Part -2 : The myth of Real Estate - you deserve to know the truth!

Let's keep digging the earth a little more (pun intended). 

·                     Why do you really need to pay more? Want to be a Rajasthani Prince?

Seems to me, everyone desires to be the guy who made it in life - Big house with a swimming pool,  two cars or maybe three (?) , LED TVs, Home theaters  etc. Or so, the advertisements put out by the builders would lead us to believe.

So whether you are struggling to live within your four figure salary, or making two-ends meet with your spouse also chipping in, or your retired father giving up his car....you must buy that "dream house" ?

Do you really play squash, badminton, practice yoga, swim, jog everyday....I don't. The Gym in my complex is about 25 meters from my apartment. So is the swimming pool. I don't use the pool for 8 months in the year and the gym probably for 20 days in a year -that too when I get nagged by my better half. Instead I walk (definitely more than I gym), on the shaded roads in my colony, enjoying the beautiful morning light, breeze and the sight of the regular morning walkers. I sometimes semi-jog...(without having to furiously punch buttons as on tread-mills) and go up the incline just round the corner.

The point being...for the majority of us, we really desire the amenities, but rarely use them....but always end up paying for them.The maintenance bills for all these large complexes is anywhere between 0.5% and 1% annually. Give or take a few. So next time you see this super-luxurious condo with amenities matching the Rajasthani palace - THINK well. You will be paying for that...Monthly...annually...along with the EMIs.

·                     Is the developer telling the truth when he says that he has no choice but to increase the prices?

To a large extent this is true. It costs money to build complexes. Funding is complicated. 

Lenders like to extract their pound of flesh. The Debt market ranges from 15% onwards generally. Equity funding demands payback (IIR) above 26% from the builder. Infrastructure funding is tough to get. 

Govt approvals are time consuming (therefore cost over-runs). Most state bodies are notorious for rampant corruption. So the builder needs to go thru' all these challenges and then deliver ensuring profits for himself and his stake-holders. Do you now wonder why projects get delayed and property costs a King's ransom? Do you? 

·                     Does the buyer have choice? How can we make a better decision?

Yes there always is a choice. Buy what you really need. Save the rest of the money. Join a plush club in the city for the rest. If you are a fitness freak join that hi-tech Gold's Gym or Fitness First which has the latest equipments and like-minded members to inspire. Much cheaper and you have multiple choices. Keep the change in your pocket. The jingle will be music to your ears over the years. 

On the other hand if you do buy that extravagant house, (seriously) you will make "nobody" envious - they either do not or will not care; or can probably buy a more expensive property than you (without denting their pockets at all); or just plain and simple - just shrug and move on with their lives. However...you guessed it now ...You, will be paying for that house... Monthly ... annually ... along with the EMIs.

Till next time....mate.

The myth of Real Estate - you deserve to know the truth!

Part- 1

It seems to me that we all fall prey to the myth of the "pot of Gold" with respect to property investments. This is largely fueled by selfish greed of individuals - Buyers, Sellers and the intermediaries. The triangular forces exert forces against each other as and when they can. The Seller wants the maximum returns for his investment, the seller wants to capitalize on his being a “genuine buyer” –as we call them in broking parlance, and of course the ubiquitous broker who tries desperately to make “the deal”.

Consider this, if you have bought a property in the last decade, most of you would have made some money. Some of you would have made a lot of money, and some of you would have made some money and some of you would have just about broken even if not lost some money.

So, to the bright guys who made money, let me ask you a question. Who would you give the credit for making that money for you? Let me guess – You?  After all, you made the call; you took the right decision at the right time for the right property, right location, right builder and right market conditions – Right?

Wrong! If you made money then it was largely due to “Lady Luck” smiling on you, and, to the economy which provided the investment cycle for entry and exit. It was also in part, due to laggards who delayed buying their piece of earth and then got “sucked” into buying from you.

Real Estate, as an asset class is highly unpredictable due to layers of misinformation and malpractices generated and transmitted by the machinery of vested interests. Let’s look at some of them,

Media: The newspapers and portals do a roaring business out of real estate – ever wondered why your newspaper looked more like a property classified or advertorial (paid advertising with the write-up being done by or on behalf of the advertiser for a fee)? They make significant money from this. Some of the established newspapers actually acquire a stake in Builder companies in return for selling ad space, Paid write-ups, interviews and focused articles on real estate and the developers (who of course are asked to pay for all this).  

Politicians – Bureaucracy- Land Aggregators nexus: Need land and willing to pay for it. Well as long as you can afford to pay for the same, land is available for any land use. If the Town planning official is honest and not obliging, then changes are made and then, “Voila! – you can get the land”.  Or else, approvals are delayed. In which case the projects get delayed and your estimates of profits (Pot of Gold) vaporize.

Lenders : Lenders often practice entrapment to get business. They introduce teaser rates (even our nationalized banks are guilty of this) and the floating rates then keep floating upwards.

Brokers: Brokers sell what they have. If you have not identified a professional broking firm, you have taken the risk of being a victim of mis-selling. So some of you would have lost money or not made enough since you took bad advice.

Friends & relatives: In my view, an ill-informed friend should be best avoided for determining the feasibility or evaluation of these big investment decisions - buying a property. This is really one category that you should consult only after seeking professional advice from people who work in the real estate for a living and someone you trust.

In the last decade, a lot of us were lucky that the math worked for us. For some it didn’t. They got trapped in projects that were delayed, had lenders who kept raising the interest rates and kept them high even when the economic cycles reversed and charged huge pre-payments when you sold your property and pocketed enough money or walled in to the frustration - to quit the property.

 

-To be continued…