By Dr. Sanjay Chaturvedi, LLB, PhD.
Investors and Speculators, Government Taxes and Levies, Land Lords and Brokers, Cost of Funds and Marketing cost, these are the reason behind escalated rates in metros for residential segments in India. Lets us review their roles and ways to avoid them.
Investors and Speculators :
There are various types of Investors and they come in at various stages of constructions. Pre-launch, Institutional investors, Private Equity people, Bridge Financiers, Creditors with barter deals including media and other suppliers. And there are Speculators who just want to invest for shorter periods like for a month till six months. They also trade properties on Allotment letters or Ernest money deposited for NPA properties. There are five stages of investment in Properties. Pre-launch Stage, Plan Passed stage, Pilling and RCC structure Stage, Finish Stage, Ready Property Stage. In every stage, Investors and Speculators change hands. Old Investors go and new take their position. In this process, every stage the profit margin of the Investors keeps on increasing the price. Also, Builders normally sells the projects in three price range to average out the sale proceeds. First discounted price, Second Average Price and Last highest market price. Hence when you buy last few flats, you will probably paying highest price in that project. That is why buyers usually go for under construction booking. Disadvantage is : you will have to pay GST.
How to Avoid Investors:
Deal directly with builder. If the project is almost completed or away with four to five months, do not buy. Because builder might be selling you Investor’s flat and not only investor wants his margin but builder will also keep his margin hence selling the same flat first to investor and then second time to you by again keeping his margins. Investors sometimes do not enter with the agreement with builder so the deal may look like original but you may probably purchasing investor’s property. Ask the lowest market price in that area. Do some research with brokers, relatives and people who have recently purchased properties in that area. There are many forums who are doing such services to give exact rates or discovering prices. Best way is to refer Accommodation Times Property Rates who are keeping it official since 1986 and Supreme Court, many High Courts, Tribunals have cited the Accommodation Times rates. MMRDA have purchased property rates data from us to have a base for Regional Plan 2032 for MMR.
Government Taxes and Levies:
Well there is difference in avoiding, ignorance and planning tax matters. You cant avoid taxes. Ignorance of Law is not an excuse hence best way is to plan. VAT, Service Tax, Stamp Duty and Capital Gain Taxes are major four taxes applicable to the property transactions. Government is also a party to escalate the land and TDR rates by allotting reserve prices. CIDCO and MHADA are in direct competition with builders by keeping highest price for flats as per market rates to their units and lands. Well, you can avoid Service Tax by purchasing and registering agreement with Occupation Certificate (OC) of the property. Many builders are offering VAT and Stamp Duty free properties hence in the bargaining, you may ask for such favors. Stamp Duty set back is allowed under certain conditions and within six months of transactions. Hence one must avail the rebates offered on old properties and set back allowed in stamp duty.
Land Lords and Brokers:
Land lords calculates maximum FSI available on a plot and mount the super built-up FSI on it and then sell to builder. Nothing left for builder to add margins. In Redevelopment cases, societies ask maximum advantages from builder and do not leave any additional FSI for free use. The builder has to purchase the TDR and additional FSI, if any. Land lord sells at a price if it is ready construction and at the market rate of finished constructions.
Brokers are asking margins instead of commissions. As traditional deals offer, any real estate broker or agent charges 1 to 2% on the deals and only 1% if the sale proceeds is above one crore. But now a days, builders are offering brokers Rs.300/- to Rs.600/- per sq. ft in affordable housing segments and in second homes projects. In premium projects, brokers behave like investors or some times group of brokers underwrite the entire project for say Rs.3000/- to the builder and then sells it at the rates as they deem fit to the investors or actual buyers.
Avoiding brokers may be possible but Land lords deals directly with builders hence it is not possible to avoid land lord greed.
Cost of Funds and Marketing Cost:
Full page advertisement in a daily newspaper with whopping high cost or in barter system may be the reason for you to be carried away, but the fact is all the marketing cost are on you only. Luckily, real estate is localized business hence satellite channels do not add cost to your purchase. Stalls at a property exhibition cost nothing less than 35 to 40 lakhs. This cost will be on you. Marketing media, professionals and International Property Brokerage houses and their fees add cost toy your purchase. To get housing finance business, DSAs, agents bribe marketing staff of the builders, hence all the cost is on you.
Private Equity funds who funds the builders keeps their IRR (Returns on Investments) at 30 to 50 % per annul. Hence cost of either debt funding or equity cost nothing less than 40% of the fund deployed in the project. These cost are added to your purchase.
Last but not the least is Corruption:
Corruption at all level in government departments for permissions at state level and at the center level is known to all of us. Nothing comes free and no NOC or permission is without a price. Then there are lionizing agents and agents of bureaucrats who adds the cost to your purchase.