Real Estate tips from Warren Buffet

I am a big fan of Warren Buffet, just like most of the investors. Not because he is the third richest man or anything, but because his ideologies makes sense to me. Oracle of Omaha, Billionaire, The most successful investor in the world are few of the phrases used to describe this man. So I thought, why not use his ideologies in the world of Real Estate Investments. 

The Basic premise “that homes increase in value over time” – is true!

It’s a totally sound premise considering the fact that the worth of any home will only go up with time because the value of any currency will go down. (Inflation to be precise, which decreases the worth of rupee making things costlier with time). The 2008 recession was caused due to the same belief. Americans started buying homes thinking that prices will keep rising with time. Banks kept on lending, well why wouldn’t they (they were also under the impression that prices will keep on rising). Clearly this assumption was wrong and God knows we have paid our dues for this false belief. 

Buy Cheap

“Never count on making a good sale. Have the purchase price to be so attractive that even a mediocre sale gives good results”.

Everyone of us wants to do that, buy at the cheapest price possible. If only there was a way to know that lowest price. Affordability is the best way to decide whether it makes sense to make that investment. And EMI/income ratio is a good parameter to judge that. Generally, if you have no other loans to pay, 35% is considered a healthy number to judge that affordability. EMI/rent ratio is another major parameter. This tells us how much we stand to gain if we were to rent out our apartment as compared to the price that we are about to pay. Ofcourse, the ideal scenario would be when we are able to pay out our EMIs just through rents. That way, we could have a complete gain from capital appreciation. “Risk comes from not knowing what you are doing”.  

But, getting a cheap buy is only in distressed times when the entire market holds a negative view. It is impossible to predict market in the short term, even for Buffet. You need to have a sound judgment, and be prepared to go against the tide when the time comes. “I will tell you how to become Rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful”.  

Buy as if you were ready to own it for your lifetime without a sweat.

“Our favorite holding period is forever”. Buffet has always preached that you should invest in a stock only if you can see its value fall to half at what you bought and still feel comfortable about it. Buy only if you have the guts to hold it for life time. The same applies to Real Estate. I have always been a proponent to buying homes if you have a need. Even investment in second or third home is worth it only if you are not speculating. If you buy for ever escalating prices and at unsustainable EMIs, you are digging your own pit. Your most coveted dream might turn into a nightmare for you. Buffet advises a long-term hold strategy to homeowners. The third richest man on earth still lives in a 5-bedroom Nebraska home he bought around 50 years ago.      

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Impact of Real Estate Regulatory Bill – “Buy / sell” or “wait & watch”?

Impact analysis of Real Estate Regulatory Bill

Union Cabinet of India has cleared the bill on June 4, 2013. The Bill was introduced in Rajya Sabha on 14^th August, 2013. The bill has to be approved by the Parliamentary Standing committee, passed by both houses of the Parliament, and then submitted for approval of the President pursuant to which it can be enacted as Legislation.

Impact Analysis

Clause	Impact on RE sector
Imposing strict regulations on the Promoter along with penal actions	Ensure that construction is completed in a timely manner and buyer gets the property as per the specifications that he has been promised.
Establish Regulatory authority and Appellate tribunal	To create a dispute resolution mechanism and provide a specialized forum for hearing disputes and avoid prolonged litigation process.
Strict norms on Marketing and advertisements	Provisions to deter builders from putting out misleading advertisements. Moreover, any false advertising implies that buyers will get full refund of the money deposited with interest.
Prior registration of Project	RE sector to become more organized. Launch of phases might get delayed by 15-30 days pertaining to time duration required for Registration.
70% of the collections from customers to be kept in a separate account for funding construction Requirements	Mal-practice of Fly by night operators, who collect money and invest in other lands and delay in construction, will stop. Would result in controlled supply and hence better absorption.
Promoter shall not accept more than 10% as advance payment from the customers before entering into an agreement for sale with them	RE sector may witness cash flow problem. Earnest money component may also change as now the allotment will be done on 10% payment rather than 20% payment from the customers.
Registration of real estate agents for each project	Leading to money trail and curbing money laundering.

Major Concerns

• Bill only deals with the post-approvals stage. Whereas, it does not provide any relief to the developers in terms of getting through the cumbersome approvals and permissions process in any expeditious manner. Single-window clearance is essential to cut through the red-tape. Else, with slowdown in launches and longer time for approvals, will create an artificial shortage and lead to increase in prices.
• Why is registration required for every phase of a project? This will unnecessarily increase the cost of construction along with the delay of the project
• There are no steps taken to keep a check on Black money component in this industry
• What constitutes a carpet area (whether car parking is included or not, etc. ) should be clearly defined
• Increase in liquidity needs of developers due to parking of 70% of funds and extra payments due to another institution being set-up to regulate funds
• Though there are constraints in acquiring land, getting regulatory approvals and starting a new project, real estate supply should not decrease in next one or two years. But, with restrictions on pre-launch sales and pre-launch bookings now, marketing of projects may slide. Projects which don’t have all the required regulatory approvals will have to wait before approaching customer
• The commercial real estate is not covered under the purview of the proposed bill

It becomes clear from the analysis above as well as statements passed by most of the real estate experts that real estate prices should increase after the bill is passed. Though Real Estate Bill has come to the rescue for the buyer community, the million dollar question for the same community right now is whether they should buy new property right now and risk becoming a prey to unethical practices due to which this bill has become a necessity, and more importantly should they sell right now when it’s expected that the prices would rise post passing of the bill. Tell me what would you rather do in the current situation along with your reasoning by posting your comments below before you read on any further.

Increase in costs 

Of course, there would be an increase in costs for the developers which will force them to increase the prices of their new launches. But the incomes of the household will fail to follow the same pace of increment. The demand for new launches will reduce further. But resale properties will still exist in the market. And in case owners want to sell their houses, they can always sell below the prices of new homes. Real estate is really a game of supply and demand or so it should be. But we see that prices keep on increasing exponentially and only speculation exists in the Indian real estate market. Just because builders are forced to increase the prices of their new launches does not mean that the intrinsic value of your house has increased.

The simple reasoning that I can come up with for such rise in real estate prices is not because of high costs of construction. That is a minuscule as compared to the cost of the land on which the property is constructed. People whose ancestors owned land a couple of decades back are getting filthy rich just because their ancestors bought a piece of land. (Sometimes I think if only government could control the prices of these lands, it would be such a relief to the buyers’ community.) Not that I am a Marxist or anything, but then people who bought land for few thousand rupees a couple of decades back are making hundreds of crores today by selling their lands. Why do I feel that it isn’t justified!! 

My take on it... 

Real estate Bill is a much needed step to regulate the Real estate industry. The Bill is sure to make a difference by boosting the confidence of buyers, who till date were very afraid to shell out their life-long earned money. The Bill might also be the door to getting industry status for Real estate which might reduce costs of financing for real estate companies. But one should not make decisions to buy or sell depending on the Bill to be passed. My personal take is that if there is a need and finance available for purchase, one should go ahead, though only after doing a thorough due-diligence. The increase in costs may affect the prices of new constructions, and in turn the prices of resale flats too. But to make a decision solely based on the probability of bill to be passed is not suggested. It will take time for the Bill to be passed and become a law, more so when election is round the corner. The Bill has still to be passed by the Rajya Sabha, the Lok Sabha, the Parliamentary Standing Committee and then signed by the President. A long way to go! You never know who will come to power and what stance the government might take after the election. Moreover, the bill only applies for new constructions that will get approvals post the Bill is passed. This bill does not apply to the constructions for which approvals has been granted before the Bill is passed. So if there is a need, go ahead and fulfill your needs!   

Any further take on what buyers should do at this time of uncertainty is most welcome. Please post your valuable comments below. 
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