Buying property in India - The common man's guide - Part 1

Buying property in India is a very complex affair. (Where in the world is it easy anyway you ask!) The reason why I say that is because the fundamental premise the property industry in India operates would be to withhold information about the buying process so that the buyer has to be content with what he or she thinks is right or takes the best smooth talker from the property vendor as the right thing to do. I had recently got myself involved in buying some property in the boonies so I wanted to share the experience and at the same time try to elaborate the property buying process in India.

So let me start off with the process - The plots are typically part of a large acreage of property that is owned by one or more vendors. These plots are sold by an organization that is called as the VENDOR and the buyer of the plots is called as the PURCHASER which would be us. The VENDOR in many cases will not own the property themselves but they will be representing the owner of the property who would be the actual seller. The vendor to represent the seller will have a power of attorney from the seller.

The first step in the game is to check out whether the property is legally OK for purchase. I would advise that you should do this step even before you start discussing the price of the lot that you want to buy. The legal check is the non-negotiable part of the deal - If the lawyer says no, I suggest you walk away.

You will have to pay a small advance to get a copy of the original paperwork for the property. If you have a good VENDOR he will give you an entire file of documents that will look positively daunting. At this point in time you need a competent lawyer who can check the paperwork for the following key items (and a lot of other things)

1. The seller has complete current ownership of the property : If the property is under lein or there are multiple owners then necessary steps have to be taken by the seller to sell the property (get all the owners to sign, close the lein etc.., ) . This is typically found through what is called as an encumberance certificate (EC). Thus most lawyers will demand for an up to date original EC. This can be easily obtained from the local body which handles registration of property (Sub registrar office typically). In Chennai and suburbs, you can actually apply it on the web and have it delivered at home - how is that for convenience? The website is http://www.tnreginet.net


2. How did the seller obtain ownership of the property : If the seller bought the property himself then this is the easy part - they have every right to sell it off. Otherwise check if the property that is being sold is not inherited (gifted property)


3. Patta, Chitta and Adangal documents : This is the part where I am also a bit hazy. The patta is the official definition of the property that is being sold (dimensions etc..,) and also says which government survey number that the property is part of. If anybody has more details on this, please let me know.
   
4. Plot have been defined according to the rules :Check whether the defined plots on the lot has been done according to the town planning rules that is prevalent in that location - for example have the roads been gifted through a gift deed to the local town planning body say the panchayat so they are responsible for owning & maintaining the roads.
   
5. The VENDOR has sufficient authority to sell the property: Verify if the power of attorney (POA) granted to the VENDOR by the seller is current and rightfully states that the VENDOR has sufficient rights to represent the seller.


6. Originals verification : This is one step that you should insist your lawyer do even if he does not show keen interest for the same :). He should verify the paperwork that he has reviewed has an equivalent original document either with the seller or in case of registered documents with the registrar. This will ensure that the copy of documents documents that you have verified have not been "altered" during the copy process.
   

This is by no means an exhaustive checklist but these are critical things that needs to be looked at for sure. Your lawyer is your friend during this part of the transaction. Since he represents you, he has your best interests in mind. You should definitely find an independent lawyer if you don't have your own already. During this process you will be involved in a lot of back and forth discussion with the VENDOR or seller and what the lawyer wants. If you have a vendor/seller who is not ready to cooperate with the necessary paperwork, it should ring some danger signals to you.

If your lawyer is happy with the paperwork that he has seen, he will give you a report saying that this property is good to be bought. Sometimes they would give a report that says the property is OK to buy subject to certain conditions being satisfied. You should followup with the seller or the VENDOR to ensure that these preconditions are satisfied.

Congrats - if you have reached this point, the property is good enough to buy. You should start negotiating the price on the vendor and start on drawing up the sale deed and sale agreement if needed. In the next article, I will touch upon what are the steps that you need to take with you lawyer if you are planning to finance on your own vs. Your are financing through a financial institution. The rules are slightly different. On the whole, you have crossed the big legal hurdle if you have reached this point.

Offtopic: Amazon has a 30 day price drop policy!

I found out that Amazon has a 30 day price drop policy!. Being a big fan of amazon myself, I was plesantly surprised by Amazon's price drop policyAmazon's price drop policy. Thanks to this blog for showing me the way.

Infosys ADR conversion priced at $67

Well folks the ADR conversion has been priced at $67/share that is about Rs. 2881 per share (assuming $1 = 43 Rs.) . So all the lucky folks who get the offer are going to have a 30-50% returns. Here is the flip side - the offer as I said before is oversubscribed. Thus not all of your shares that you have offered for conversion will be converted to ADRs. You will have some if not all shares returned back to you.

Now what can happen going forward? I believe that the price has only one direction to go - down in the short to medium term. Here is my rationale behind it - the ADR at $67 is now going to have a large free float thereby increasing the available volume for trades on NASDAQ. This new float will bring a volatility in the price due to the market adjusting to the available float. The stock price which was about $60 has recently run upto $67 post ADR announcement. Thus there is a good reason for the price to swing back to its original levels. This will definitely have an effect on the Indian market. The price in the local market will be influenced by the ADR price since the ADR float is now larger. Thus the price locally would also come down.

So what can one do at this moment? Short Infosys in the futures market. That would be a good strategy if you were not lucky to be on the $67 gravy train.

Hedging using derivatives - Can we really do it?

In india, the derivatives market is relatively new and some of the quirks are yet to be ironed out. This is especially tough for the individual investor who is looking to operate in the market with a smaller capital base (say < 1 lakh). Let me attempt to explain the problem - The contract size is different for each stock: Unlike the US, the where one options contract represents 100 shares, the contract size in the Indian market is dependant on the underlying stock. I am not aware of the logic behind the sizes but here is a sample 1 Infosys contract = 100 shares, 1 Wipro contract = 300 shares. Also, the margin amounts that need to be provided for taking a short position in any of the options requires the investor to put in a certain percentage (around 20%) of the money as margin. This has the following disadvantage - I can hedge at a minimum of 100 Infosys or 300 Wipro shares - not less than that volume. The cost of such volumes of Infosys/Wipro at today's price represents about 2 lakhs. Further to buy one contract, the margin is 20% of 2 Lakhs which is another 40K. Thus the total cost of maintaining a position with fixed return (100 shares of Infosys and sell 1 call option) is about 2.4Lakhs.

As a side note, the whole concept of options and options strategy is a fascinating concept and one of my favourites. Do spend some time to understand the mechanics of it. If you like complex problems with elegant solutions, this is probably an area that will offer hours of fun. There is very good book on options - considered one of the best books written about various derivative instruments. The book is Options, Futures, and Other Derivatives - John C Hull

Starting Simple : Small savings reviewed

For the individual investor there are basically the following options for small savings or secure savings. They are

1. RBI Bonds (Currently 8% taxable returns)


2. Post office monthly income scheme (8% taxable monthly income + 10% maturity bonus)


3. Voluntary provident fund (currently 9.5% non-taxable)


4. Public provident fund (currently 8% tax free)

So if you think about it, the first two options are not really that good for a simple reason. They are taxable returns. For people in the highest tax bracket, that means 30% of the returns are gone poof. Thus the 8% really means 5.6% effective returns and the POMIS with the trick involving the POMIS and RD supposedly gives a return of 11%. This would still be 7.7% post tax return. Thus the real race is between the VPF and PPF. Currently the VPF's 9.5% tax free return is absolutely unbeatable. So there you go folks, the absolute winner is VPF. Go ahead and have a quick chat with your payroll department. Ask them to post a large chunk of your pay back into the VPF and you are rest assured that the money is earning 9.5% returns.

So what is the downside you ask? Provident funds are illiquid instruments - i.e. you really cannot get to your money if you want it in a hurry. VPF especially can be accessed only under some special circumstances such as building a home or children's education etc..., So there you go, park some of that surplus cash in a VPF before it reaches your purse.

The Infosys ADR conversion for local investors

Let us start this off with the Infosys ADR conversion option that has come into the market. It has been oversubscribed by 5 times. So what does it mean? the herd felt that there is quick buck to be made and have opted for it since the ADR has always traded at a premium to the local price. Interestingly there has been nearly 5 times the number of shares offered by the investors compared to what the company had originally planned. Thus, not everybody's offer will get accepted. So a lot of people will have their money locked up since the shares have been transferred from the individual account to an escrow account. It will be released only after the conversion reaches a certain milestone. Thus any appreciation of stock price during this time will not be available to the investor. Further, due to the fact that the Indian market tends to follow the US market, post the conversion, due to increased free float in the US market, there could be a dip in prices reflecting in drop in the local prices also. Thus a double whammy it seems. One has to wait and see the outcome of this interesting option.

Hello World

Hello - I have started this blog to talk about various personal financial options available in India. I am not going to be talking about the obvious things that everybody seems to write large articles about neither am I going to profess knowledge about what I am talking about here. These are ramblings pure and simple. Take it if you want, that too with a pinch of salt. I just want to cover the various aspects of complex new world of finance that is emerging in India.