Want to buy a house – Know the ACTUAL MONEY from your Pocket to Purchase a Flat

If you have bought a flat before or if you intend to buy one in the future, you always need to know what will be the total final cost to your pocket! You see those fancy ads by various developers who talk about rate per square feet of the flat. But we all know that’s not it. That rate is just tip of the iceberg (more or less). As a buyer we are more interested to know the total real outgo of money as well as the breakup to understand what every penny is charged for.

In this article, I have tried my best to give such a breakup and to arrive at the total price charged from us. There might be slight variations depending on the city where you intend to buy your house, but more or less the calculation remains the same. Hope this helps!  

Let’s assume:

1. Super Built-up Area of the flat – 1200 sqft
2. Carpet Area of the flat – 800 sqft
3. Basic Selling Price (BSP) – Rs. 10,000 / sqft
4. Building – 25 storeys
5. Floor rise – Additional Rs. 100 / floor
6. Car Parking – Rs. 10,00,000
7. PLC (Preferential Location Charges) – Rs. 50 / sqft

Then Agreement Value is the sum of 3) + 5) + 6) + 7)

Let’s assume we book a flat on the 20^th floor

So,

• Agreement value = 10,000 + (20-1)*100 + (10,00,000 / 1200) + 50 = 12783/sqft

• Other Charges = Club development + maintenance (2 years advance) + water meter + electricity + cooperative society share money + fire protection fund + Internal Development Charges (IDC) + External Development Charges (EDC) + Stamp duty + Registration charges

         Stamp Duty = 5% of Agreement Value
         Registration charges = Rs. 30,000 or other as applicable

• Service Tax = 3.708% (for agreement value > 50 lakhs)  of Agreement Value + 12.36% of other charges
• NOTE: Most developers do not include Floor rise, PLC and Club development in the Basic APR. As a result, you end up paying higher service tax of 12.36% on it's value. If the developer had included these in the basic APR you would have paid just 3.7% of tax. Any guesses on why a builder does not include these in their basic price? Because then the price quoted in all advertisements would look higher that would dissuade their customers. And this comes at the cost of us paying more money. Feeling duped, are you??

• VAT = 1% of Agreement Value

Now,

  

     

Next time when you go to enquire about your new house, I am sure you will be better informed to get the hidden value of the flat too. It always pays to be an informed customer. J

Assessing the Economic Footprint of Indian Real Estate Sector

Iron & Steel, Cement, Bricks, Glass, Sand & Wood are the primary raw materials used in the Real Estate Sector. Consumption of such materials has been projected below for the estimated supply of Real Estate in 2013.  

Total Estimated Real Estate Supply in 2013	3.6 bn sqft
Total Consumtion of Iron & Steel	22 Mn Tonnes
Total Consumption of Cement	140 Mn Tonnes
Total Consumption of Bricks	49,000 Mn bricks
Total Consumption of Glass	1 Mn Tonnes
Total Consumption of Sand	102 Mn cubic meters
Total Consumption of Wood	4 Mn cubic meters

Source: CBRE Research, CREDAI

Economic footprint of Real Estate Sector in 2013

Below, we have mentioned the estimated economic opportunities that would be generated based on the estimated consumption of the above selected construction materials for 2013.

Economic Footprint	Iron & Steel	Cement	Bricks	Glass	Sand	Wood	Others
Potential Revenues (in cr)	103,000	78,000	47,000	34,000	15,000	45,000	48,000
Investment Generated(in cr)	87,000	70,000	18,000	4,000	7,000	35,000	33,000
Direct Employment Generated	157,000	100,000	1,600,000	2,000	105,000	129,000	350,000
Potential Employment generated on the building site during the construction of 3.6 bn sqft in 2013						5,100,000

Source: CBRE Research, CREDAI

Overall Economic Impact of the Real Estate Sector in the year 2013

Assuming industry standards for costs of construction for commercial office, retail and residential assets, following is a broad estimate of the economic footprint of the real estate construction sector in the year

2013.

Total Estimated Real Estate Supply in 2013	3.6 bn sqft
Total Revenue potential of Real Estate Construction in 2013	370,000 crores
Estimated Gross Domestic Product (2013)	5,833,685 crores
Estimated Contribution of Real Estate to GDP in 2013	6.3%
Total Employment generated by sector in 2013	7.6 million people
Total Investment generated by the sector in 2013	254,000 crores

Source: CBRE, CREDAI

Affordable Housing in India

Definition: Affordable Housing refers to housing units that are affordable by that section of society whose income is below the median household income.

Description: Though different countries have different definitions for affordable housing, but it is largely the same, i.e. affordable housing should address the housing needs of the lower or middle income households. Affordable housing becomes a key issue especially in developing nations where a majority of the population isn't able to buy houses at the market price.

Disposable income of the people remains the primary factor in determining the affordability. As a result, it becomes the increased responsibility of the government to cater to the rising demand for affordable housing. The Government of India has taken various measures to meet the increased demand for affordable housing along with some developers and stressing on public-private partnerships (PPP) for development of these units.

Affordable and Low-cost housing are often inter-changeably used though a subtle difference exist between these two terms. Low-cost housing is intended to cater to the bare minimum housing needs of the Economically Weaker sections of the society whereas, Affordable housing is meant for the Lower-income (LIG) and Mid-income group (MIG) and includes basic amenities like schools, hospitals and other such community services.

Challenges faced by this Segment

• Affordable Land
• Excessive control on Development of Land creates artificial shortage
• Lack of Marketable Land parcels
• Lengthy approval & Land Use Conversion Process
• Titling issues and Lack of Information
• Affordable Materials, Labor, Design & Technology
• Affordable Finance

Parameters	Affordable Housing
Amenities	Basic
Target Income Level	LIG & MIG
Location	Within city
Project Developer	Government & Private Developers
Source of Finance	Banking & Housing Finance

Source: Credit Suisse, KPMG Analysis, Prop Equity

SIZE		EMI
EWS	Minimum of 300 sqft of super built-up area Maximum of 269 sqft (25 sq m) of carpet area	Not exceeding 40% of gross monthly income of buyer
LIG	Minimum of 500 sqft of super built-up area Maximum of 517 sqft (48 sq m) of carpet area
MIG	600-1200 sqft of super built-up area Maximum of 861 sqft (80 sq m) of carpet area

Source: Guidelines for Affordable Housing in partnership, MHUPA 2011

Housing Shortage in Urban India

	Monthly per-capita Expenditure	Estimated number of Households (2007)*	Housing shortage in million (2007)	Percentage Shortage
EWS	< 3300	21.81	21.78	99.90%
LIG	3301 – 7300	27.57	2.89	10.50%
MIG	7301 – 14500	16.92	0.04	0.20%
HIG	14501 and above
Total Shortage		66.3	24.71	37.30%

Source: Report of the Technical Group (11^th Five Year Plan: 2007-12) on Estimation of Urban Housing Shortage

Multitude of Statutory Approvals adds 2-2.5 years to the pre-construction process

Mc Donald Real Estate

Quick… what business is McDonald's in? In 1974, Ray Kroc, the founder of McDonald’s, was asked to speak to the MBA class at university of Texas at Austin. After a powerful and inspiring talk, the class adjourned and the students asked Ray if he would join them at their favorite hangout to have a few beers. Ray graciously accepted.

“What business am I in?” Ray asked, once the group all had their beers in hand. No one answered, so Ray asked the question again. ”What business do you think I am in?”

The students laughed again, and finally one brave soul yelled out, “Ray, who in the world does not know that you’re in the hamburger business.”

Ray chuckled. “That is what I thought you would say.” He paused and then quickly said, “Ladies and gentlemen, I’m not in the hamburger business. My business is real estate.”

Ray spent a good amount of time explaining his viewpoint. In their business plan, Ray knew that the primary business focus was to sell hamburger franchises, but what he never lost sight of was the location of each franchise. He knew that the real estate and its location was the most significant factor in the success of each franchise. Basically, the person that bought the franchise was also paying for, buying the land under the franchise for Ray Kroc’s organization.

McDonald’s today is the largest single owner of real estate in the world, owning even more than Catholic Church. Today McDonald’s owns some of the most valuable intersections and street corners in America as well as in other parts of the world. 

NOW, LEVY ON PROPERTY TO FUND EXPRESSWAY

The Economic Times, 14 November 2013, New Delhi 

The government is looking to tap into real estate demand to fund a new expressway project amid a slowdown in highway construction. It is exploring the possibility of financing the Rs 12,000 crore green-field Delhi-Jaipur expressway project through a 2% surcharge on commercial and residential properties that come up along the 260-km project. The surcharge will be levied on the stamp duty that property buyers will pay to Haryana and Rajasthan governments at the time of registration. This levy — which is expected to generate Rs 5,000 crore — will be in addition to the toll that commuters pay.

Haryana government has approved in-principle the plan for new townships in Manesar, Pataudi and Rewari, while Rajasthan may allow to build new townships in Behror, Kotputli, Sahapura and Chomu. These townships will cover almost 20,000 hectares and will have exclusive links to the expressway. "NHAI acquires land. So, if we can get alternate mode of financing to take care of construction expenses the project can take off soon," said a government official.

The move comes at a time when road developers are finding it tough to raise equity and arrange bank funding.

While government officials confirmed the proposal, they said a final decision will be taken shortly. On Monday, an inter-ministerial committee will discuss the issue. The ministry is also proposing other financing models for the project without any requirement for private investment. First among these options is to provide viability gap funding (VGF), which works out to almost 42% of the project cost, to a developer who will manage the project with the revenue earned from tolling. The expected traffic on this stretch will be 25,000 passenger cars per day.

The second option is to allow the developer to collect toll on the existing Delhi-Jaipur highway after the expiry of present contracts. Concession period for Delhi-Jaipur highway will end in 2023, and Delhi-Gurgaon in 2024. "This will also address the concern of competing road projects. The developer will have the responsibility to carry out expansion of NH-8 during the contract period," said an official.

Important Real Estate Terms

Some terms & terminologies are very relevant in the real estate industry but a lot of investors actually have no knowledge about what they mean. These details may seem small but fine print matters in the long run. Not only will you have a good grasp over these real estate terms but also be able to convey to the builder that you are well updated about the industry.

1. Carpet Area: The carpet area is the net useable area and is measured as the area between the inner walls of a structure. When you buy a property, the builder should usually quote the price based on carpet area of the flat, which he does not unless you ask for it.  
2. Built-up Area: Built-up area includes the entire carpet area together with the area of the walls and the doors. This measure is almost 15-20% more than the carpet area.
3. Super Built-up Area: In addition to the built-up area, a proportionate amount of the common space of your society that all residents can use, like the parking areas, lobby, staircase, hallways etc.). Most of the builders use this figure to market their projects and give out a wrong idea to their customers about the actual size of the flats.
4. Capital Gains: Long term capital gains represent the profit made on a sale of property 3 years after making the purchase. This is entitled to tax after the application of indexation. A seller can avoid paying this tax if he or she diverts this amount into buying any other property
5. Encumbrance Certificate: This is the certificate that entitles you to the ownership of your property. All legal or monitory dues on the property is also evident from this document. Usually, the bank needs this document for any home loans that you may be applying for to ensure that there is no mortgage already existing on that property.
6. Title Deed: This document proves the ownership of the property and is very important when you are buying the property. Check the title deed to ensure that you are buying it from the right owner. Always ask for an original of the document
7. Stamp Duty: This is the tax that you need to pay to the government for purchasing your property. The stamp duty differs from state to state and can be 3-8%. This tax is payable on the Agreement Value. Do consider the stamp duty while making a budget for purchase of a house as it can be very high.
8. Franking Charges: This is a small charge that you need to pay to the bank when you take a home loan. This is actually a stamping in which an official seal is put on the document of purchase that needs to be done at the sub-registrar’s office for a very small fee. The bank does the franking and collects the charge from the buyer.
9. Registration Charges: This is a charge that is similar to stamp duty and is also based on the Agreement Value and is paid at the time of registration of your property. This again varies from state to state and may be 1% of the property or lower.  
10. Power of Attorney: This is a legal process in which you transfer your rights as property holder to someone else. In case of Real Estate the right to sell or buy property has been banned by the Supreme Court  
11. Sale Deed: The sale is considered to be legal only when this document has been signed by both the buyer and the seller. This document contains all particulars, including the details of the property.
12. Service tax & VAT: The Service Tax needs to be paid only in case of properties that are under construction. For completed properties no such tax is applicable. VAT is similar to this and is applicable only to properties that are not completed. But not all State Governments charge a separate VAT.
13. Conveyance Deed: This deed is a document that the builder needs to have to legally transfer the title of the land to the housing society that has been formed. This is compulsory or the title will remain with the builder and may cause legal hassles later.
14. Ready Reckoner Rates: This is is a rate that has been specified by the Government and is the base price on which the Registration charges, the stamp duty and other legal matters are based on. 

Well, after knowing these important real estate terms, you can be more aware of what you are getting into and taxes and documents that you need and what they signify. 

21 things to learn from Donald Trump Strategies

Donald Trump is considered as one of the best known Real Estate Entrepreneurs in the United States. I've actually managed to pick up tips for success in business and life in general by reading about him in his book "TRUMP STRATEGIES FOR REAL ESTATE".

1. You can’t make big real estate investments—or really profitable small investments—without projecting certain personal qualities that inspire confidence in others, and make them want to help you or to see things your way. The key personal qualities you need are enthusiasm, relationship-building skills, showmanship, preparation, and tenacity
2. Enthusiasm (and focusing initially on the large outlines of a deal rather than the financial details)   can overcome many obstacles
3. Trump knows that people like to be excited. You just have to find creative ways to excite them
4. One way to build a good relationship is to assume that the present transaction you’re working on is only the beginning of negotiating many deals with your counterparts
5. If you’re going into a meeting with someone, learn as much about them beforehand as you can. Ask someone else about them, find out what they know
6. An even better example of Trump’s showmanship is the way he used flashy architecture to get people excited about the Commodore-Hyatt deal. Using eye-catching, conversation-starting architecture is one of Trump’s signature tactics, and it’s something every real estate investor, no matter how small, should consider doing
7. Whatever the situation, whether you are buying or selling, try to anticipate any likely potential problem
8. Trump always does more preparation than other people are willing to because it gives him greater control in a fluid situation
9. Take advantage of the fact that most people are not willing to spend time on preparation
10. Trump always does more preparation than other people are willing to because it gives him greater control in a fluid situation        
11. Take advantage of the fact that most people are not willing to spend time on preparation
12. Everything worth doing is difficult, and in order to accomplish it, you have to be tenacious
13. One of the cornerstones of Trump’s philosophy is “Improve any Location”
14. To be attractive to Trump or to any intelligent investor there has to be undiscovered potential for adding significant value to the property—value that is not already factored into the selling price of the building
15. Though you may be a small investor, if you want to be extremely successful make sure that you too have a vision for adding significant value to any property you buy. Think about your vision for adding undiscovered value before you get serious about putting any money down for the property. You have to think creatively about the ways to get the highest and best use out of a property
16. The bottom line is, whenever you are considering buying an investment property; explore ways to “Improve the Location”
17. “Will this investment keep up with changing times? Will rents keep up with inflation? Is the area stable, getting better, or deteriorating?”
18. Unfortunately, lawyers are too often trained to kill deals when problems arise, rather than translating legal problems and risks into financial terms, so that a business decision can be made. Many times real estate deals run into problems that can only be solved with creative, “out-of-the-box” thinking
19. Once Trump intends to purchase a property, he has his associates prepare a projected business plan containing the following items:
• Anticipated costs of various items
• Nature and cost of available financing
• Estimates of income
• A projected timeline indicating when expenses will be incurred and when income will be received 
20. Creating a preliminary business plan is an important discipline for you to adopt because it forces you to think through the most important elements of owning a particular piece of property. It also forces you to think of your future plans for the property, and the timing of an eventual sale
21. “Does the purchase achieve the intended goal as part of your investment portfolio” Ask yourself, “Am I looking to make a capital gain? Will it be short term or long term? Am I looking to buy and hold this property as part of my estate? Am I looking for a transaction that has great tax benefits, at the expense of other monetary benefits?”

BE WILLING TO PAY A PREMIUM FOR A PRIME LOCATION

Below is a transcript from the book "Trump Strategies for Real Estate" I am quoting the entire transcript because I found it interesting. May be you will too. 

BY GEORGE... A STORY OF SMART OVERPAYMENT

Perhaps the best example of paying a premium price for a piece of real estate occurred in 1962 when I was counsel for Sol Goldman and Alex DiLorenzo Jr., the multimillionaires I worked for early in my career.

Since they were considered to be the most aggressive purchasers of real estate, they would get dozens of listings sent to them every day. Part of my job was to screen the sale offers and get Sol’s opinion as to which ones were of interest to him. One day, a disheveled old broker came into my office and handed me a crumpled piece of paper listing an apartment house in Brooklyn Heights that was for sale by the family who had built it and owned it for over 40 years. The asking price was $860,000 which, at that time, was a lot of money. I didn’t know whether the price was high or low but I did know that Brooklyn Heights was a desirable neighborhood, so I brought the listing into Goldman. I told him the broker was a “nobody” and I doubted his ability to bring in anything worthwhile but I thought it was worth bringing it to Sol’s attention. Goldman took a quick look at the listing and said, “George, find out how many people the broker has offered this apartment house to.” I did as I was asked and when I went back into Sol’s office I said, “He knows you’re the number one buyer of property in Brooklyn so you are the first person who is aware of this offer.” After listening to me, Sol said to me, “I know everything about this property, the type of apartments, the rentals, how well it was built and operated, and I have been secretly trying to buy it for years without success. If the listing gets out in the marketplace, a bidding war will take place for the property and I want to avoid that at all costs. Go out and tell the broker your oddball client will pay $1 million for the property.” I said, “Sol, they’re only asking $860,000 for the building, so you could probably buy it for $825,000, why offer $1 million?” Sol insisted that I do as he directed. I pleaded, “How can I possibly get the broker to understand the excessive offer.” Sol said, “Hey, you’re the lawyer, be creative.”

I went back to the broker who was still sitting in my office and said, “My client likes the property but there is a serious problem. The price is too low!” Thinking he heard wrong the broker said, “You might be able to buy it for $820,000 if you move quickly.” I replied, “You’re going in the wrong direction, unless you up the price to $1 million my client isn’t interested.” The broker had a look of total bewilderment on his face and asked, “Why would anyone pay $1 million for a piece of property that could be bought for $860,000?” I replied, “My client is a very eccentric millionaire, he thinks anything that costs less than $1 million is beneath him. So if you come back with a sales contract indicating a purchase price of $1 million, I’m authorized to sign it and give you a deposit of $100,000 immediately. But, I suggest you move quickly before my client comes to his senses.” The broker came back with the contract the next day; I signed it and gave him the deposit. The amazing thing is that before title had even passed, Goldman obtained a first mortgage on the property from a bank for $1.4 million—the property was that good. So Sol now owned a building he always coveted, and had pocketed $400,000. The seemingly exorbitant price in reality was an incredible bargain. By overpaying, he made sure the property stayed off the market. There’s an excellent lesson here for the small investor. If your instinct tells you a piece of real estate has your name on it, and is significantly undervalued, go for it and forget the price tag!

Hyderabad Realty Outlook

In the past 10 years Hyderabad Real Estate has seen it all, from being an attractive destination for IT/ITES services between 2000-2008 to being a victim of the Global Recession between 2008-09 to political turmoil lurking there in the name of state bifurcation since 2009. Hyderabad Realty witnessed attractive capital appreciation in the period 2000-08. Over the past decade, Hyderabad has eveolved from the commonly apprehended image of an under-developed tier-III city into a vibrant city with thriving Business opportunity and a major centre of employment. Most of the major Real estate destination of India has recovered and recovered strong post-recession except for Hyderabad.  

Andhra Pradesh has gone on a shutdown mode with the latest being the strike in Vijayawada Thermal Power station. The strike by the Anti-Telangana  power sector has crippled life in Andhra Pradesh badly hitting Hospitals and Power supply. This political turmoil is badly hitting the growth of Realty in Hyderabad. The New Launches are almost on a dry state and no capital appreciation can be seen. Work has stopped on most of the undergoing construction due to political instability in the region. But, there is a silver lining in every cloud.

Residential weighted average capital values escalated from approx. INR 1,000 per sq. ft. in the year 2000 to INR 3,100 per sq. ft. by Q3 2008 exhibiting an annual appreciation of approximately 15%.Post the slump triggered by the global financial crisis, the city has failed to replicate the growth rate of pre 2008 years. The political turmoil on Telangana issue could not have happened at a worse time for Hyderabad real estate. The period after the year 2008 has been characterized by fewer project launches and declining or at best stagnating capital values.The weighted average capital value has witnessed a decline from INR 3,100 per sq. ft. in Q3 2008 to INR 2,980 per sq. ft. by the end of Q1 2012 exhibiting a negative annual return of 1.4%. (Source:Prop-Equity)

HYDERABAD - Capital Value Trend

People who couldn’t afford to buy a house five years ago can find a house which is affordable and at a preferred location now. The price/sqft of an apartment in the prime locations of Hyderabad are comparable or in some cases lower than the price existing in the peripheral locations of Navi Mumbai and Gurgaon. Doesn’t it make sense to buy at such huge discounted prices!

Ofcourse, the risk still prevails in Hyderabad Realty. But then, if it were not for this risk the prices wouldn’t be so affordable now would it? The challenge is to keep a good track of the political situation prevailing in Andhra Pradesh and to time your entry well. The market well deserves to be at par with other prime residential markets in the country. Once the situation gets better, there won’t be any looking back for this city. To summarize, the long term opportunities outweighs short term risks.