Natarajg007

I have decided to avoid getting into UNWANTED discussions with folks who any way wont reform. So let me discuss the mathematics of Chennai realestate in a new Thread.
An hour ago, I called a Builder in Saligramam asking for the price of his flat. He quoted 5600 psft. I asked him about UDS and FSI and road width. He was building a clean property on 2 grounds, 8 flats with stilt and road width was 30ft. He was using an FSI of 1.67 which is perfectly understandeable.
Then I asked him " what is the price of land here ?"
Builder: 1.5crores to 1.25crores.
I: So I can offer you land there in a much better place than you are building.
Builder: I cant buy outright now sir, but 50:50 is ok.
I: How is 50:50 fine? For 3200sqft that I have you can build minimum 5000sqft even though I know you will build 5400sqft at 1.67. So what is your cost of construction?
B: 1500psft.
(Now this price is terribly high but I was ready to let him go with the price?)
I: So how can it be 50:50? You need only 75L to build 5000sqft?
B: See if I give you 2 flats worth 2500sqft you can yet get at 5600psft.
I: That is just 1.4cr for 3200sqft.
B: I can maybe give you another 10L or so.
I told him that even if I turned a builder and sold one flat I would have built the entire 4 flats but he was telling WITHOUT ANY MATHEMATICAL BACKING that he will need 1.5 flats. Then he said well I cant sell 1250sqft flat to which I said you can make 6 flats with new rules.
This went on till I said "get lost" or rather a "bye" and left him.
Now let us see the mathematics.
If I can get 5600 psft for 1 flat then cost of 1250sqft of flat is 70L. Let us assume I throw one 5L more and I will have the property ready even if I use this builder's rate of 1500psft. That rate is ridiculous and includes profits. In today's "builder in trouble" market, you can find a good contractor to build you at 1200psft.
Now if one flat sold at 70L then 4 flats cost 240L, so the builder should give you 240-75(his construction cost even at 1500psft)=175L.
He is throwing in 2 flats at 140L and maybe another 10L. So you might think it prudent to lose the 25L and take it.
However what guarantee do you have that you will get your money? Secondly in joint venture, your money is not in your hand. So if I got 150L outright now, in 2 years that will be worth 180L at 10% interest rate.
In other words, builders in Chennai are super cons! And remember, his investment is ZILCH (Zero).
So if I turned a builder with my own land, I can get the best of construction at 1200psft. Also I used 5000sft, which in reality can move to 5400sft even at 1.67 FSI. Today you can get even more since the third floor can be built after 3 years and if you keep those rights for yourself, then you got that too.
Let me ignore even the 3rd floor. With 5400sqft and price of 5600psft, I will need 5400x1200=64.8L to complete the project. I will find JUST ONE BUYER and charge him 5600psft, which means 5600x1350sft(since total built up area is 5400sft for 4 flats). I will get this 75.6L. I can use this 75.6-64.8=10.8L as pocket money for any price changes or troubles or legal charges or whatever. Net I get 3 flats all for me. I can sell them at the prevalent price after 2 years or get them booked at current rates and et 75.6x3=227L or 2.27Cr.
Now does it make sense to get 2.27Cr or just 1.5Cr is the question. How many of you earn 75L for 2 years? I bet most of you dont! Again you don’t need to be a fulltime builder. Just employ a good contractor and MANAGE him!
BETTER BECOME A BUILDER IS YOU HAVE YOUR OWN LAND!
(PS. Hope this helps some folks who wanted to sell their land in Mylapore!)

Incidentally if I reduced the price of flat by even 600 rupees my net gain is 2.27cr-600x5400=1.95cr. So all I need to do is SEARCH for one serious WORTHWHILE (meaning has a safe job) buyer.

Natarajg007

Hope land owners in Chennai start realising that it is better to find the end user (Flat buyer) and sell to him than to a shady Builder!

gone_mad

Amazing thoughts! hats off.
Thanks for sharing...

kkkumar

I have never read such a brilliant analysis before, its nice to have such analysts in this forum,Mr,natraj also has a great sense of humour and good journalistic skills, we are all privilaged to have him with us.

badrig

mr.nataraj is having very wild dreams .please wake up
or you may have shock treatment before you wake up.

wiseman

Ok. Let us simplify this, make it more understandable and provide some alternative scenarios to see if it is all that solid an argument ...


A. Land Cost per ground (2400 SFt) = Rs.1,25,00,000 (1.25 crores)
Note: 1.50 is a nice quote, but lets be conservative / realistic about the actual price it will sell at. So, I'm taking the lower price in the range given.

A1. Total Cost of Land (3200 SFt) = Rs.1,66,66,670

B. Total Buildable area = 5000 SFt (as assumed)

C. Total # of Flats (1250 SFt each) = 4

D. Total Cost of Building (1250 per SFt) = Rs.62,50,000

E. Total Cost of 4 Flats = Rs.2,29,16,670 (Rs.57,29,167 per flat)

F. Builder Margin ( 25%) = Rs.57,29,167
Note: 40% is the margin commonly quoted, but let us reduce it to a reasonable 25%).

Remember, no builder actually provides you a free lunch - especially in these very uncertain times. I would assume that, with the risks of future drops possibility, builder would rathe work with a 40% margin!!! In todays constrained circumstances this 25% includes profits, selling expenses and carrying cost of inventory, all of which are pretty significant!!!).

G. Total Cost (including margin) = Rs.2,86,45,833 (Rs.71,61,458 per flat)
Note: At a 40% margin, flat price rises to Rs.80,20,833

This does seem a little more organised, does it not?

OK! Now for the scenarios ...
What happens when, over the next 6-8 months that it takes to build it, the market tanks by 10%, 20%, 30%? (All values in Rs.)

DROP PRICE/FLAT LOSS(4 flats) REMAINING PROFIT
----- ----------- ------------- ------------------
10% === 64,45,313 === 28,64,583 === 28,64,583
20% === 57,29,167 === 57,29,167 === 0
30% === 50,13,021 === 85,93,750 === -28,64,583

NOTE: It is especially important to note that I'm assuming that the builder is putting in cash for the term to build (is 1 year a reasonable period to build a solid building of this type?) and there is no cost of funds (in this market thiscan be very high indeed!)

Also, marketing is getting increasingly difficult and costly. This also has been ignored.

Both these factors have a serious reduction effect on the profits and may themselves help reduce profit by as much as 20%.

CONCLUSION:
As you all can see, with price declines of 20% - 30% being widely predicted, the only thing which can give way will be the cost of land (building cost has little leeway and without a profit motive why should the builder build?!). Besides, how many of you are fulltime RE SPECULATORS like Nats to hire builders and manage them? Do you even have the knowledge about the business to manage effectively?

Let us calculate what should be the price of land if the price of flats declines by 10%, 20%, 30% ...

(If) FLAT DROP (Then)LAND DROP (And)LAND PRICE (per ground)
-------------- ----------------- -----------------
10% === 14.0% === 1,07,00,000 (1.07 Crs)
20% === 27.5% === 90,62,500 (90.63 Lakhs)
30% === 41.0% === 73,75,000 (73.75 Lakhs)

NOW, do you guys see why I have asked you all to wait?

I think this gives a more balanced view of the PROs as well as CONs of this computation!!!

cheers

chataara

Dear wiseman

Well done...

Superb answer.

At current scenario when there are lot flats lying unsold, it is not easy to

sell flats at higher(est) price.

If flat price is coming down naturally plot price also will come down

thanks

chataara

lovebird

All these calculations show plot/flat sellers were making huge profits in the past. And now they find difficulty to continue.

So buyers, pl negotiate for cheapest price in this down turn economy

ks2071746

Dear friend,

It looks quite true.

ks2071746

chataara

Dear friend

Your view here is quite different. Ofcourse thats true also.

Sellers cannot quote the price at their will today.

Its buyers who has to catch the buyers. Buyers should not fall cheaply in

sellers greedy net.

Thanks

chataara