I wrote this earlier blog was based on a casual conversation with one of my team member. Let us call him Mr. C, no C and I were talking about real estate prices in the city as he has been searching for an apartment for some time. I as usual was eager to show off my financial gyan to him and mentioned that as per the latest RBI guidelines the down payment requirement for the housing loan has been increased to 20% from the earlier of 15 percent. Which wuold mean that he will have to cough up a higher amount of down payment. He informed me that his budget is 3 million INR so as per the new guide lines he will have to make a down payment of INR 600000/- plus incidental charges like registration, brokerage, utilites etc. To this C mentioned that the reason his apartment is getting delayed is because he and the apartment builder are negotiating so that he can inflate the price of the apartment so that the bank will give a higher amount as a loan. My question was that if you inflate the price of apartment then the down payment will be even higher.
What I learned after this was really amazing and makes me wonder why we still have such practices going on in this country.
So here is the modus operandi as explained to me:
C will take a personal loan from a bank and/family and friends and make a down payment, the agreement with the builder will be of a higher value than the actual market value of the apartemtn. So if the market rate of the apartment is 3 million they will show it as 4 million. The bank will sanction a loan based on the inflated market value of the property and once the money is disbured to the builder Mr. C and builder will share the additional amount paid to the builder. The kick back that C will receive will be used by C to either pay back the costlier personal loan or to buy furniture for the new home.
C will pay the additional tax burden the builder will bear due to higher cost of apartmetn on the books. C will also pay the additonal registration amount that he will have to bear for the apartment.
I have known of many cases where people sell properties at price lower than the market price to save on Capital gains tax ( seller) and to save on registration charges ( buyer), but this is the first case I am hearing where the property value is being inflated to benefit both the buyer and seller. But then I guess this is not very different from what happended in the LIC Housing scam case, although at a much grander scale.
I would never go for such an approach simplye because it is illegal. Remember if you get involved in any kind of legal tangle due to illegal dealings it will be a very painful process for you to get out of it. So my suggestion would be to go the legal way, save till you have enough money for downpayment and are confident of making monthly payments on the house.
I wonder how different is this kind of lending by banks from the subprime lending in US that led to the crisis in the
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