The case of the vanishing flat

All that’s left after all that effort are full-page classified ads, offering the same apartments, with two differences — one, it’s not the company that’s offering them, but financiers, brokers and, in some cases, a firm related to the builder’s; and two, the price has risen by 10 per cent in three months. It’s a neat little market manipulation that’s creating quick bucks for players, turning the finances of consumers topsy-turvy and generating huge amount of black money.

Anyone having Rs 5-6 lakh of risk capital — money they can afford to risk losing — can become a player in this low-investment, high-return business. And the market is such that you don’t even need brains to identify good housing stock or builder. The returns, virtually assured by a rising market, would give the Sensex a run for its stocks.

Here’s how it works. A builder comes up with a residential scheme of apartments at a price of Rs 2,200 per sq ft. The selling price of an 1,800 sq ft apartment works out to Rs 39.6 lakh. The down payment range: 10-15 per cent (or Rs 4-6 lakh). The game begins as financiers and manipulators enter the market.

Unlike consumers, in a liquidity-driven property market that has been going in only one direction for the past two years, the financiers have no choices to make, no plans to see, no loans to negotiate. The only thing they need to do is book. Like buying potatoes or onions. Their advantage is the risk capital in their hand. Many book up to 10 apartments.

When end users come to buy the same apartments, the builder has none to offer. A ‘friendly’ executive there directs them to financiers who want to sell. Unfortunately, the prices have risen — the cost of the 1,800 sq ft apartment has gone up to 2,420 per sq ft and it now costs Rs 43.56 lakh.

Having spent so much time, money and energy on the deal, consumers settle for buying the apartment in a second sale. Depending on how much the margin was, investors get a return of 67-100 per cent in three to six months. Do two such deals a year and the return on investment, over two years and four deals, works out to between six and 16 times.

Making the deal worse for consumers is that the ‘premium’ being charged by these investors — Rs 220 per sq ft — is demanded in cash. For an apartment that the builder was selling for Rs 39.60 lakh and whose cost has risen to Rs 43.56 lakh, the premium of Rs 3.96 lakh has to be paid in cash. Which means, an honest taxpayer has to convert his tax-paid money into black in order to get to buy this apartment, the sum total of which should run into scores of crores.

That’s not all. Even if a consumer buys the apartment, chances are pretty high that the project will not move ahead. The financiers who have cornered the apartments don’t pay up the next instalments — generally 10 per cent of the total cost — that generally come up once every three to six months. When a project comes to a stand-still, genuine buyers get hurt twice over. While they continue to pay interest on the money borrowed, they are forced to live on rent for longer.

Solutions? This is tricky, because if the government is induced to interfere in something that’s happening in a free market it would amount to a manipulation of a different sort, with manipulators of a different type. But we do need to look into this. Two suggestions: One, let builder rating be mandatory. Factor into the rating the timely completion of projects. This will force builders to focus attention on finishing projects rather than on collecting down payments. Build consumer awareness about these ratings.

Two, incorporate stiff and executable penalty clauses into every agreement to sell by a builder. Any default and the builder should be black-listed, not given permission to build more houses. Impose penalties that hurt — apart from returning home buyers’ money, with interest.