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Ten new investment rules for Real Estate


Ten new investment rules for Real Estate

Last updated: May 29 2011
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  • Ten new investment rules for Real Estate

    Realty is no longer the asset that always gives good returns. The ground reality has changed. So have the investing norms. ET Wealth explains the new tenets and ways to exploit these for maximum gains.

    1) Don't go by the MRP

    Most developers desperately need cash to complete delayed projects and start new ones. You can wrangle discounts if you know how to drive a hard bargain.

    There was a time when developers used to quote a fixed rate and offer up to 3% discount if you paid the entire sum within 60 days of booking an apartment (through a home loan, of course).

    Things are different now. The 3% discount is not the upper limit; it's just the starting point to begin your negotiations.

    Today, most developers desperately need cash to complete delayed projects and start new ones, which means discounts and freebies if the customer knows how to bargain.

    Also, in some parts of the country, sales didn't pick up last year between October and January, the period that accounts for approximately 40% of the annual sales of residential projects. This is why it may be the best time to wrangle a good price.

    Seen from another angle, since there is no sanctity of an MRP, developers try to load charges surreptitiously. So, always keep some extra money at hand without which you may not be able to seal the deal.

    This has assumed greater importance now because in a bid to make the project appear affordable, builders do not load extra charges in the quoted price.

  • #2


    Re : Ten new investment rules for Real Estate

    2) The discounts will continue, so don't be in a hurry

    Builders are more desperate to sell than customers are eager to buy. They will continue to offer discounts even if it means taking a hit on margins.

    Ask any builder and he is bound to tell you that his project is almost sold out and that prices will be revised upwards very soon, maybe even next week. The fact is that builders today are more desperate to sell than buyers are eager to buy.

    Overheated markets, sliding share prices and rising interest rates have made matters worse. While the IPO window is now closed, at least for the short to medium term, listed real estate stocks have taken a beating and tighter lending norms by banks have made capital scarce. Money is not cheap for builders even if it is available. Debt is a big worry, too.

    The Rs 25,000-crore debt, which the RBI allowed to be restructured following the slowdown, is due for repayment. While private equity investments have thrown open an opportunity, investors are driving hard bargains and looking for higher safety and returns. Another comparatively cheaper opportunity for listed developers is to borrow against shares held by the promoters.

    But with most companies already highly leveraged and stock prices continuing to be low, there is not much scope on this front too. The only cheap source of money available to realtors is through the sale of their projects. This is where the discounts come in.

    Given that the situation is unlikely to get better any time soon, builders will continue to offer discounts to attract buyers even if it means taking a hit on their profit margins. The moment they realise that you are a serious buyer, most developers will be ready to negotiate the rates they have quoted.

    Pledged shares: Promoters of real estate companies have pledged a significant chunk of their holdings to financial institutions.


    • #3


      Re : Ten new investment rules for Real Estate

      3) The best deals may not be available with the builder

      Brokers usually book multiple flats in a new project and can offer you the choicest properties.

      Real estate brokers have always made news for the wrong reasons, fleecing both buyers and sellers, selling one property to more than one buyer, and conniving with builders to create a hype. While much of this is true, in some cases brokers may also get you the most attractive individual discounts.

      Some large ones command the best deals from builders because they book multiple properties and then sell them to individuals; it is their way of benefiting from buying in bulk. So once you have zeroed in on a property, do not forget to check with the broker in the locality about the best rate he can offer.

      Another fast emerging layer between the builder and buyer is the underwriter. These underwriters buy a major chunk of the project from the builder and sell it in the market at a premium. In these cases, the developer cannot offer you a lower rate than the underwriter, but the underwriter may be willing to cut his margin if the sales are low.

      Another mistake most buyers make is ignoring the resale market completely. Sometimes financially distressed investors offload their property at a much cheaper rate than that being offered by the builder. Here again, a broker can be of help in identifying such properties.


      • #4


        Re : Ten new investment rules for Real Estate

        4) Nothing comes for 'free'

        Don't fall for freebies. The cost of these add-ons is usually factored into the price of the property. Try getting a cash discount instead.

        Freebies are the flavour of the season. From registration fee to modular kitchens, even cars, all are being offered when you book an apartment in a project. Don't fall for these lures. The catch is that all freebies are already factored into the price of the apartment. The same goes for the attractive schemes on offer.

        The latest to catch investors' fancy is the 'attractive' 10:90 scheme being offered by developers in many cities. The idea is that you pay just 10% of the property cost now and the rest on possession. The truth is that developers urgently need the cash and many of the projects have not even got approvals from the authorities.

        As HDFC Chairman Deepak Parekh puts it, "Within days of buying a plot, builders are putting out advertisements accepting booking at 10% upfront payment". This puts a question mark on these projects. Another such lure is the 'attractive' financing schemes that builders offer by tying up with banks. In most cases, you will get a better deal by approaching the bank directly.

        'Guaranteed returns' is another bait being used by builders to trap investors. It is only after you make the down payment that you are told about the fine print, you get the returns only if you share the property with two others or the advertised returns are only for an investment above a certain amount. The builder knows that after you put in the money, you will either stay put or invest more for better returns. The bottom line is, don't look for freebies; try getting a cash discount instead.


        • #5


          Re : Ten new investment rules for Real Estate

          5) Grouping is the key to best deals

          Teaming up with other customers can not only get you a good discount but also helps in making your voice heard.

          It's common knowledge that builders are desperate to clear their inventories, but they can offer discounts to individuals only to an extent. "For developers, bringing down the prices may work like a downward spiral; every new customer starts quoting the previous base price and asks for a better deal," says real estate consultant Mahesh Raghupati.

          However, this hurdle can be overcome if the builder realises that he can clear a certain percentage of his project at one go by selling it to a buyers' group. Today, most builders are willing to offer a decent discount if they can sell more than five flats/units at a time in a particular project. Group sales are also more lucrative for builders because they reduce the cost of marketing the properties separately.

          "The scale of the project also plays an important role. The smaller the project and developer, the higher the discount a group can get," says Raghupati. Some builders are even willing to construct a separate tower if the numbers are big enough, he adds. "We do get a lot of corporate bookings where flats are bought in bulk quantities of 50-100 units. Usually, the discounts are given based on the location. If it is a good location and it's boom time, then discounts could be as low as 4-5%. But in times of recession, corporates can get good discounts," says Niranjan Hiranandani, managing director of the Hiranandani Group .

          If you think you do not have enough friends to team up with, explore the Internet. If that doesn't work, there are group buying websites like ******.com, which get potential buyers for a project together for group discounts. Built on the concept of collective buying, ******.com aggregates demand for real estate projects and then approaches the builder for a discount for the group that a single buyer cannot negotiate.

          "We aggregate single buyers who are strangers, help them form a group and enable them to get a higher discount," says Sandeep Reddy, founder, ******.com. "In the first deal that we made, we sold about 35 flats in one day for Oberoi Splendor in Andheri (East), Mumbai , at a discount of 32.5%. The market rate for these apartments was Rs 10,000 per sq ft and we sold these at Rs 6,500 per sq ft," he says.

          ******.com has now forayed into the home loan segment, enabling potential borrowers to get home loans at rates 0.25-0.75% lower than the market rate, with zero processing fee. This will be a much-needed relief for the borrowers who are already feeling the pinch of high property prices as well as the rising interest rates.

          Online advantage: Group discount websites offer rebates on property too.

          -- Register on a group buying website like ******.com.
          -- Join an existing active group or form a new group.
          -- After the group reaches a critical number, the website announces a closing date.
          -- If the group doesn't get enough people, it becomes dormant.
          -- The website negotiates a deal and presents it to the group.
          -- If most group members accept it, the deal goes through.


          • #6


            Re : Ten new investment rules for Real Estate

            6) Maintenance charges will be mini-EMIs

            Most new residential complexes are offering lavish facilities. You have to pay for these luxuries whether you use them or not.

            When Rahul Khanna moved into his new apartment in Gurgaon four months ago, he had planned out his finances to include the Rs 50,000 home loan EMI. What he hadn't factored in was the Rs 5,000 monthly maintenance charge. "It's like paying another EMI besides the home loan. I can't even opt out of any common facility as the builder has made them mandatory," he says.

            It is the same story across the country. Most new complexes developed by private builders now come with lavish facilities. While you have all the provisions within the complex, such as club house, swimming pool, tennis courts, convenience shopping, etc, you also end up paying for them whether you use them or not. In the past three years, maintenance charges have gone up from as low as 50 paise to Rs 1 per sq ft to Rs 5 per sq ft now. In some cases, this does not include the water bill or the power back-up.

            Since, most developers levy the charge based on the super built-up area, not the actual area you get, you end up paying even more. Most of the time, the charges are levied in an arbitrary manner. For instance, the stated cost of construction of the club house facility is usually not commensurate with the location. Builders usually benchmark it with the most premium location in the city.

            This is particularly galling because builders are supposed to hand over the maintenance of the project to the Residents' Welfare Association after a specified period. However, this rarely happens. While some builders have started collecting maintenance charges for two to three years in advance, others refuse to hand over the project till it has been sold out completely.

            Builders add to their profits from maintenance if they have more than one project in the same location. While the low-cost maintenance staff is separate for various projects, the high-cost ones and machinery are shared among several projects, bringing the cost down for the builder, but not for the buyer. Keep this expense in mind when you take a home loan.


            • #7


              Re : Ten new investment rules for Real Estate

              7) Renting is not always a bad idea

              In some cases, renting can be a better option than buying property, especially in overheated metros.

              If you are at the beginning of your career and are not sure of the city you want to settle in, staying on rent can sometimes be a better idea than buying property. This is especially true of the metros, where prices have gone through the roof. This, however, is assuming that you are not paying an exorbitant rent (more than 25% of your take-home salary).

              You can always have a house of your own wherever you want to settle down eventually. So, instead of locking your funds in a house you may not need immediately, you could invest to build a corpus for whenever you decide to buy. Another reason for staying on rent till you can buy a house of your choice is that today's affordable projects may be small and at far-flung locations.

              The projects being sold today are either 'affordable' or 'premium'. Both don't project the actual picture. The premium property may just be an average-sized flat, while an affordable apartment may turn out to be a box-sized flat insufficient for your needs. A standard 2-BHK apartment in Delhi /NCR, which offered 1,100 sq ft of built-up area till two years ago, now comes packed within 900 sq ft.

              Similarly, realty companies are positioning their developments located in the extended outskirts of a suburban metro as affordable housing. Some others have launched projects in locations where accessibility is a problem and there is no social infrastructure around it. Many buyers who bought apartments thinking they would be left out ended up doing so in far off places.


              Returns from rent: If the difference between rental yields (rent as percentage of the price you paid for the house) and home loan interest rates is more than 5-6%, postpone buying. Right now interest rates are close to 12% and rental yield is 2.5-3%.

              The difference: 9-10%

              Real estate market: If property prices are rising, the capital appreciation of the house you buy can make up for low rent yields. But if the prices are stabilising, as is the case now, higher future prices won't compensate for low yield.

              House prices: If the price of the house is over 25 times the annual rent that you would pay, stay as a tenant for some more time, especially if the property prices are likely to stabilise or go down.

              Interest payment: If more than 80% of the EMI goes into servicing the interest component of your loan, don't buy. This is because you are not paying for asset creation for at least a few years. Wait for the interest rates to fall before buying.


              • #8


                Re : Ten new investment rules for Real Estate

                8) Taking on the builder is easier now

                Social media is a powerful weapon if you face problems with the builder. Teaming up with other buyers is also simple.

                Working as a group not only gets you better deals but also gives voice to your complaints. During the slowdown in the property market, when delayed projects became the norm, buyers in many cities got together and forced builders to not only sit up and take notice but also give additional discounts or refund their money.

                In case of a DLF project in Chennai, around 900 buyers in a housing project formed an online group (in March 2008) and forced the developer to refund the people who wanted to exit the project because of the inordinate delay in completion and the builder's inability to get the plan approved. If you have a problem with your builder, chances are other buyers in the same project will have the same issue. Here's how you can leverage the power of the Internet to get people together and fight for a common cause.

                Dedicated websites: If you are considering the purchase of an apartment, all it takes is a click of a mouse to access feedback from buyers on the developer or the project. Websites like or offer such platforms. The opinions, posted so freely make it imperative for the companies in a competitive market to respond to complaints.

                Video clippings: The sites that are similar to Youtube can work as powerful tools of complaint. After moving into his house, a buyer found that the developer was not redressing his complaints about peeling paint and cracking plaster. He shot a 7-minute video of all that was wrong with the building and posted it on Youtube. Soon after the link was posted, the builder carried out the repairs.

                Blogs: Create a free blog and drive traffic to it by posting links on popular forums. People with similar problems will find their way to your blog and a group will be formed with little effort.

                Consumer rights groups: Organisations like Consumer Voice and Investor Helpline allow users to post complaints and opinions online. Make the most of it.


                • #9


                  Re : Ten new investment rules for Real Estate

                  9) Follow the builder to the location, not to his project

                  Builders move into an area because they find out about the new infrastructure projects much before the general public.

                  When a big builder moves in, the whole area gets a facelift, pushing up the value of the property. Often big builders move into an area only when they get a whiff of a new infrastructure project, sometimes ahead of the others.

                  Though an initial spurt in the new areas identified by a real estate developer is usually due to speculation, once the projects are launched and the supporting infrastructure begins to take shape, there is a consistent appreciation in property prices.

                  "I generally look at a place where I can get land in bulk so that I can create townships there. When I bought land in Thane and Powai, I wanted to develop 50-70 buildings there. I may not be able to change the history of a place, but I can certainly change the geography," says Hiranandani.

                  Till sometime back, this was an impossible task unless you had inside information. Real estate deals used to be so opaque that no one got to know which builder had bought the land until a project was suddenly launched. This is no longer the case. Most national-level realtors are now listed companies, their operations are more transparent and their future plans are better known.

                  There is a caveat, though, you will have to think long term. Realtors usually think several years, even decades, ahead. So don't follow a big builder blindly into the countryside where nothing may come up for another 10-20 years. Get an idea about the time frame that the builder has in mind for that city, town or area. Buy only if there is a potential for job creation, if companies are moving in and if the infrastructure is well-developed.


                  • #10


                    Re : Ten new investment rules for Real Estate

                    10) If you are a seller, be a month early

                    You may lose a good opportunity if you wait for too long or set an unrealistic target selling price.

                    The days when a seller could ask for a price that was 10% more than the last deal in the area, and get it, are almost gone. While it is not really a buyer's market yet, brokers are advising prospective sellers to ask for a price that competes with the price tags on other houses in the market.

                    The wait for a higher offer can sometimes be endless. Anand Narola bought a plot in the Adajan Road area of Surat for Rs 12 lakh in 2003. The property doubled in value in three years. Narola rejected offers of up to Rs 25 lakh in December 2006 because he expected the prices to go up further. Now he can't find a buyer at Rs 23 lakh. So, set a realistic target for your property and sell it when that target price is offered to you.

                    Wait for too long and you may lose out like Narola. Remember, it is more difficult to sell in a declining market because there are a lot more sellers than there are buyers. Is there a way to determine your property's value without getting carried away? Yes. Look at the houses that are priced as much as you expect for your property and ask yourself: "Which of these would I rather buy?"

                    If you can objectively answer that question, you won't find it difficult to set a price for your house. To get closer to the real value, you can also be a pretend seller by putting up your house for sale on one of the real estate listing websites and considering the offers you get.

                    When to sell your house

                    When is it a good time to put up your house for sale? Timing is important because placing it in the market at the right time could fetch a higher price. In cities, the resale property market is most active between March and May. "It's a good time for families to move between school terms and while the weather is good," says Vikas Kumar, a Noida-based property broker. Some people also prefer to buy after they have completed tax-related investments or after they have got the year's increment, he adds.

                    Similarly, monsoons bring a lag in sales, especially in regions which are more affected by the rains. Sales surge again between October and January. However, closing a sale can take weeks, so it's a good idea to put your home on the block early in the season. If you can't sell in the peak season, consider putting up your house for sale soon after you have done it up for festivals like Holi or Diwali. However, seasonal ups and downs in the market aren't the only factors.

                    You should also pay attention to the local market. Your agent will give you a good estimate of the local housing market. Also, be aware of the underlying factors that influence the local market. A season of layoffs or a negative development could mean a flood of desperate sellers, possibly driving down the market price of your house. Alternatively, you may be in an area where the housing prices are going through the roof.

                    Ten new investment rules for real estate - The Economic Times


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