My ordeal with a real
estate investment in an under-construction property and the lessons learnt I
would like to share a real-life experience in real estate investing.
In 2007, I had booked
an apartment in a premium project called ‘Estancia’, promoted by Arun Excello
in collaboration with L & T.
The former took care
of sales, financing & such while the latter was responsible for the actual
construction.
Chennai’s first
‘integrated township..!
It was billed as
Chennai’s first ‘integrated township’, located in proximity to an emerging
industrial and services hub. Although the project was on the wrong side of the
airport, close to the Sriperumbudur area, along with several other projects,
the connectivity to the airport by public transport was reasonable.
 |
Mr. R. Balakrishnan |
My choice was based
primarily on the faith that the construction company, L&T, had an equal
stake in the project and, hence, believed it would be completed.
Even if it was
delayed, I assumed I would get the flat as promised. I now realise that none of
these ‘beliefs’ was a contractual obligation or / a written commitment given by
the builder.
Sometime later in
that year, I was told that the flats would be delivered by December 2008 and,
with a grace period of 6 months, at the latest by June 2009.
Since the builder had
promised to pay a penalty of 5 rupees per square foot per month to me in case
of delay, there was some consolation. In other words, delay in delivery would
mean that my cost per square foot would be lower by 5 rupees per month of
delay.
This was the first
instance in Chennai of such a penalty clause by a builder, since closing down
of Alacrity Housing. I understand that now it is a standard practice for
builders to offer some interest payment, or / compensation of some sort, in
case of delays.
The project was
supposed to have 6 towers in the first phase; I was allotted the flat of my
choice in Tower Four.
Trouble started
brewing..!
In early 2009,
trouble started brewing. Project delays were visible; apparently a lot of NRI
(Non - Resident Indian) bookings were cancelled, after the Lehman Brothers
crisis. The builder decided to go ahead with only 3 towers in the first phase.
The foundation for
the 4th tower had barely been laid. Thinking that my capital was not at risk, I
persisted with my investment, when I should have pulled out of the project.
At this stage, I made
my first mistake. Around 2011, when a ‘progress payment’ was due to the
builder, I was told that the cheque should be made out in the name of a
different entity. The initial name was ‘L&T Arun Excello’; now, it was
simply ‘Arun Excello’!
I found out further
that while L & T had constructed the first 3 towers, the remaining
construction was to be executed by Arun Excello. When I tried to make
enquiries, I was never told of the facts.
The sales people, at
some point in time, tried to persuade me to buy a flat in one of the first
Three towers. But since the flats that were available did not suit my
requirements, I refused. I even ventured to make the full payment, provided I
was compensated for early payment in a fair manner.
Unfortunately, the
terms were not suitable as the compensation they were offering was way less
than what I had asked for.
I skipped their
offer. Time elapsed.
In January 2013, I
was told that they would be giving final possession soon. I was called for an
‘inspection’.
On going there, about
40 KM from where I stay, I found that the lift was not functional yet and
climbing 10 floors was a stiff challenge.
Still, having done
that, I found that they had unilaterally changed the specifications also. They
had also changed the parking set up; the partner, L & T, whose name was a
major factor in my purchase decision, was no longer there.
I sent an email to
them complaining about the ‘inspection’, the change in specifications and about
their lack of communication about their parting ways with L & T. What I got
was a terse reply that my allegations were baseless.
They said that they
did not invite me for any inspection & that the contract mentions that
specifications can be changed without the buyer’s permission.
About their parting
ways with L & T, there was total silence. The response clearly drove home
the concept of ‘caveat emptor’.
I had been taken for
a ride!
Yes, the financial
implication of the entire investment is that my liquidity has been destroyed
and the final returns on my investment are likely to be lower than the interest
on a savings bank deposit for the period.
If the project had
been delivered on time, I would surely have earned some rental income which
would have been higher than the ‘penalty’ for the delay in possession.
However, I must say
that the project, from a price point of view, is a reasonable one if one were
to invest today, and there is less likelihood of prices crashing by more than
20% to 30%.
The lessons for me
are:
1) Never trust a
builder, however big the name or / reputation;
2) Never trust a
joint venture;
3) Never book a flat
if delivery is not clearly committed, unless you are a pure financier;
4) Do not fall for
any sales pitch that is not expressly mentioned in the contract;
5) Even if one has to
pay a higher price, it makes sense to buy a flat that is ready.
5) Real estate is all
about location, location and location. It is better to buy a tiny flat in a
prime area rather than a palace in a desert.
6) Liquidity in real
estate is a myth.
7) Returns are lumpy,
bumpy and uncertain. Anticipation of a location becoming more valuable is a
mere guess.
Yes, I am aware that
most of us book flats at various stages of construction, from launch to
ready-for-use. We all want to lock in early because we fear price escalation.
Buying the first
house is a necessity that demands the least risk. On the other hand, one tends
to be less cautious while buying a property for investment.
I have come to the
conclusion that the measure of due diligence should be no less for a second
house than as it is for any other investment.
Money has alternate
uses and real estate investment is just another form of diversification. There
is also a difference between buying a plot of land and a flat.
In the case of a
flat, one wants to ensure that if one is not going to live there, the rental
income will be an important factor of the return; whereas, for investment in
land, one has to be patient, speculating on the appreciation in land value
alone.
While buying a flat,
there is also no guarantee about what we see and what we get. We get carried
away by ‘model flats’ which often use materials and eye-candy accessories to
tempt the buyer.
Mr. R
Balakrishnan can be reach at balakrishnanr@gmail.com
Src: Moneylife
and http://frustrationsamalgamated.blogspot.in
About R.
Balakrishnan..!
| Mr. R. Balakrishnan have a regular column in MoneyLife, a personal finance magazine. Visit www.moneylife.in |
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