Is due diligence by banks sufficient when buying property?

In real life, too, it’s not uncommon to uncover issues related to properties after you’ve seemingly made a rightful purchase. Sometimes a property is sold twice, to different parties, or the title deed is not clear, or relatives might come into the picture. In fact, National Crime Records Bureau data shows that more than 7,000 such cases relating to ‘land issues’ were recorded in India in 2022 alone.

Such problems can get compounded when buying land in an area you’re less familiar with, say, for example, someplace 200km from where you’re staying. You’re greatly increasing the chances of your getting cheated as well.

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Amrit Kabra, a 30-year-old chartered accountant residing with his family in Kolkata, invested in property in Bengaluru’s Whitefield area. To avoid the usual legal hassles, he used an easy fix. His family applied for a loan of ₹25 lakh from HDFC Bank even though they were ready to pay the full amount upfront. The logic was simple: banks do their due diligence on the property before sanctioning a loan, and he would get to know of any pending issues beforehand. He also structured the loan such that he could claim the maximum tax deductions on the home loan.

“Even if you don’t need to, you can get a small loan so that the headache is lifted," said Kabra, who now lives in Mumbai. To be sure, while the family eventually didn’t end up taking the loan as the bank wanted a personal guarantee, it had done its due diligence and was willing to sanction the loan, thereby assuring Kabra that there were no pending litigation issues. The property was bought in the name of the family office along with other associates.

Swapnil Gholap, 37, did something similar. He wanted a bigger house for his family and so bought land in Maharashtra, for which he took a ₹50 lakh loan in 2015. “Rather than you running for due diligence, the banks can help you understand if there is any pending issue with the plot," said Gholap.

But is that enough? Banks have their incentives, say experts. Apart from due diligence, they also need to worry about meeting their loan targets in a cut-throat industry. This makes them more willing to issue loans if the basic requirements are met. After all, the onus of paying the equated monthly installments (EMIs) remains on the borrower even if the property goes into contention.

“Banks want to catch borrowers as they need to fulfill their targets," said a public sector banker, requesting anonymity. “No one wants to reject a loan if the basic due diligence is met, given they don’t already have too many pending loans."

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Not foolproof

Rahul Lakshmanan took a loan from a public sector bank in 2018 to buy an under-construction apartment in Mumbai. After getting the loan, it turned out there was an issue with the land ownership and the buyers did not receive the occupation certificates. Although the land was registered in the builder’s name, the government had marked the land as reserved for ‘playgrounds.’ Next, the governing body for the area changed from a jila parishad to a municipality. The matter of the land ownership is now pending before the high court, while Lakshmanan has to keep repaying the loan.

“I am not very optimistic about ever getting the apartment," said Lakshmanan. “I think the bank saw that the land was registered in the developer’s name and hence did not foresee an issue."

Kunal Sharma, a partner at Singhania & Co, said an advocate should ensure that the building plan is approved by the local municipal corporation per the Real Estate (Regulation and Development) Act, 2016, or RERA.

“Even if a bank conducts its due diligence through its lawyers, the need to get an independent advocate is indispensable," he added.

“The bank’s primary concern at the time of undertaking due diligence would be to secure the loan repayment. Therefore, the scope of the bank’s advocate while undertaking it would be limited to minimizing the bank’s risk and ensuring that the property serves as adequate collateral, whereas an independent advocate will undertake legal due diligence with the primary intent of securing their client’s interest. Therefore, an independent advocate’s scope of work will be much wider, and it will focus on ensuring there is a clear title, the property is free from encumbrances, and there are no legal issues that could impact your ownership in the future."

Finding a good advocate

Vidhan Vyas, the founder of Vyas Legal, said buyers can approach lawyers in the local/district courts whose offices are on the premises of the sub-registrar, adding that they are well-versed with land records and have their connections in the registry to help sort out any issues. “Any land dispute would be instituted in the court of the local jurisdiction, and they would know about it. For commercial properties, it’s advisable to get the services of a law firm as the matter can get complicated."

Vyas added that if you are buying an apartment from a builder, you can check the developer’s registration and details on the RERA website. If you’re buying land on the outskirts or in a small district, you can check with the local municipal corporation or the relevant authority and ask for documents like utility bills. The lawyers can then easily do their due diligence based on the documents. That said, the due diligence ultimately depends on the kind of land and for what purpose. “Each one will have their unique requirement," said Vyas.

In terms of costs for doing simple due diligence on a home or an apartment in the Delhi-National Capital Region (NCR), Vyas says the typical charge would be ₹40,000 to ₹50,000. He added that it varies from lawyer to lawyer, and from place to place. “Chennai and Mumbai might be 20% cheaper, but it depends on case to case."

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Penny-wise, pound-foolish

Buying a house is a once-in-a-lifetime exercise for many, and usually takes up the bulk of one’s savings. Trying to save money by not taking an independent advocate and relying on the bank for due diligence is not advisable. Although banks do their checks, taking extra precautions is advisable as the amount involved in real estate transactions can be huge. Don’t miss out on the big picture to save on the little costs.

To borrow a phrase from the 17th century Oxford scholar Robert Burton in his book The Anatomy of Melancholy: avoid being ‘penny-wise, pound-foolish.’