entire profits must be used to buy another house within two years or construct another one in three years Section 54 (EC) – Capital gain amount is invested for three years in bonds of the National Highways Authority of India and Rural Electrification Corporation Limited within six months of selling the house


Taxation

Yes

No


Glossary

Acre – Often used in Indian real estate unit of measurement of a big chunk of land area. 1 Acres is equals to 43560 sq. ft.

Allotee – The person who is allotted a property, either by government body/authority or by a developer.

Agent – Agent in real estate is usually referred to the Realtor or Broker. An agent plays the role of a facilitator for property transactions for a consideration.

Appraisal – A written report of the estimated value of a property prepared by a certified Real Estate appraiser.

Appreciation – An increase in the value of a property due to changes in market conditions or other causes over a period of time. Assessed Valuation – The value that a taxing authority places on real property for the purpose of determining the amount of taxation for that property.

Benami Ownership – In Benami Ownership, the title of the property is in one party's name and the real ownership is in another party's name.

Beneficiary – The person/persons/institution designated to receive the income from a trust, estate or a deed of trust. A contingent beneficiary has conditions attached to his/her/their/its rights.


Circle rate: This is the minimum rate decided by the government authorities for valuation of land in a particular area. Clear Title – A title that is free from claims or legal questions and all other encumbrances about the ownership of the property.

Collateral - Any asset that guarantees the repayment of a loan. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan contract. In a housing loan scenario, collateral would mean additional security over and above the security of the property being financed.

Commencement Certificate -A certificate issued by the appropriate local authority certifying the construction may commence. Typically, this is done after the concerned party has obtained sanction of plans for the construction of a multi-storied building and has put the columns in place indicating the building boundaries.

Commercial Property – A building / property which is used for the purposes of carrying out commercial activity or trading. Common Areas – Those portions of a building, land and amenities owned (or managed) by a planned unit development (PUD) or condominium project's homeowners' association (or a cooperative project's cooperative corporation) that are used by all of the unit owners, who share in the common expenses of their operation and maintenance. Common areas include swimming pools, tennis courts, and other recreational facilities, as well as common corridors of buildings and parking areas. Comprehensive Development Plan (CDP) – The Master Plan approved by an authority.

Co-ownership – When there is more than one owner for an immovable property, the status of the property is known to be of the Co-ownership type. A Co-owner can do whatever he wishes with his part of the property as long as he does not affect the share of the other Co-owners.


Deed – The legal document conveying title to a property. De-facto Possession – Also called Constructive Possession; the actual physical possession is called De-facto Possession. The actual possession should be held without force or fraud. De-jure Possession – Also called Juridical Possession, it means possession in the eyes of the law. This may not be accompanied by De-facto Possession. Even when the property is lying locked, the De-jure possessor is the Defacto possessor of the property. Deposit – A sum of money given to bind the sale of Real Estate / a sum of money given to ensure payment / an advance of funds in the processing of a loan. Deposit could also be the deposit paid to a landlord as part of a rental transaction.

Depreciation – A decline in the value of property brought about by age, physical deterioration, functional or economic obsolescence.

Due diligence – Verification of the authenticity of the title of the property.


EDC – External Development Charges.

EMI – Equated monthly instalments. Earnest Money Deposit or EMD – A nominal sum of money given as a token to the vendor, signifying the assent to a contract of sale or the like, that the parties are in the earnest or have made up their minds. Encroachment – The physical intrusion of a structure or improvement on the land of another. For example, a neighbor's fence or construction that crosses over your property line.

Encumbrance Certificate - A report issued by Registrar of Assurances or Sub-Registrar's Office, after due verification of the relevant documents certifying that the property in question is free from all encumbrances such as mortgages, leases, easements or restrictions.


Fair Market Value – The highest price that a buyer, willing but not compelled to buy, would pay, and the lowest a seller, willing but not compelled to sell, would accept. In other words it is a value decided by the market forces.

Farmhouse – The concept of a farmhouse is nothing but the building appurtenant to the agricultural land. A farmhouse may be used for dwelling purposes, or as a storehouse or an outhouse.

Freehold Property – A property where title paramount has conveyed the property in favor of the purchaser by conveyance/ sale deed with no restriction on the right of the holder of the property to further transfer the property. Record of ownership of the freehold property can be ascertained from the office of the sub-registrar. It can be transferred by registration of sale deed. It's a property where the owner has complete control of the land and all the buildings on it. When you buy a freehold property, you get absolute right to it, subject to the law and applicable regulations. This means you can transfer or sell the property, mortgage it for a loan or give it on lease. For obvious reasons, a freehold property is considered more valuable than a leasehold one. FSI or Floor Space Index / FAR or Floor Area Ratio – The maximum amount of construction allowed on a given plot of land. This is purely dependent on the plot area and would vary from one locality to another based on factors such as the road width. It's the ratio of the total area of all the floors in a building to the total plot area. So if the FSI is 2, the total floor area of a multi storied building cannot exceed twice the size of the plot.


IDC – Infrastructural development charges. Immovable Property – Includes land, buildings, hereditary allowances, rights to ways, lights and things attached to the earth or permanently fastened to anything which is attached to the earth, but not standing timber, growing crops not grass.

Industrial Property – Any property used for a manufacturing purpose. Areas where industrial activity may be carried out are specified by the respective local authorities.

Joint Ownership Agreement – An agreement between owners defining their rights, ownership, monetary obligations and responsibilities.


LOI –The Letter Of Intent is a non-binding offer letter to buy a commercial place.

Lease – Lease is where there are no two kinds of payments made to the landlord by the tenant unlike a rental transaction. A sum of money is paid to the landlord at the beginning of the lease tenure, which is repaid without interest when the tenure ends. No monthly payments are made. Lease Hold – Such a property is leased from the freeholder for a specific period of time on certain terms and conditions. The lease can be transferred to another person after taking permission from the lessor. Most lease agreements are for 99 years. At the end of this tenure,the property reverts to the freehold owner. The lease also specifies the person or party responsible for maintaining the property.


Maintenance Charges – Charges payable by the owners / occupants of a development (apartment complex / commercial complex / plotted development etc) towards upkeep & maintenance of all common areas and facilities. It is normally a monthly charge and the amount payable is dependent on the kind of amenities that are part of the project.

Mixed land use – The term could be used for residential properties that have the provision commercial use on the ground floor and apartments on upper floors. Mixed use is the use of commercial and residential simultaneously. Mutation – Mutation means transfer/change of name in the records of the Corporation for the concerned property. Mutation of a property is the entry of the transfer of title in the revenue records of the local municipal body. Since it is only for the purpose of paying property taxes, it doesn't provide a legal title to the person mentioned in the mutation records. As the state collects property tax, the procedure and fees differ among states.

Net Operating Income (NOI) - Net Operating Income is the annual income after deduction of expenses like property tax, insurance, and maintenance but mortgage payments are exceptional.

No Objection Certificate or NOC – A certificate issued by the concerned local authority that the plans are in order and conform to the guidelines and rules in force. In other words, the authority concerned has NO OBJECTION to the commencement of construction.


Occupancy Certificate or OC – A certificate issued by the local development authority certifying that all necessary works have been completed as per the sanctioned plans and that the property is fit for occupation. The OC is issued after clearance from the water, electricity,sewerage, fire fighting authorities etc.

PLC - Preferential Location Charges Power of Attorney – This is a legal contract, which gives a person the right to manage, rent,lease, mortgage or sell property, and take binding decisions on behalf of the owner. Normally seen in a case where a property cannot be sold or purchased due to certain restrictions, power of attorney is executed to transfer the rights to the buyer. However, the ownership of the property remains with the seller.

Registration – A legal documenting and subsequent recognition of a transaction under the State. This can either be a rental or capital transaction and there is a fee attached to registering a transaction, which varies from state to state.


Security – In lending, security refers to the collateral given, deposited or pledged to secure the payment of the loan.

Super Built-up Area or Super area – The plinth area along with a share of all common areas proportionately divided amongst all unit owners makes up the Super Built-up area. The common areas include corridors, balconies, swimming pool, garden, clubhouse, the lift wells. This is also known as the usable area.

Tahsildar – Revenue authority or officer empowered to impose and collect revenue from a particular jurisdiction.

Tenant – One who is not an owner but enjoys possession of a property from the owner on certain specified terms and conditions for a temporary period.

Title – The document that provides legal evidence that the person has the right to the possession of the land. Title Search – An investigation of public records into the history of ownership of a property to check for liens, unpaid claims, restrictions or problems, to prove that the seller can transfer free and clear ownership.


Under-valuation – A value of the property that is lesser than the fair market value. Registration fee for a property is based on the value of the property in case of capital transaction or rent in case of rental transaction. Urban Land Ceiling and Regulation Act (ULCRA) – Popularly referred to as ULC Act. This is basically a legislation that was enforced to prevent profiteering and hoarding in the urban land market as well as prevent urban congestion.

Zone – Parts of a city or town are allocated and categorized into zones, which in turn will have a bearing on factors like type of property that can be constructed, number of floors allowed for construction. For e.g. SEZ, ITZ.



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