Monday, March 9, 2009

The Hindu Business Line : Grasp the ground reality

The Hindu Business Line : Grasp the ground reality
“When will the prices fall?” This could have been the most frequently asked question by interested property buyers a year ago. Now, at offerings as low as Rs 1,800 per sq.ft for new residential apartments in key cities, it may appear that the buyer’s market is truly round the corner. Or is it?

Despite the property price slashes, a popular strategy resorted to by developers, and the attractive interest rates doled out especially by the public sector banks, home buyers need to ensure that they do not throw caution to the wind. It is perhaps in these times that “caveat emptor” or buyers beware holds more significance than ever.

While buyers definitely have a good chance of hitting upon a first-class deal now, they would do well to first understand the tricky issues about property pricing. For instance, are the prices indeed lower than what they were earlier for the same locality/property or have the new plans been merely modified to fit a lower budget?

You also need to consider if the pricing is merely a modified package or, in other words, is the per sq ft rate lower only to be loaded with a host of other payments that are not included in the price prominently quoted?

If so, you may simply be getting a seemingly delightful package that may not really make much of a difference to your wallet. You may also need to look up whether the total sq ft that you pay for will be fully made available for your use. Here are a few tips to help you recognise the ‘real’ price of the property as well as the real area you will get to occupy while buying that dream home of yours.
Old wine in new bottle

In 2007 and even early 2008, a good number of developers in the organised space came up with larger-sized projects that mostly offered three-bedroom hall kitchen (3BHK) homes, especially in Tier II and III cities or very large two-bedroom homes in metropolitan cities.

With the surge in interest rates (that made home loans expensive) and the slowdown in the IT sector ( IT employees were said to be the key drivers of residential real-estate demand), builders preferred to lower the total price of a housing unit in the market to encourage buying. In a number of cases this was done by way of reduction in the size of units or lowering the frills or amenities originally offered by the project.

For instance, a 1,300 sq ft home that was earlier priced at, say, Rs 32.5 lakh may now be reduced to a 1,000 sq.ft unit at Rs 24 lakh.

But note that it may now be at the cost of curtailing the earlier offered amenities such as sports club or shopping centre and gardens.

While such a move is indeed welcome, as it makes housing more affordable for a larger universe of buyers, it essentially points more at the mere change in the strategy employed by developers than any significant slash in property prices.

In these cases, home buyers probably may still have some headroom for negotiating with the developers for further price cuts. Such bargains, however, should be backed by research of price trends in the local market.
What you see may not be what you get

The second issue in the recent property offers is the seemingly attractive per sq.ft rate advertised boldly in newsprint and property fairs. A home for Rs 2,000 per sq.ft in Bangalore city may appear hard to resist but then is that rate an all-inclusive one? Well, it seldom is for a host of additional charges may increase the property price as much as 10-15 per cent!

Preferential location charges or PLC, which is paid to get a pleasant view of, say, a garden or pool from your home, is one of the most common forms of add-ons. This is charged on a per sq ft basis (say Rs 100 per sq ft x total area of the house). So too, floor rise cost that is typically charged for higher floors of, say, fourth onwards is a common occurrence in high-rise building projects.

Another cost add-on could be the car parking space, which is almost always paid separately and may vary based on whether it is covered or open or stilt. The corpus fund for maintenance of the property (typically called interest bearing maintenance security), which is collected one time for major expenses of property also merits attention.

Buyers need to bear in mind that this one-time expense is besides the monthly maintenance or upkeep charges that one may have to pay for later. Some projects also collect deposits for power and water supply — especially where there are facilities such as power back-ups and water and sewerage treatment facilities.

You can seldom refuse these payments as these services are a necessity for many projects developed in the outskirts of cities.

Moreover, where the property comes tagged with a clubhouse or other outdoor amenities, be assured that a deposit may surely follow it. In some cases, not only are such deposits mandatory (whether one gets to use the facilities or not), a compulsory membership charge for one-two years is also collected. And these apart, the stamp duty and registration charges too add up to the overall cost.

So, wondering what these additional costs may mean when you are looking to buy a house? Well don’t. It simply means that you may end up paying at least Rs 5-10 lakh more (may vary based on the total area) than the ‘per sq ft x area’ cost you had initially imagined. Remember, most per sq.ft quotes advertised by builders would not include these charges. These additional cost components usually make their presence known only in the detailed break-up when you seek further information.
the greater ‘common space’

The third aspect a buyer should be aware is that while one pays for the full super built area of the apartment, the living space or carpet is a good 22-30 per cent lower than the area typically quoted. A 1,000 sq.ft house may eventually have only 770 sq.ft of living space.

This is because you have to also pay your share of the common undivided area (total area less common interest is called the plinth) in the whole apartment complex and also the space lost in wall thickness and so on.

So, in other words, while you pay for the super built-up area, you get to own only the super built area minus the common area and the wall thickness; this is called the carpeted area or the area you get to use inside your home.

While some developers may claim that they have not built in all the common undivided area in to your per sq.ft rate, do not get carried away as it is not easy to verify the developers’ stance, i.e. whether say the Rs 2,000/sq.ft is indeed excluding some of the common area.

But all said and done, do not lose heart as these issues do not suggest that property price cuts may be a farce. In fact many developers have genuinely slashed prices for some properties they have recently launched.

So, while there may be good deals in such offers, you need to bear in mind the pricing issues we have looked at to arrive at the actual cost before you make a final purchase decision.

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