Buying a home not only tugs hard on your purse-strings but also takes a psychological toll. There is many a slip between the proverbial cup and the lip between booking and receiving possession. With the Centre passing the Real Estate Regulatory Authority (RERA) Act, one hopes that buying a home becomes easier and transparent. However, with only some states/ union territories notifying the RERA rule even as the April 30 deadline neared, the question remains as to whether the law will really make a difference.
Will RERA kick in on time?
Experts believe that the law may be rendered ineffective if states do not implement the law on time. At the time of writing, only 13 states including Maharashtra, Gujarat and Andhra Pradesh have notified the final rules, while another 14 have prepared draft rules. Binaifer Jehani, Director, CRISIL Research, told the Finapolis, “In the absence of RERA, developers will not have to register projects, and hence, buyers affected by delay will not get any relief.” Alternatively,it may create a void. “Non-implementation of RERA would create a vacuum in states that miss the April 30 deadline,” said Ramesh Nair, CEO & Country Head, JLL India.
What does the RERA promise?
Developers will have to register their projects (including ongoing ones) beforehand (within three months of the law kicking in) and clearly mention all facets of their projects in their application to the RERA, failing which the RERA could revoke the registration and bar the project in question. Developers not registering their projects will have to pay a penalty of 10% of the project cost and face jail if the offence is repeated.
While the developer has to state a lot of things in his registration application, two elements are noteworthy. One, developers have to reveal the carpet area to buyers and two, specify the number of parking (garage) slots that he is providing. More so, the clarity on parking is surprising as this has often been sold outside of the main deal, and often buyers have to pay for the same even when current laws forbid developers from selling parking spaces separately. The RERA is not too different. For instance, while Maharashtra’s rules allow for parking/ garage spaces, they designate such spaces as common areas and say that the consideration for these will have to be included within the sale agreement. This means that payments for parking shall no longer go unaccounted.
The new law also proposes a model sale agreement that clearly delineates items such as the payment schedule, payment, size of the apartment, payment for parking, date of possession, etc. Developers will have to compensate buyers for incorrect statements, with full reimbursement of property cost with interest up to 5% of the estimated project cost, said Jehani.
Your money stays safe
Another important element is the provision for a ‘separate’ account in a bank, into which the developer will have to deposit up to 70% of the amount from time to time to cover for the costs of a specific project, said JLL’s Nair. What this does is to totally stop diversion of funds; developers will no longer be able to use funds amassed in one project for another or manipulate it in any manner. “Diversion of funds to other projects was a major reason for project delays and RERA will address it effectively,” added Nair.
However, the feature is not altogether new. Binaifer Jehani from CRISIL Research said, “The escrow account feature is already prevalent in case of real estate projects funded by private equity players, even banks ensure that developers maintain such an account before releasing funds for a project. Moreover, it is only unorganised developers who do not do this. The law will thus ensure that only developers with the financial wherewithal will they be able to launch multiple projects at once.”
The law also offers relief in a lot many other respects. Most importantly, buyers will have full security as regards the title of the land. Developers must also now insure building where the apartment has been purchased, even while ensuring that there is no defect in title of the land. Nair said that the RERA will also put an end to ‘pre-launches’ as no developer would be able to start a project without getting requisite approvals from the local authorities and the RERA.
Should you postpone that dream home for RERA?
With many states yet to notify the final RERA rules and some (such as Goa) not even kick-starting the process, should you wait before you buy that dream home? Adding to the confusion is the fact that developers are coming out with a lot of sops to lure homebuyers in the interim. Jehani believes that such are not only a function of RERA but also due to the sluggish demand in the real estate market. “Buyers will go ahead and buy if they get good deals, though the decision depends on the status of a project. While buyers may go ahead and invest in ready-to-move in projects, those eyeing under-construction projects may do well to wait, as the RERA offers them a lot of security. In any case, post RERA, organised builders will find it easier to launch projects.”
Industry to consolidate
With the RERA appearing on the horizon, developers will rush to obtain completion certificate (CC) and therefore spare themselves the hassles of the RERA. As the Central law specifically excludes projects that have a CC, developers may speed up on completing projects to obtain a CC and avoid the mounting paperwork and the additional costs thereof, believes Jehani.
This also brings us to the question of how the RERA covers ongoing projects. While Gujarat has excluded ongoing projects, whether all ongoing and under-construction projects get covered under the Act, or not, will depend entirely on the respective state governments, said Nair.
On a broader note, Jehani believes that RERA’s provisions, especially with regards to fund diversion, may spark off consolidation in the industry and make it more organised. “As the law requires all developers to set aside the funds received from buyers, unorganised developers may find it difficult. They may therefore join hands with organised developers. The industry will see more joint development (JD) projects where unorganised developers bring in land banks, thus benefiting the larger developers who will only have to focus on sales and marketing. Overall, the industry will consolidate and buyers will be able to better choices.”
Fewer delays now, penalties will force developers’ hands
Another key area that the RERA brings relief for homebuyers is that it imposes stiff penalties on developers for delaying possession of apartments. In case a developer contravenes the terms of the sale agreement and is unable to give buyers the keys to their apartments on time, the developer will have to return the amount received from buyers with interest and compensation. Jehani believes that the possibility could also reduce now as the RERA will make the developer obtain all approvals prior to commencement of the project itself. “However, developers could also now set a buffer period in the sale agreement to account for unforeseen delays.”
“Buyers will now be paid interest by the developer for every month of delay, till the handing over of the possession, at a prescribed rate (2 percentage points over SBI’s MCLR, i.e. roughly 10%). Note that dissatisfied buyers can also choose to exit from a project that is delayed. Also, buyers who delay payments will have to shell out interest at the prescribed rate,” said Nair. However, one has to note that the law doesn’t specify any relief for projects that have received a CC and yet may have been delivered late (see graphic below on how to seek relief from RERA).
Overall, one believes that the RERA will make homebuying as easy for customers as buying any other good. Both Jehani and Nair opine that the RERA Act intends to increase transparency and accountability in the real estate sector, by providing mechanisms to facilitate and regulate the sale and purchase of real estate. “It will instill greater confidence in buyers…overall, it is a win-win for both homebuyers and developers,” added Jehani.
How to raise your plaint to the RERA