Investing in real estate assets is lucrative; murky dealings look highly lucrative.
No legal remedy will rescue you, if you fall prey to such risky dealings.
We cover a series of such murky dealings in these columns.
In large majority of cases, it is the ‘greed’ of investors, which has lead them to invest in murky dealings in real estate assets, resulting in losing huge sums of money. Most of the time, entire life savings are lost in such dealings and many times, after losing the property, the burden of repaying long term loan, availed to acquire the asset has put the family of investors into hardships, no one can imagine.
Some pitfalls of entering into wrong deals:
Here are few common pitfalls; normally a gullible investor falls into.
I will deliberate on few case studies, which are factual dealings handled by during my counseling sessions.
During 2014, Mr. Suhas Gowda (name changed) approached me with few photo copies of property documents belonging to one Mr. Prashanth Nair (name changed) and sought my opinion to buy the property. He was jumping with joy as he had an offer to buy an independent house at Rs. 45 lakh, the market price of which was Rs. 70 lakh. The reason given for distress sale was that seller had got a dream job in USA and had to report to new job in 10 days flat. Before going he wanted to complete the sale process, register the sale deed and give possession of the property.
Mr. Suhas requested me to vet the documents and confirm whether seller has marketable title and there any encumbrances/charges on the property. He wanted me to give my opinion in two hours, as he was to go back to the seller and pay advance of Rs. 15 lakh and arrange balance money in next 5-6 days.
I reminded him the proverb ‘marry in haste repent at leisure’, which very much applies while purchasing a property and firmly told him that I cannot give opinion, until I have full set of documents and I need at least one week time to verify requisite documents, check on the veracity of documents and approvals obtained from various Govt. authorities. He was annoyed with me and walked off.
After couple of months, he came back with a sordid story, on how he was cheated and further sought my advice on how to come out of the problem. I found that Mr. Suhas did not do proper diligence on the seller and on the property. He believed on seller’s words and relied on the loan discharge certificate, issued by a leading Bank, where the seller had availed loan and repaid the same. The Encumbrance Certificate issued by Sub Registrar was also not showing any charges on the property. The seller had informed him that he has lost original title deeds, after receiving the same from the Bank. Suhas went ahead and arranged Rs. 45 lakh plus registration expenses of Rs. 3 lakh, by liquidating all his savings, taking hand loans of Rs. 30 lakh from close friends and relatives. He got the sale deed registered and took the possession of the house property.
He thought of repaying hand loans taken from friends and relatives by availing loan against property on the property purchased. Since loan was already advanced on the same property by a leading bank, he was confident of loan approval. But when he approached the same bank, he came to know the importance of original sale deed of seller which was not there with him. He was asked to complete legal formality for not having sale deed, such as execute and notorize an affidavit stating that he has lost sale deed in transit and lodge FIR in jurisdictional Police Station. Then hire services of an Advocate and issue public notice, get the public notice published in one English daily and one vernacular news paper and wait for 15 days. And if nobody has found the title deed and contacted the Advocate, get a certificate from advocate confirming that title deed is not traced. Once he completes the formality for the lost sale deed, he was hoping of getting loan against property.
While Suhas was running from pillar to post to complete the above formality and spending lot of money and time, he had shock of his life, when a recovery officer from a public sector bank banged on the door informing that Mr. Nair (the seller) has availed home loan of Rs. 50 lakh on the property (purchased by Suhas) and has been a defaulter for past 2 years. Further recovery officer informed that the bank has served notice to Mr. Nair, under SARFEASI Act and if outstanding loan and dues amounting to Rs. 68 lakh were not remitted before last date (which was less than one week), the property will be attached and will be auctioned.
By then, Mr. Nair was not traceable and efforts to reach him went in vain.
In fact, Mr. Nair had availed home loan of Rs. 50 lakh by mortgaging the property (sold to Suhas) by depositing original title deeds of the property and not disclosing the same to Suhas. Since it was equitable mortgage (mortgage by deposit of title deeds), the mortgage entry was not found in the Encumbrance Certificate, issued by the Sub Registrar.
After going through all documents deposited with the bank, memorandum of mortgage, loan statements, action taken under SARFAESI (The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest) Act, I could suggest two options to Mr. Suhas, as follows.
Option 1: Suhas can request the bank to reduce the late fee and penalty charges to the best possible extent on outstanding loan and arrange to clear off the loan outstanding.
Option 2: Suhas can request the bank to reduce the late fee and penalty charges to the best possible extent on outstanding loan and request the Bank to auction the property at best possible price, clear off the outstanding loan from auction proceeds and pay the balance to him.
After all out efforts of reaching to senior executives of the Bank, the Bank agreed to reduce the total payable amount to Rs. 62 lakh, the final amount to settle the closure of the loan.
After discussing with senior executives of the Bank, Suhas came to know that if property is auctioned, it may not fetch more than Rs. 62 lakh, the total outstanding loan amount.
Suhas was almost broke!
Finally he had to sell his self occupied dream home under distress sale, which he had acquired after 15 years of employment and availing home loan from a Bank. The outstanding loan was Rs. 15 lakh, apx. Suhas had to take the decision so as to close the loan availed by the Mr. Nair and also to repay hand loans taken from friends and relatives.
His family had to move from a larger house in a good central locality to a much smaller house in the outskirts of city.
With all these hardships, eventually he spent Rs. 110 lakh to buy the property, the market value of which was Rs. 70 lakh!
The ‘greed’ of making a profit of Rs. 25 lakh in a short span of 10 days made Mr. Suhas to undergo mental agony and hardships as above and further forced him to sell his dream home under ‘distress sale’, wherein he lost another Rs. 20 lakh, as he had to sell his dream home at much lesser price than market value of the property.
The author is Managing Director of Abhrant Property Counseling Services Pvt. Ltd., Bangalore