Losses in Real Estate Deals
A few days ago I did a sarcastic article on ‘how real estate prices cannot fall at all’….now I am contradicting myself!
Two different stories about real estate deals:
One person bought in a upcoming luxury project in year a 4bhk house for Rs. 112 Lakhs in dec 2006. In 4 years time, a self respecting real estate ‘player’ expects to get about 18%p.a.However the builder had said if he held on for 4-5 years he would get about Rs. 250 lakhs.
Well he is not getting anywhere close to that price. He is getting about Rs. 130L for the same. And he is not sure whether the deal will go through at all…..and the big reputed builder wants a 5% transfer fee. LOL.
In a second case a person had booked a 2bhk with a builder in 2007 Jan. He was supposed to get possession of that flat in 2009 Divali.
2009, 2010 and 2011 Divali have passed!
Recently this guy went to a local politician who has said ‘I will ensure all his construction is brought to a halt if he does not give possession by April/May 2012.
Even in the first case, the buyers have formed a group and are planning to go to court. The builder used to charge them 18% p.a. for delay in payment, but when he is delaying the handing over of the building there seems to be no regret – not even a tone of apology. Even now the builder is talking big, comes on television as an authority of the construction business….but the property is not ready for possession.
The second builder again is not delivering…and the buyers cannot do anything. Neither can you do anything to the builder – he has sold a few flats to the local bigwigs in the police department – so they cannot come out in the open, OR speak against the builder. Ha ha ha…
So here are 2 investments – one giving a pathetic return, and the other one may or may not return your capital AT ALL…
hmmmm…
anon
interesting stories. hope you come up with more such posts. i was talking to some people in office about bombay and chennai RE. didnt know that chennai RE was crazy too. apparently someone or the other known to them had a property which was bought for X and was worth atleast 2X, making it 1-2 crores. i wonder if its like your first story :).
suhas
Sir
Following your blog regularly I know your views on real estate
I just wonder following things
1) Isn’t Demand more than supply the root cause of all issues in real estate?
2) You refer American story on real estate
But our economy, people’s mentality & banking are different .
We may be in process of becoming like them …so it will take some time to see similar events here.
Till then may be fantastic return story is real
Here again may be demand & supply is giving high returns
Our cities are not big as American in size
By the time we reach their size we may get such returns
I would appreciate you & other readers commented
Sanjay
Under construction flats are always risky. Even Ajit Dayal has said that it is nexus between banks (which releases payments on completion of slabs) and builders. Common man can not think deep enough to know about the nexus and how he is siphoned of his funds (in the hope of mediocre returns with great risk). The situation would have been worse if RBI would not have increased interest rates.
It is interesting to see that common man cannot think of long term and does not have patience and courage to sit on cash (aka FD).
krish
Let me share my experience of buying two properties in B’lore in last 2 years.
Property # 1 : Bought a flat at X price in 2003. Thanks to registration charges, interest hikes and other expenses, I had to pay X in total to the bank after 5 years. Effectively all the 5 years EMI had gone to interest. I am a NRI and no tax benefits were availed. Out of the 2X price that I paid from the pocket so far, it is nearly 9 years and am unable to sell for the price that I incurred (2X).
Property # 2 :Bought a flat at Y price in 2004. Bank sanctioned the loan and repaid the nearly same amount after 6 years. Same story as above with only one twist. Builder duped me and sold of this flat in unauthorised floor. This illegal unit is generated due to Builder-Bank-Babu nexus. No buyers and am stuck with ‘any time ready for demolish unit’.
Never again dared to buy the property.
subra
sad story krish…and such stories DO NOT COME OUT..so the lovely builder-banker-politician nexus…continues…:-)
Pramod
The problem is the nexus between RE & politician. In fact 50% of the builders in NCR are kins of politicians. Forget lesser players, JP ASSOCIATES & JP infra have launched many projects from 2007 to 2011 & none of them is near completion. The first ones launched in 2007 are 60% ready which were supposed to be ready by jan 2010.
A story as told to me by my uncle who is a RE agent in NOIDA
One NRI woman booked 2 flats in JP Greens Noida in 2008 through him when the RE prices were down & almost 70% amount was paid. Come 2011, prices improved by almost 80% & she received a letter from JP that due to some wrong info(god knows) in her app. form the booking is cancelled & the booking amount is returned w/o interest. She contacted her agent(my uncle) who followed up with JP. They simply cited the clause in agreement which states ” builder reserves the right to cancel any booking any time” & refused to budge. The woman had some good contacts in Power Circles in Delhi & with one phone call from there all the objections were cleared. However not so fortunate people were left cheated. Builder is returning your money so legally you cant do anything & you are losing an opportunity & interest on your money or worse paying interest on borrowed capital.
This is no by the road company. This is One of the Sensex Company & one can imagine the rot deep down.
Pooja R
A client of mine had booked a luxury flat in Chennai with Hiranandani Builders, but they turned out to be complete frauds. They have not completed the project, there is a huge delay (cannot believe they do not have the money), they want to charge a TRANSFER FEE if the client finds a direct buyer, and they want to charge interest for payment delay by the client. Convinced ALL builders are CHEATS, some are MORE cheats than others. (sorry George Orwell).
Sanjay Singhaniya
@pramod,
Was there a registration of agreement? If there would have been agreement then builder could not have cheat you.
But it was interesting. Only politician can cut builder’s short changing 🙂
Sanjay Singhaniya
@Pooja,
I was also not aware of this fee. The TRANSFER FEE is perfect example of lock in.
Builder can screw buyer anytime he wants. He would simply halt the construction and buyer cannot do anything.
People have to come out of emotional attachment from owning a house. Also house is not asset class. It is speculative bubble.
subra
Pooja R:
with the kind of margins that are available in the construction biz..surprising why bank managers do not have real estate TARGETS??
Abhisek
Is there a Buy or rent calculator available in India. Generally some cities are easier to rent whereas some cities are easier to buy home.
Vikas
surprising why bank managers do not have real estate TARGETS??
They do sir. Who says they don’t. Bank managers have targets for everything.
The problems are symptomatic of lop sided controls. One executive order can clear all of it. Till a few years back the builder did not even need to put down a delivery date. Now at least they do.
All that one needs is to make the penalties for delayed payment and delayed delivery the same. All problems mentioned above will reduce to a great extent.
Frauds and selling flats in unapproved buildings/floors is a different matter.
Vikas
symptomatic of lop sided controls
please read “controls” as “contracts”.
pi
I don’t know. Maybe most buyers here did not do enough research before buying. Ofcourse there is a risk in buying with your eyes closed. do your research on the promoter and the location, the property etc thoroughly. My dad bought a property for 35lakhs in 2005, financed with 20 lakhs loan. In the entire cycle of EMIs reducing, going up, reducing, going up etc the capital outstanding on the loan is still 18lakhs. EMi paid would be some 13lakhs. But if i sell the apartment now i could sell it for some 1.5 crores.
I personally bought an apartment like 2 yrs back. 1Cr value. 15L upfront from my pocket. Next 60 lakhs bank pays. I could exit that property for a profit of some 60lakhs now if I want. 15L upfront investment. 4x returns. Power of leverage and a good buy made at the right time.
But in the current scenario I would advise everyone to invest in equities for the next 5 yrs. Real estate is going to be flat. But those rooting for fall in real estate prices are going to be dissapointed. There will be a time correction, not a price correction. And I would still say Hyderabad and Gurgaon are still cheap. There is still lots of money to be made in these cities. Real estate is always a local thing.
Vaibhav
Hi Subra. Why not make the builder names public so they can be punished and the public may avoid them?
rajivahuja
@ Vaibhav-I agree with your views that let the builders name be made public so that the public can avoid them.
Abhishek
Man, this is an eye opener.. suddenly I feel so lucky.
Great idea Vaibhav/Subbu Sir, we should get a list & check list ready, I feel the Property edition of newspapers are totally bogus.
But someone just stated on time correction & not price correction in RE. Can somebody throw more light on this.
Sanjay Singhaniya
@Abhishek,
as I understand, in real estate prices do not fall. They just stay at same levels for many years. This is called time correction and not price correction.
For example, it is possible that prices stay at same levels for next 5 years and your return on real estate will be less even compared to fixed deposit.
Prakash Natarajan
Concur with Subra’s views but we must resist throwing the baby out with the bath water. By all means , we must do the following :
1. Share information on bad experiences .( share good ones too)
2. Refuse to buy expensive real estate
3. Avoid leveraging.
4. Invest small ( the equivalent of a seat belt ).
I personally believe in avoiding risk.