Property Registry – 10 Most Common Types of Registration
Property Registry is one of
the most curious subjects for any buyer. Predominantly, it depends whether you
are buying a resale or under construction flat /
property. Property Registry is most crucial and a final step of property
purchase. Normally, a buyer gets confused because of unique suggestions from
builders/lawyers on property registry. In many cases, banks also impose
conditions on property registry. Each stakeholder has it’s own
motive/logic on how to execute property registry.
The stamp duty and registration charges play a crucial role in
this regard. The prime objective of a buyer is to save stamp duty. The builder
or seller play with this psychology of a buyer & try to keep property
registry value as low as possible. Some time back, i have written a post on how
to save property registration charges.
It might or might not be beneficial in all the cases. Normally, buyers fail to
judge the impact of low property registry value on capital gain at the time of
purchase. I always suggest my clients to take a balanced approach. A saving in
stamp duty at the time of purchase might not compensate for the incremental
capital gain at the time of sale. The approach should be financially beneficial
depending on the investment horizon, appreciation, tax slab, and various other
factors. I will discuss this topic in detail in my future post.
Property Registry – 10 Most Common Types of Registration
As the property registration
has a financial and capital gain implication on a buyer. Therefore, it is
important to understand the types of property registry. It can also have an
implication on Home Loan eligibility of a buyer. For simplicity purpose, i have
divided the property registry into Resale and Under Construction.
Each one of the following types is unique but may sound common. I can share the
overview and common pros and cons. For any specific clarification, you can post
your queries in the comments section at the end of the post.
A. Resale Property:
1. Full Property Value: From
a buyer perspective, It is the simplest and straightforward way to execute
property registry. The only precondition is that the property value should be
more than or equal to circle rate/guidance value/ready reckoner rate. The only
negative is that a buyer may need to shell out more for stamp duty and
registration charges.
Quite interestingly, if the
buyer is registering at full property value that is higher than the circle
rate. In this case, the officials of sub registrar office desist property
registry at full value. Many clients asked me the reason for same. The answer
is very simple, the real estate mafia. The circle rate/guidance value/ready
reckoner rate is decided every year by the average value of transactions in a
particular area. It’s a known fact that the actual property value is still
higher than circle rate though govt tries to bridge the gap. Now assume that
everyone start registering property at full property value that is closer to
actual market value. In this case, next year’s circle rate will be at par with
market value. It is not a happy situation for builders. It may impact real
estate market negatively. The officials of sub-registrar office in collusion
with builders insist buyers register property near to circle rate.
2.
Property Value is Higher than Circle Rate: This
is the most common scenario. In this case, the buyer has the option to execute
property registry at circle rate. Let me clarify that in this case, it is
perfectly legal to register property at circle rate that is lower than property
value. A buyer can execute Deed of Transfer of Rights to
bridge the gap between sale deed and sale agreement value. By following this
arrangement, a buyer can save on stamp duty and registration charges.
3.
Property Value is Less than Circle Rate: I
discussed this point in detail in my post What if circle rate is more than market
value. You may go through the post for more details. The only word
of caution is that the difference amount of circle rate and property value is
taxed as “income from other sources” to the buyer. For example, if i bought a
property for 40L and circle rate is 60L. In this case, i can register property
at 40L. I will be paying stamp duty and registration charges at circle rate
i.e. 60L. So far so good but biggest catch is that difference amount i.e. 20L
will be taxed as income from other sources. It will be taxed as per my Income
tax slab.
4.
Bank Valuation: In some cases, banks insist borrowers register the
property at either full property value or higher value. In the first scenario
i.e. full property value, the home loan eligibility is fixed based on sale deed
value instead of sale agreement value. The reason being, many borrowers
fraudulently execute sale agreement at a higher value to increase the home loan
eligibility. A sale agreement is not registered and mostly executed just for
home loan purpose. For example, my property cost is 50L and based on that my
home loan eligibility is 80% say 40L. Now i would like to avail home loan of
50L. Therefore, i will execute sale agreement of 62.5L and can avail home loan
of 50L. It may land buyer in trouble if seller raises the fresh demand of diff between
actual sale value i.e. 50L and inflated value i.e. 62.5L. This difference of
12.5L is added just to increase home loan eligibility. To avoid such frauds
banks like SBI insist property registry at full property value.
In the second scenario, banks
may insist higher property registry value depending on their internal property
valuation. In one of the case, my client was buying a property for 63L whereas
circle rate was 72L. In this case, the bank insisted on registering the
property at 80L. The reason being, bank’s valuer assessed the property value at
80L. The banks are particular about property value so that in the case of
default they should get fair market value through auction.
5.
Sale Certificate: This scenario is applicable only in case
of bank auction properties. Mostly the bidders have a lot of confusion on
property registry in case of bank auction process.
Let me clarify that in the case of bank auction, the Conveyance Deed or Sale
Deed is NOT registered in the sub registrar office. In this case, sale
certificate issued by the bank is registered in sub registrar office. It is
signed by the designated and authorized bank official at the time of
registration.
B. Under Construction Property:
The property registry of
under construction property is slightly confusing compared to resale property.
The timing of property registry is also crucial. The timing will have a major
financial bearing on the capital gain of the property. As i shared, i will
discuss the impact of property registry on capital gain in my later post. Let’s
check out the 5 most common types of property registry of under construction
property.
1.
UDS/Sale Agreement Value: To register a property
at Undivided Share (UDS) is the most common practice. For an under construction
property, builder sign 2 agreements with the buyer i.e. Sale Agreement and
Construction Agreement. In layman terms, Sale Agreement is towards the cost of
land. It is also referred as a common area or undivided share in the land or
undivided right and interest in the property. On the other hand, construction
agreement is towards the construction cost of the flat/property.
Builders register the
property at sale agreement value or UDS. It helps to save the stamp duty and
registration charges. In many cases, the stamp duty and registration charges
charged to the buyer is much higher compared to actual cost. The reason being,
builder levy registration charges on total consideration value but property
registry is executed at UDS value that is normally 25% to 35% of total cost.
Therefore, balance is savings for builder or icing on the cake. In this
point, i am referring to the registration at the time of possession to the
buyer.
2.
Under Construction Property: I have discussed this
topic in detail in my post, Register Under Construction
Property for Home Loan. This type of property registry is executed
only to avail home loan and is very risky. A buyer hedges the risk of a builder
and the bank.
3.
Sale Agreement and Work Order: This type of
registration is very common and popular in Hyderabad. Builder shares two
agreements with the buyer i.e. Sale Agreement and Word Order. A work order is
executed to include the cost of tiles, kitchen slab, Windowpane, doors,
flooring, POP etc. Normally in such cases, buyer are not aware of VAT and ST
implications of the work order. Builder informs these charges only at the time
of execution. A top line calculation shows that this kind of arrangement is
financially beneficial only for the builder. From buyer’s perspective, the
outflow towards stamp duty and registration of sale agreement and VAT + ST of
Work order are same if the property is registered at full or gross value. The
buyer should insist on property registry at full value. As we know that the
attitude of a builder is as if he is selling the last flat on this planet,
therefore, very difficult to convince him.
4.
Sale Agreement Value + Construction Agreement value: The
reputed builders prefer to register the under construction property at full
value. A sale deed is executed equivalent to a total of sale agreement and
construction agreement value. Similar to point 1 in resale property i.e.
property registry at full property value, it is a hassle-free type of property
registry for a buyer.
5.
Transfer Cases / Assignment Deed: The biggest confusion
for a buyer is in the case of transfer cases or assignment deed. A buyer buys
under construction property from the secondary market. A tri-party assignment
deed is executed between the builder, buyer and the seller. The mystery is in
the execution of property registry. Logically speaking a builder cannot
register property at UDS in this case as the sale agreement is not signed with
the new buyer. I observed that builder still prefers property registry at UDS
or sale agreement value of original buyer. The reason being, sub-registrar will
never come to know that the under construction property exchanged hands.
On the contrary, if the
property is registered at assignment deed value then it is problematic for the
builder. The reason being, the premium on property sale is retained by the
seller. Technically, the builder will only receive original consideration value
as per the sale and construction agreement signed with the first owner. Typically,
i observed that property is registered at a value somewhere in between the
total consideration value of first owner and the sale agreement value.
Personally, i could not understand the logic behind the same.
In the "Property Value is Higher than Circle Rate" section in the referred link it says "It cannot be executed for sale and purchase of Land / Plot." What to do in case of a Plot purchase?
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