Buying a house? Here's how you can get a good deal

Missed out on the last real estate boom? Yet to buy a house? Your own house seems a distant dream? Don't worry.

The time for getting good deals in housing market are back, at least for the next 2-3 years. But only for those who understand the big picture. Here is how:

...

India has witnessed tremendous growth in the past 10-12 years. What was a weekend at the beach has become a weekend at the mall.

What used to be the conversation about getting a good job, has now become a conversation about affording a house.

Growth has its pains and inflation is the biggest of them. Although, when it comes to getting hold of a house at a good price, the opportunities might just be available for the next 2-3 years.

Here is why:

Real estate basics

Real estate prices always go up in the long run. Why? There is a reason. First, land is a finite resource. Only a limited of it is available to man.

Second, every time when a bank prints out a currency note and it goes into someone's hands, it goes back into real estate. When steel companies take big loans, most of it is spent on expansion of their factories and buying more land.

When IT companies take loans, most of it goes into developing new IT parks. When Auto companies take loans, most of it goes into setting up new factories for newer models. When government gets the funds, most of it goes into developing infrastructure.

...

Likewise, when an individual gets a sum of money, it always goes back into buying a bigger or new house or a bigger office.

Real estate is the basis of investing for everyone.

So, everyday whatever money is poured into the economy, almost 90% of it goes back into real estate. Land being limited for a higher supply of money, its likely it's value is likely to go only upwards.

...

The India story

In case of India, the growth was slow and steady from 1970s. As new jobs were created, real estate prices were slowly increasing. But what happened in 2003 changed the life of a common man substantially.

The government opened gates for foreign direct investment (FDI) in almost all the sectors and suddenly the money into the economy quadrupled overnight. The banks were also very generous is giving loans to industries, businesses and builders.

Hence, more amount of money was put into limited land, limited agricultural output and limited pool of educated people.

...

This made the real estate prices shoot up nearly 7-8 times. Production of agricultural output, electricity, water is also limited hence all these prices have gone up many folds as well.

Real estate developers, investors and land bankers know these basics. Hence what started in the market was speculative investing. Meaning, more money started going into real estate in anticipation of rapid appreciation than actual use.

Till now, most of the developers and investors with real estate holding would never sell it out because they knew the prices would never come down.

Then, how is the opportunity to get good deals for home buyers in the market now?

...

In the long run, the real estate prices will only increase because of the basics discussed above.

But a catastrophe is happening in the market right now that will open windows of opportunity and enable buyers to get a house at nearly 30-40% lesser than the market prices, only if one understands the situation and opportunities.

1. Worst economic outlook

For the past 12-13 years the economic outlook of the global markets has never been so negative than it is now. Effects of double dip recession are clearly seen.

Jobs are being slashed; production is being lowered and restructured. Budgets are being revised. Euro zone crisis is going deeper and growth estimates are lowered and revised everywhere.

...

2. Reserve Bank of India (RBI) tightening on real estate lending

As per recent circulars, RBI has tightened the lending on real estate where borrower only wants to sell off the real estate after developing or just wants to give it out on lease.

The loans are available only if the borrower wants to use the real estate himself and carry business activities there. That means, speculative investors and developers are denied of loans from all banks.

A typical Builder ideally develops the property to sell or lease it to others hence the loans to builders are not available.

This has stopped the cash flows suddenly in the industry as only genuine buyers who want to buy real estate for their own use are only getting funds.

So developers are in cash crunch, suddenly the futuristic calculations that assume consistent real estate appreciation is not going to work for next 2-3 years.

Because there is no cash, whatever funds are available, are available at very high interest rates. But now, even that is getting difficult.

So how can one get a house at affordable or discounted price?

1.Negotiate, Negotiate, Negotiate

You will be surprised how much the rates can come down if you negotiate, because the builders need you to buy their homes.

Remember, builders might never announce reduction in prices because that will create a free fall effect on all their projects. If your negotiating skill is good, rates can come down in 10-15% in basic negotiation itself.

2. Cash is King

Availability of cash is a huge scarcity in the market. A developer has to literally borrow at 20-25% interest rates from the financial institutions.

So if you have cash availability and can pay around 40-50% down payment, then one can get discount of nearly 25-40% after negotiation.

...

3. Group buying

Inventories in the market are piling up. Whatever inventories are available, the developers want to quickly sell it out to put the money into new projects.

So if you can form a group within your friends and relatives who want to invest in the same property, then you can negotiate even further to get an additional discount of up to 10%.

4. High supply areas against low

Watch out for high supply areas against low supply areas in the metro city. There are some areas where there is genuine scarcity of land.

...

But within 2-3 kilometer radius, one can find areas where the lands are available and hence many new projects are being launched creating supply.

Such areas are where you can get the best deals even if the projects are launched at high prices.

For e.g in Mumbai suburban area, Vile Parle has genuine scarcity of supply due to height restrictions and low availability of land and is commanding rate of nearly Rs. 25,000/sq ft in certain projects.

...

But within only 2-3 km radius, Andheri has appetite and availability of supply. So there, even if the developers are launching projects at 14K to 15K per square feet, one can really negotiate to get deals at Rs. 8K-8.5K/sq. ft.

Same applies to areas like Worli and lower Parel. Many such opportunities are available in other metros like Delhi, Bengaluru and Chennai.

To summarise, a limited window of opportunity is available in the next couple of years due to limited supply of cash in real estate market from the banking system and negative economic outlook.

Hence, wish happy hunting for those who really want to get the best deal in buying their dream home.

Atul Khekade is the Director of Netz Capital which provides real estate services such as HNI and NRI investment consulting, quality and affordable real estate development and financing. Atul can be reached on atul at netzcapital dot com