With the development of private property ownership, real estate has become a major area of business. It has evolved into several fields like—valuation services, brokerage, property management, etc, Rajkumar Adukia elaborates
The term ‘real estate’ refers to land as well as building. The word ‘land’ includes—the air above and the ground below and any buildings or structures on it. It covers residential houses, commercial offices, trading spaces such as theatres, hotels & restaurants, retail outlets, industrial buildings, factories and also government buildings. Thus, the term real estate connotes immovable property which can be either land or building or both. Real estate differs from personal properties such as furniture, money, clothing, etc with regard to the basic assumption that any type of personal property is movable with the owner of it.
The real estate transaction includes:
- Sale and
- Development of land (both residential and non-residential buildings)
Real estate is a term that encompasses land along with those improvements to it such as commercial & residential structures, roadways and ports that are all fixed in location. Construction is the process of building new infrastructure on real estate. Given their close inter-linkages, these sectors are often treated as one. Far from being a single activity, large scale real estate development is a feat of multitasking by a wide host of professionals, including financial analysts, legal experts, project managers, construction managers, design engineers and project architects, amongst others.
According to Section 2(6) of the Registration Act, 1908, “Immovable Property includes land, building, hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefit to arise out of land, and things attached to the earth or permanently fastened to anything which is attached to the earth but not standing timber, growing crops nor grass”.
Types of ownership interests in real estate (immovable property) include:
- Freehold: Provides the owner the right to use the real estate for any lawful purpose and sell when and to whom the owner wishes.
- Life estate: An interest in real estate which is granted to a life tenant until that person dies. The interest terminates upon the death of the life tenant.
- Estate for years: Similar to life estate but the term is a specified number of years.
- Leasehold: The right to possess and use real estate pursuant to the terms of a use.
- Reversion: The right to posses the free interest in real estate after the expiration of a life estate, estate for years or leasehold.
- Concurrent or co-tenancy: The ownership of an interest in real property by more than one party. Rights of any single party may be limited in various ways depending on the jurisdiction and type of concurrency.
The main players in the real estate market include:
- Landlords / owners
- Builders / developers / contractors
- Real estate agents
Real estate business
With the development of private property ownership, real estate has become a major area of business. In fact it has evolved into several distinct fields like—valuation services, brokerage, development of property, property management, real estate marketing, etc.
Following factors influence the price & cost of the real estate:
- Physical characteristics of the property
- Property rights
- Time horizon of holding the property
- Geographical area
- Development rate
Unique characteristics of real estate market are enumerated hereunder:
- Durability: Real estate is durable. A building can last for decades or even centuries, and the land underneath it is practically indestructible. Because of this, real estate markets are modelled as a stock / flow market. About 98% of supply consists of the stock of existing houses, while about 2% consists of the flow of new development.
- Heterogeneous: Every piece of real estate is unique, in terms of its location, in terms of the building, and in terms of its financing. This makes pricing difficult, increases search costs, creates information asymmetry and greatly restricts substitutability. Further, the real estate market is typically divided into residential, commercial and industrial segments. It can also be further divided into subcategories like recreational, income generating area, historical / protected, etc.
- High transaction costs: Buying and / or moving into a home costs much more than most types of transactions. These costs include search costs, real estate fees, moving costs, legal fees; stamp duty, registration fees, etc.
- Long time delays: The market adjustment process is subject to time delays due to the length of time it takes to finance, design, and construct new supply, and also due to the relatively slow rate of change of demand.
- Both an investment good & consumption good: Real estate can be purchased with the expectation of attaining a return (an investment good), or with the intention of using it (a consumption good), or both. This dual nature of the good means that it is not uncommon for people to over-invest in real estate, that is, to invest more money in an asset than it is worth on the open market.
- Immobility: Real estate is locationally immobile. Consumers come to the good rather than the good going to the consumer. Because of this, there can be no physical market-place. For example, if tastes change and more people demand suburban houses, people must find housing in the suburbs, because it is impossible to bring their existing house and lot to the suburb (even a mobile home owner, who could move the house, must still find a new lot).
Other important terms:
Acre: Often used in Indian real estate unit of measurement of a big chunk of land area. 1 acre is equal to 43,560 sqft.
Allotee: The person who is allotted a property, either by government body / authority or by a developer.
Agent: Agent in real estate is usually referred to the realtor or broker. An agent plays the role of a facilitator for property transactions for a consideration.
Appraisal: A written report of the estimated value of a property prepared by a certified real estate appraiser or a valuer.
Appreciation: An increase in the value of a property due to changes in market conditions or other causes over a period of time.
Assessed valuation: The value that a taxing authority places on real property for the purpose of determining the amount of taxation for that property.
Benami ownership: In Benami ownership, the title of the property is in one party’s name and the real ownership is in another party’s name.
Beneficiary: The person/persons/institution designated to receive the income from a trust, estate or a deed of trust. A contingent beneficiary has conditions attached to his/their/its rights.
BHK: Bedroom, hall, kitchen
BSP: Basic sale price
Bhumidar: A Bhumidar is of the class of a tenure-holder under the Delhi Land Reforms Act, 1954. He has the right to use land for any purpose connected with agriculture, farming or poultry. He has no right to use the land for industrial purposes other than those connected directly with the aforesaid activities, unless the land lies within the declared industrial belt.
Built-up area: Includes the carpet area, the wall thickness
Capital transaction: Sale/purchase of a property.
Carpet area: The actual usable area of an apartment/office unit/showroom, etc minus wall thickness. Simply put, it is that area within the walls where you can actually lay a carpet.
CBD (Central Business District): The main commercial area of a town and its immediate radius of 2km-3km, typically located towards the city centre, which forms the hub of all major commercial activity in a city. Most large corporate entities, retail outlets and financial institutions would be in this area.
Circle rate: This is the minimum rate decided by the government authorities for valuation of land in a particular area.
Clear title: A title that is free from claims or legal questions and all other encumbrances about the ownership of the property.
Collateral: Any asset that guarantees the repayment of a loan. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan contract. In a housing loan scenario, collateral would mean additional security over and above the security of the property being financed.
Commencement certificate: A certificate issued by the appropriate local authority certifying the construction may commence. Typically, this is done after the concerned party has obtained sanction of plans for the construction of a multi-storied building and has put the columns in place indicating the building boundaries.
Commercial property: A building / property which is used for the purposes of carrying out commercial activity or trading.
Common areas: Those portions of a building, land and amenities owned (or managed) by a planned unit development (PUD) or condominium project’s homeowners’ association (or a cooperative project’s cooperative corporation) that are used by all of the unit owners, who share in the common expenses of their operation and maintenance. Common areas include swimming pools, tennis courts, and other recreational facilities, as well as common corridors of buildings and parking areas.
Comprehensive Development Plan (CDP): The master plan approved by an authority.
Co-ownership: When there is more than one owner for an immovable property, the status of the property is known to be of the co-ownership type. A co-owner can do whatever he wishes with his part of the property as long as he does not affect the share of the other co-owners.
Deed: The legal document conveying title to a property.
De-facto possession: Also called constructive possession; the actual physical possession is called de-facto possession. The actual possession should be held without force or fraud.
De-jure possession: Also called juridical possession, it means possession in the eyes of the law. This may not be accompanied by de-facto possession. Even when the property is lying locked, the de-jure possessor is the de-facto possessor of the property.
Deposit: A sum of money given to bind the sale of real estate or a sum of money given to ensure payment or an advance of funds in the processing of a loan. Deposit could also be the deposit paid to a landlord as part of a rental transaction.
Depreciation: A decline in the value of property brought about by age, physical deterioration, functional or economic obsolescence, etc.
Due diligence: Verification of the authenticity of the title of the property
EDC: External Development Charges
EMI: Equated monthly instalments
Earnest money deposit (EMD): A nominal sum of money given as a token to the vendor, signifying the assent to a contract of sale or the like, that the parties are in the earnest or have made up their minds.
Encroachment: The physical intrusion of a structure or improvement on the land of another. For example, a neighbour’s fence or construction that crosses over your property line.
Encumbrance certificate: A report issued by registrar of assurances or sub-registrar’s office after due verification of the relevant documents certifying that the property in question is free from all encumbrances such as mortgages, leases, easements or restrictions.
Fair market value: The highest price that a buyer, willing but not compelled to buy, would pay, and the lowest a seller, willing but not compelled to sell, would accept. In other words a value decided by the market forces.
Farmhouse: The concept of a farmhouse is nothing but the building appurtenant to the agricultural land. A farmhouse may be used for dwelling purposes, or as a storehouse or an outhouse.
Freehold property: A property where title paramount has conveyed the property in favour of the purchaser by conveyance/ sale deed with no restriction on the right of the holder of the property to further transfer the property. Record of ownership of the freehold property can be ascertained from the office of the sub-registrar. It can be transferred by registration of sale deed. It’s a property where the owner has complete control of the land and all the buildings on it. When you buy a freehold property, you get absolute right to it, subject to the law and applicable regulations. This means you can transfer or sell the property, mortgage it for a loan or give it on lease. For obvious reasons, a freehold property is considered more valuable than a leasehold one.
FSI (floor space index) / FAR (floor area ratio): The maximum amount of construction allowed on a given plot of land. This is purely dependent on the plot area and would vary from one locality to another based on factors such as the road width. It’s the ratio of the total area of all the floors in a building to the total plot area. So if the FSI is 2, the total floor area of a multi storied building cannot exceed twice the size of the plot.
IDC: Infrastructural development charges.
Immovable property: Includes land, buildings, hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefit to arise out of land, and things attached to the earth or permanently fastened to anything which is attached to the earth, but not standing timber, growing crops not grass.
Industrial property: Any property used for a manufacturing purpose. Areas where industrial activity may be carried out are specified by the respective local authorities.
Joint ownership agreement: An agreement between owners defining their rights, ownership, monetary obligations and responsibilities.
LoI: The letter of intent is a non-binding offer letter to buy a commercial place.
Lease: Lease is where there are no two kinds of payments made to the landlord by the tenant unlike a rental transaction. A sum of money is paid to the landlord at the beginning of the lease tenure, which is repaid without interest when the tenure ends. No monthly payments are made.
Lease hold: Such a property is leased from the freeholder for a specific period of time on certain terms and conditions. The lease can be transferred to another person after taking permission from the lessor. Most lease agreements are for 99 years. At the end of this tenure, the property reverts to the freehold owner. The lease also specifies the person or party responsible for maintaining the property.
Maintenance charges: Charges payable by the owners / occupants of a development (apartment complex / commercial complex / plotted development etc) towards upkeep & maintenance of all common areas and facilities. It is normally a monthly charge and the amount payable is dependent on the kind of amenities that are part of the project.
Mixed land use: The term could be used for residential properties that have the provision commercial use on the ground floor and apartments on upper floors. Mixed use is the use of commercial and residential simultaneously.
Mutation: Mutation means transfer/change of name in the records of the corporation for the concerned property. Mutation of a property is the entry of the transfer of title in the revenue records of the local municipal body. Since it is only for the purpose of paying property taxes, it doesn’t provide a legal title to the person mentioned in the mutation records. As the state collects property tax, the procedure and fees differ among states.
Net operating income (NOI): Net operating income is the annual income after deduction of expenses like property tax, insurance, and maintenance but mortgage payments are exceptional.
No objection certificate (NOC): A certificate issued by the concerned local authority that the plans are in order and conform to the guidelines and rules in force. In other words, the authority concerned has no objection to the commencement of construction.
Occupancy certificate (OC): A certificate issued by the local development authority certifying that all necessary works have been completed as per the sanctioned plans and that the property is fit for occupation. The OC is issued after clearance from the water, electricity, sewerage, fire fighting authorities etc.
PLC: Preferential location charges
Power of attorney: This is a legal contract, which gives a person the right to manage, rent, lease, mortgage or sell property, and take binding decisions on behalf of the owner. Normally seen in a case where a property cannot be sold or purchased due to certain restrictions, power of attorney is executed to transfer the rights to the buyer. However, the ownership of the property remains with the seller.
Registration: A legal documenting and subsequent recognition of a transaction under the State. This can either be a rental or capital transaction and there is a fee attached to registering a transaction, which varies from state to state.
Security: In lending, security refers to the collateral given, deposited or pledged to secure the payment of the loan.
Super built-up area or super area: The plinth area along with a share of all common areas proportionately divided amongst all unit owners makes up the super built-up area. The common areas include corridors, balconies, swimming pool, garden, clubhouse, lift wells, etc. This is also known as the usable area.
Tahsildar: Revenue authority or officer empowered to impose and collect revenue from a particular jurisdiction.
Tenant: One who is not an owner but enjoys possession of a property from the owner on certain specified terms and conditions for a temporary period.
Title: The document that provides legal evidence that the person has the right to the possession of the land.
Title search: An investigation of public records into the history of ownership of a property to check for liens, unpaid claims, restrictions or problems, to prove that the seller can transfer free and clear ownership.
Under-valuation: A value of the property that is lesser than the fair market value. Registration fee for a property is based on the value of the property in case of capital transaction or rent in case of rental transaction.
Urban Land Ceiling and Regulation Act (ULCRA): Popularly referred to as ULC Act. This is basically a legislation that was enforced to prevent profiteering and hoarding in the urban land market as well as prevent urban congestion.
Zone: Parts of a city or town are allocated and categorised into zones, which in turn will have a bearing on factors like type of property that can be constructed, number of floors allowed for construction. For e.g. SEZ, ITZ, etc.
The author is an FCA, ACS, AICWA, LL.B. M.B.A. Dip IFRS (UK), Dip LL&LW