33.43 Real Estate Scams - A Case Study

If Real Estate is such a good asset, then why is there so much negative news around it?
Because just like any other asset, there are numerous cases of scams and over-priced properties everywhere. Especially in India, where the market is not so transparent.

What are these scams?

Let’s try to cover one example:

High Rise- High-density (a box in the sky) buildings are an investment scam.

[1] Such flats are getting sold for 3-6Cr in cities like Gurgaon, Hyderabad, Mumbai etc.
[2] You will lose money if you buy such overpriced assets.
[3] Many a time (you are not given conveyance/land rights). So in case something happens to the building, you get nothing.
[4] These are environmentally bad.
[5] These are horrible investments because an almost infinite supply of "box in the sky" can be added by the builder. So you will have a hard time re-selling it. The only folks who benefit from such projects are builders and politicians.
[6] There are even cases of abandoned properties and construction defects. And for a middle-class person, this would mean a large chunk of your money stuck in such assets.

Let’s take a look at another case study:

Many luxury projects are getting sold out in a matter of days

But, are they getting REALLY sold out? The short answer is NO.

[1] Basically: big cities (and big builders) in India right now are adopting the Dubai model of selling real estate.

While this model is complicated to explain in a post, I will explain one element of it: this is called EOI (expression of interest).

[2] Sometimes properties for which permission to construct hasn't even happened could be sold through this concept.

The way this happens is: 
A project launch announcement happens.

And, only a certain fraction of the project is brought into the market (let's say 100/1200 units)

A payment plan is proposed by the builder.
Some are extremely creative (they might pitch 1% every month).
Builder's own guys buy like 20-30% (many a times).

A feeling of artificial scarcity is created.

[2] You see the property price going up. And, rush to buy the remaining 60-70 units. The project "contract" gets sold out.

[3] You deposit let's say 20Lakhs on a 6Cr property. What you have now are the 'trading' rights on that property.
You can find the next person. And, sell these trading rights to him/her. The next person buys it because they think:
"Hey the property got sold out in 2 days, so this is really worth it!!" Let me buy the trading rights at 6.5Cr now"

[4] Meanwhile, the builder tries to sell the remaining inventory (1100 units) at the baseline inflated price of 6-6.5 Cr.

[5] Now, the thing is in Dubai: the middle-class folks are not really buying the property. They are rich folks, who can afford to make payments, even when the market goes down. In India, the perceived rich are buying these properties on loan EMIs that they can't afford.

A bubble is brewing up.
So exert caution.

The bottom line is:
Real Estate is a good investment only if;

And for that, you need to make smart choices.


Thoughts 🤔 by Soumendra Kumar Sahoo is licensed under CC BY 4.0