Types of Advancement Payments to Be Avoided by Buyers in Property Deal
Planning on purchasing a property? You will most probably come across a situation where the property developer or a seller will be asking for a number of advance payments. The advance payments we are talking of here is not the token money or advance payment for booking. That’s mandatory. Everyone needs to pay token money. Apart from that token money, the property developers / sellers / banks will be asking for a number of other advance payments and you should not be paying. If you pay, you may get into trouble.
Funny thing that we are not living in a society that is idealistic. If it were so, the seller of the property would not have asked for any other payment apart from token money. The remaining money that buyer needed to pay would have been during the registration of the property. But that never happens and in most cases, the buyers are often slapped with additional advance payment requirements. As a matter of fact, buyers are actually harassed for that.
Worst of all, even some banks resort to this practice despite the fact that banks cross the boundaries of rules and regulations and business ethics. By doing so, banks risk the money of the buyers either intentionally or unintentionally. This should not happen. Such instances of banks resorting to unethical practices are not many. The majority of those instances come from brokers and sellers. Good thing however is that, most of the times, the brokers or sellers actually do not intend to commit any fraud. There may be a few instances where frauds are committed but such instances are few.
From a Buyers’Perspective
From a buyers’ perspective, making advance payments are not that bad. They will have to anyway pay the money sooner or later. However, despite that being true, the question of fraud comes in. What if a buyer becomes a victim of a fraud? There wouldn’t be enough left to be done. Hence, it is important that even if a buyer is accepting the request of advance payment, he or she should get full clarity and receipt of such payments so that later, in case of a fraud, the buyer can hunt down the seller and recover the money.
In this article, we are going to take a quick look at the 5 different types of advance payments that are often asked for by the sellers and we will take a look at how the buyers need to shield themselves against potential fraud.
5 Types of Advance Payments Demanded in Property Deal
Type 1: TDS or Tax Deducted at Source
This is the commonest form of advance payment that you may be asked for. Usually this demand comes from banks in case you are opting for a home loan for purchasing a property. The bank or any other financial organization offering home loan will usually insist that you pay the TDS upfront. What really happens is that the banks or other financial organizations will ask the borrower to make an upfront payment of the TDS and only then, the loan amount will be disbursed. In case of NRIs opting for home loan, the scenario is even worse because TDS for NRIs is very high. The banks will demand that the borrower needs to show the TDS payment receipt for the money to be disbursed.
The rule of thumb states that TDS payments are to be made only and only at the time of making the actual payment. This means that the TDS payment should be made during the final payment for registration of the property. So, banks or other non-banking financial companies that offer home loans are actually breaking law and are illegally forcing a borrower of home loan to pay TDS.
Let us cite a quick example. What we will be doing here is we will take a hypothetical case. Say, a person wants to purchase a property which will cost Rs. 100. The buyer needs to pay the booking or token fee of Rs. 10. The bank agrees on paying Rs. 80. Now, the bank manager asks the person to pay the TDS upfront. since the person needs to pay upfront TDS, let us assume that he or she needs to pay TDS of Rs. 20.66 (That’s the rate a person needs to give for LTCG or Long TermCapital Gains against any property whose worth is more than 1 crore).
The manager of the bank insists that the TDS be paid out of the pocket of the buyer. Weirdly enough, since TDS is supposed to be paid during the final payment, the buyer will have to pay Rs. 80 + Rs. 10 + Rs. 20.66 to the seller of the property. This amount stands to Rs. 110.66. So, eventually it stands that for a property of Rs. 100, the buyer ends up paying Rs. 110.66 to the seller. The question here is that how will the buyer get back Rs. 10.66 extra that he or she is paying to the seller. The bank manager cannot answer that. Hence, paying TDS upfront is not a good idea.
There is another problem. What if the buyer pays the TDS upfront and then, somehow the sale of the property never goes through? How on earth will the buyer get a refund of the TDS he or she pays? No one gives an answer to this simple question and yet, it involves financial loss for the buyer. In reality, this can actually happen. There may be unforeseen situations which may lead to cancellation of the deal. For instance, the seller of the property my die suddenly. In such a situation, the likelihood of the buyer getting a refund for the already paid TDS will be almost nil. Scenarios like these can actually lead to financial loses that may run in lakhs.
So, it is always suggested that when you are going through a property purchase deal and you are asked to pay TDS payment upfront, you should strictly decline the request even if the TDS is just 1%. It is your responsibility to pay TDS and hence, even if the bank is asking for TDS upfront, simply decline the same and ask the bank personnel about the due date for the TDS payment. Also, ask the bank personnel that if the deal eventually fails for some reason, who will be responsible for returning your TDS payment.
Since it is your responsibility to pay the TDS, you can ask the bank to deduct TDS every time the bank disburses some money and send the remaining amount to your account (here ‘you’ refers to the buyer). It is really not necessary for the bank to deduct TDS with each disbursement. You can simply submit TDS on your own using Challan 281. However, you need to remember that the TDS payment should be completed on the due date or before it. Once you have paid TDS, you can give the TDS certificate to the seller and the bank.
Type 2: Advance Payment for Seller’s Home Loan Pre-Closure
Remember, this kind of advance payment request is most likely associated with fraud. The probability of fraud in a scenario like this is way too high and hence, you should always avoid this. What really happens is that some sellers think that they are way too smart. They will ask a buyer to make an advance payment so that they can pre-close a home loan they already have. Remember that in this case, the seller is not really a developer. He or she is basically a person who owns a property and is now selling it to a buyer (say, buyer A). The logic the seller will put forward is that once the money comes to his or her hand, he or she will quickly pre-close the home loan that he or she has and then quickly sell the house to the buyer. Unfortunately, once the buyer A pays the money, the seller will use the money to actually close a home loan and then find another buyer (say buyer B) and sell the property to buyer B.
In the meantime, the seller will actually create some fraud documents and hand it over to both buyer A and buyer B. This means that the seller will actually sell the property to both the buyers and in the process, the seller will make some money and run away. Now, the two buyers – A and B will keep fighting over the property and eventually someone will lose. The one who loses will lose a significant amount of money.
This type of fraud is rampant and actually there are cases where a single property has been sold to more than two (sometimes up to 4 buyers) and the seller can be found nowhere. If any such demand is coming and if you are willing to make a payment like that, here are a few things you need to do:
- Instead of paying the money to the seller, pay the money directly to the bank where the seller has a home loan and take a payment receipt with bank stamp and signature of someone who is responsible and accountable in the bank. If possible, have the seller sign the receipt too.
- Make sure that you get a written statement from the seller in a court paper and in front of a lawyer that you have paid the money for pre-closure of the home loan of the seller. Also, ask the seller to give numbers and addresses of several contacts (apart from his own) and call and verify that those people actually do know those people.
- Physically visit the house of the seller and get a good knowledge about the surroundings. Ask the locals about the seller and his past financial background etc.
- If possible take advice from an advocate to know whether you can file an FIR against the seller in advance so that if the seller tries to do some fraud, he or she can be apprehended by law whenever necessary.
These are important steps as they will keep you guarded against any possible fraud where you may very likely lose money – your hard-earned money.
Type 3: Registration Charges and Stamp Duty
Registration charges and stamp duty differ from one state to another. The rules are different and hence, you will have to abide by the rules. There are some states where you can pay the stamp duty simply by purchasing stamp papers of the same value as the total stamp duty you need to pay. So, if your stamp duty comes to say, Rs. 500, you can actually buy stamp papers worth Rs. 500 before the registration of your property. There is a problem with these stamp papers. You cannot transfer them and neither can you have them refunded. Usually, these stamp papers stay valid for 6 months but in some states, these stamp papers may have 3 months of validity. In some states, you can actually pay stamp duty as well as registration charges in advance.
Now the question is that if the stamp duty and registration charges can be paid in advance then why is it a problem? Let us take an example – a real life example. There was a property buyer. He decided to buy stamp papers in advance as allowed by the state. There was nothing wrong in that. However, because of some reasons, the deal was cancelled and then the person was left with only 3 months to get a new property registered because the stamp papers had a validity of 3 months. Unfortunately, the buyer was unable to find another property within that time frame. The result was that the person lost all the money that he spent on purchasing the stamp papers because they were non-refundable.
This might happen to you also and hence, it is advised that you should never pay these charges in advance. If a seller is saying that you HAVE to pay in advance, you can clearly decline because there is no such rule. These charges are to be paid during the time of property registration. What you can do is carry a demand draft or a banker’s cheque and pay the stamp duty and the registration fee directly on the day of registration.
Another important thing that you need to keep in mind that you should be fully aware of the stamp duty as well as the registration fee that you need to pay. Some sellers may end up taking more money for those purposes. So, it is wise to visit the office of sub-registrar and get the exact figure of money that you will have to pay. You can get the details 5 to 6days ahead of the day of scheduled registration. On the day of registration, give a banker’s cheque or a demand draft directly at the office of sub-registrar.
Type 4: Higher Advance Payment from Self Contribution
Almost every home buyer who purchases a house will buy it by pooling some money from his or her own savings and taking out the remaining as home loan. Now, when you are going for a home loan from a bank, the bank will not really give you the money straight away. Rather, bank will take its own time to do all paperwork and verification and then start disbursing the loan amount in instalments and sometimes in whole. As a result, the money you are getting out of a home loan comes in late. This means that the advance payment that you are making for booking your property is the money that comes from your personal savings or other sources from where you have pooled the money.
Now, a seller is always a smart fellow. You give the seller a scope and you will be screwed (there is no better language for this). A seller will invariably ask you about the percentage of fund you are getting from bank loan and the percentage of funds you will be arranging on your own. The very moment you state that you will be arranging for a higher amount from your own resources compared to what you are taking out as a home loan, the seller will immediately ask you to pay higher token money or advance money for booking your house.
For instance, you if say that you will give 70% of the funds from your savings and remaining 30% will come from bank loan, the likelihood of the seller asking for 70% advance payment increases dramatically. If that happens and you really like the house you want to buy, we suggest that you take your own sweet time (possibly 3-4 days) and then call the seller or meet the seller in person and say that your sources of pooling 70% of the funds have failed and that you could arrange only 20% of the total price and the remaining 80% will now come from home loan. This way, the seller will lose hopes of getting more money as advance payments because the seller knows very well that the home loan you have applied for is not getting disbursed anytime soon.
The general rule of thumb is that you should never pay more than 20% of the property value as advance payment or token money for payment. The moment you do so, you risk your money and in case the seller turns out to be a fraud, you will lose more money. So, play wise and think before you act. It is your money and you need to be careful. Sellers will always try to rip you off.
Type 5: Registration Date Should Define the Amount of Advance Payment
This is very very very vital. We cannot stress more. You do need to make an advance payment for booking your property. But, just how much should you pay in advance? The seller can ask for any amount. That can be as high as 70% of the property price. The rule of thumb states that the token payment should never exceed 20% of property value.
But, did you know that sale agreement of a property takes place way earlier than the property registration. So, there is always a time difference or time lag between property sale agreement and property sale deed. It is this time lag that should define the amount of advance payment you should be making.
In many cases a property deal will be totally closed with 45 days to 60 days. This means that the registration will be completed with 1.5 months to 2 months from the date of sale agreement. However, there are cases where the sale agreement is executed on a date and then the registration takes place after 6 months or 12 months or 18 months. There can be several reasons for such delays. For example, the buyer needs time for arranging the money. The property might be on a lease that is irrevocable. The seller needs to make stay arrangement and for that he needs more time. There are several other reasons too.
However, the longer the time lag, the greater is the chance that a sale agreement will not go through. Put in simple words, the property sale may not take place. One of the primary reasons is that the property or real estate market is almost always on the rise and during a significant time lag, the property prices may simply go higher and higher than what the buyer and the seller agreed upon. Given that situation, the seller will simply back out. The opposite may be true as well. The buyer may actually find another property which is cheaper and better that the one he has agreed upon. The buyer may then back out.
Whatever the case be, when the sale does not go through, the seller will not easily give back all the money that was paid as token money. In fact, the seller will actually deduct some money showing a number of excuses and there will be very little the buyer can do. So, the bigger the token money, the bigger will be the loss for the buyer.
Ideally, the time lag between the date of sale agreement and the date of registration should not exceed anything more than 6 months. In cases where this time lag is bigger, only 1 out of every 5 property sale agreements actually go through and the buyers end up losing money. So, if the seller is demanding higher advance payment than 20% of the property value and the date of registration is way far from the date of sale agreement, it is time that you politely decline that request.
Summary in a Tabular Format
Okay, we have processed a lot of information in this article. In case you do not remember the whole thing or you do not want to go through all the details, here is a quick summary of the 5 types of advance payments you should avoid in case of a property deal:
|Sl. No.||Type of advance payment||Why to avoid|
|1||Advance TDS||This may lead to over payment and if the sale doesn’t go through you will lose money. TDS is paid during the final payment and it is your responsibility to pay the TDS. Banks or sellers, if demanding TDS in advance, are actually making an illegal demand. You can be trouble.|
|2||Advance payment for home loan pre-closure of the seller||Never do that because the seller will take your money to pre-close his or her home loan and then sell the property to someone else and thereby sell the property to two people who will keep fighting among themselves and the seller will escape with the money. You will lose your money.|
|3||Stamp Duty and Registration Charges in advance||If you are paying stamp duty by purchasing stamp papers of equivalent amount and that too in advance, you may end up losing the money because stamp duty (stamp papers purchased instead of paying stamp duty in cash) is non-refundable. If the sale deed doesn’t go through you will lose the money you spent on purchasing stamp papers unless you manage to buy another property within the validity period of the stamp papers. Yes, the stamp papers will have a validity period.|
|4||Higher advance payment if self-contribution is higher||Never disclose your share of contribution in the property price and the home loan share to the seller. If your share is high, the seller will ask for higher advance payment. If the seller turns out to be a fraud, you will lose greater amounts of money.|
|5||Higher advance payment for registration date which is farther away||The registration date should not ideally be any farther away from sales agreement by 6 months. If the date of registration is more than 6 months away from the date of sale agreement and the seller is asking for higher advance payment, you may get into trouble if the seller or even if you pull out of the agreement because of obvious financial benefits due to inflation or deflation in real estate market.|
Avoid advance payments as much as possible because once you give the money, it will be very hard to get it back from the seller in case the sale doesn’t take place. You will end up losing your money while the seller will benefit out of your financial misery. Play wise. Property purchase is a big decision. Take your time and think over and over again from various angles. The more you think and discuss, the better it is for your pocket.