Real Estate Transaction Costs: Who Pays What?

Nothing in the world can be bought without a price…!

The same applies to a property. An NRI investor intending to buy real estate in India must be aware of the various laws governing property transactions in India, along with the various costs involved in the process. It is crucial for the NRI investor to identify what costs are liable to be paid by him/her, and those that the seller needs to pay.

Let’s take a look at the costs involved in real estate transactions and understand who is liable to pay them.

Real Estate Transaction Costs: Who Is Liable To Pay What?

Here are the costs a buyer and seller of the property must bear when it comes to a real estate transaction in India.

1. Stamp Duty:

The government levied a compulsory tax on a property transaction⁽¹⁾ (when the rights of ownership are transferred from the seller to the buyer). It is levied on residential as well as commercial properties, as well as freehold or leasehold properties. Stamp duty is generally calculated as a percentage of the higher among the circle rate and the agreement value of the concerned property. The rate differs from state to state and depends on the following the factors:

• Status of the property: whether it is old or new
• Location of the property: whether it is situated in a metro, a town, a rural area, etc.
• Age of the owner: Discounts may be provided to senior citizens (in some states)
• Gender of the owner: Female real estate owners could avail certain concessions (in some states)
• Usage of property: Whether it is a residential or a commercial property
• Type of property: Whether it is an apartment or an independent house

Stamp duty can be paid in the following three ways:

• Through non-judicial stamp paper: The agreement details are mentioned in this paper, and it is later signed by the executants. It has to be submitted within four months at the sub-registrar’s office.
• By franking: The agreement is printed on plain paper and then submitted to an authorised bank, which processes the document using its franking machine.
• Online: In some states, the stamp duty can also be paid online, using the NEFT or RTGS. Once that is done, the stamp duty certificate (with details such as the date, stamp duty type, etc.) can be downloaded for the registration process.

A lot of people try to avoid paying stamp duty, by undervaluing the property in question, in the agreement. However, the consequences of evading the stamp duty can be grave – the penalty may range from 8%-20% of the actual stamp duty amount, and imprisonment for a certain period. These, too, vary from state to state.

Stamp duty is payable, irrespective of whether it is a primary sale (purchased directly from the developer) or a secondary one (purchased from the current owner). Stamp duty charges range from 3% to 10%, based on the slabs determined by different states.

Paid by:

The liability to pay the stamp duty rests with the buyer of the property. ⁽¹⁾

2. Registration Fee:

Along with the stamp duty, the registration fee also needs to be borne by the buyer. This cost also forms a substantial part, depending on the value of the property. Usually, it ranges from 1% to 2% of the property cost. It needs to be paid before the registration of the property at the sub-registrar’s office. ⁽²⁾

Like the stamp duty, this fee is also payable irrespective of whether the property has been purchased directly from the developer, or it is a resale. To know more about the process of registration, refer to this article on the buying and selling processes.

Paid by:

The Buyer

3. Legal Fees:

It is advisable for a buyer to hire a real estate attorney to protect his/her interests during a real estate transaction. The attorney draws up an agreement of sale, once the price has been negotiated with the seller. The buyer will typically pay 10% – 20%  of the property value as a deposit.

The attorney then conducts due diligence, the most crucial component of a real estate transaction. It is conducted mainly to verify the ownership of title over the property and any encumbrances over the property, so as to protect one against pre-existing claims. Such claims could either affect the ability of the transferor to transfer the property or could create problems even after it is transferred. Depending upon the nature of the transaction, the property involved and the objective of the participants, a due diligence can be categorised into two types:

• Full search: A full search is usually done while giving a title certificate of the property in instances of sale/resale/long-term lease transactions and for transactions that involve financing by mortgaging the property in question. It also includes a detailed search of all aspects relating to the history of that property such as the status of encumbrances over the property, the status of disputes relating to the property, the applicable regulations and the status of compliance of such applicable regulations relating to the property in question.
• Limited Search: Unlike full searches, in a limited search, the search relating to the history of the property may be limited to restricted aspects such as recent title history, encumbrances on the property, disputes related to the property etc.

Typically, during the due diligence process, the following aspects will be examined:

• Legal capacity of the present owner of the property: It is important to check if the person is legally capable of entering into a binding contract for sale or lease of the property or for mortgaging the property.
• Nature of the current owner’s right over the property: It is necessary to identify the nature of the current owner’s right over the property and the transferability of such right.
• Source of right or title of the current owner: In India, a person can acquire right or title over the property by purchase, inheritance, partition, as a gift, through a will, or through perpetual lease (ongoing tenure over state land, issued for a specific purpose, and must be used only for the purpose for which it was originally issued).
• Legality of the construction: There are specific rules and regulations that govern the manner in which civil constructions need to be carried out in that particular State. Therefore, a lawyer undertaking a due diligence of land having a structure on it needs to first get familiar with the local construction laws applicable in the region in which the building is situated, and then, to determine whether these have been complied with, in undertaking the construction of the building in question.
• Encumbrances over the property: It is necessary to verify whether there are any encumbrances, charges, or mortgages on the property in question. The records of the concerned Sub-Registrar of Properties should be examined to ensure that the property is free from all sorts of registered encumbrances or charges or mortgages. It is also advisable to obtain an encumbrance certificate issued by the concerned Sub-Registrar of Properties which would detail the registered encumbrances, if any, on the property. If there is an existing encumbrance, charge or mortgage over the property, it should either be cleared prior to the purchase or provided for in the consideration.
• Whether the land is part of any acquisition process: It is also important to know if the property is under the process of acquisition by any government authority. If the property has been acquired by the government, then the property ceases to belong to its original owner and becomes the property of the acquiring authority.
• Whether the property taxes have been paid: Another aspect of the due diligence conducted would be if the property taxes have been paid to the municipal authority of the area where the property is located.

Based on the due diligence conducted above, a valid title certificate is issued.

Paid by:

The legal fees for this process sum up to 1.5% of the property value and are borne by the buyer and the seller if they avail such services.

4. Transfer Fee:

A transfer fee is charged when the ownership of the property is transferred from the seller to the buyer and is generally split between the seller and the buyer. Societies charge transfer fees, and the amount varies from society to society based on services, size and facilities. Some of them have a fixed administrative fee, irrespective of these factors (legally, they cannot charge more than Rs. 25000). ⁽⁴⁾

Another fee is ‘donations’ towards the management of the amenities and facilities offered by the society. This is generally an optional payment which can be paid to the housing society. However, it cannot be made compulsory.

For properties under construction, the builder may also charge a transfer fee, on per sq. ft. basis. This rate would also vary from property to property, across localities and states. If the transfer charges are not paid, the owner will be refused a NOC for transferring the ownership.

A builder charging a transfer fee is considered a violation of the Transfer of Property Act, 1882.⁽³⁾

Paid by:

Usually split between Buyer and Seller or as mutually agreed upon.

5. Brokerage:

In the case of a secondary sale, the buyer and seller may hire real estate agents to make sure that the property transactions are transparent and swift. Even in the case of a primary sale, the developer may be associated with brokers, and pay them a fee for their services. The brokerage fees charged differs across properties, localities, and states, and is a percentage of the agreement value (1-5%).

Paid by:

Buyer and Seller if they hire the services of a Real Estate Broker

Flow of Payment

For properties under construction, the tranches of payment are linked to the stages of construction. Some builders have 3 pre-determined slabs – on booking, lump sum within 30-45 days and then rest on completion or possession.

With ready-to-move-in properties, the flow would be determined on the basis of the terms mutually agreed upon by the buyer and the seller. As per market norms, the transaction should be closed within 45-60 days after paying the token. The last stage of the transaction, in case the buyer has opted for a home loan, is when he/she pays his/her contribution to the seller (a loan is generally provided to the extent of 85% of the property value – the balance is the buyer’s contribution).

Buying the property is only the first step of the process for the NRI investor. He/she will need someone to manage the property, in terms of deciding whether to keep it vacant or rent it out, screening and choosing the right tenants, maintaining the property, and taking care of all the taxation and legal matters. A Real Estate Portfolio Manager is who the investor needs!

Before zeroing in on a real estate portfolio manager, it is essential that the NRI investor be clear on all aspects of property management, one of which is the amount charged by the manager for these services. These charges will need to be borne entirely by the existing NRI owner of the property.

If you are an NRI investor looking for advice on real estate matters, get in touch with Homzhub today!