Sunday, May 2, 2010

Is that the 'right' price for your dream home?

If you are currently scouting the market to find the ideal ‘roof over your head’, you probably ask yourself this question several times a day.

Home buyers are constantly nagged by doubts such as, ‘Is this house overpriced?’, ‘Seems like a good price but should I try and get a better deal?’, ‘How do I know this is the best deal for me?’

Purchasing property is a daunting task and property valuation is an ever more daunting task.

Moreover, if it’s a home purchase, its not a purely financial deal, complicating matters further. Right?

Developed real estate markets have clear methods of determining what is called, ‘fair market value’. Also, the variation in prices of property in a particular area is not much making it easier to determine the price of property.

However in fairly underdeveloped and disorganized real estate markets such as India, this is not the case. The extent of variation differs from time to time depending on market conditions. It can be 25% or even as much as 40-50%.
This because various factors such as:

-Age of construction:
According to me this a crucial factor. Unlike developed markets such as New York and London, the difference between old and new property in India is huge resulting in an equally large variation in their prices.
Maintenance of old property in India is very poor resulting in fairly quick depreciation in value. Moreover, earlier there was no concept of value adds and amenities and most residential properties were plain vanilla stand alone buildings.
As against this, a new property comes with the latest amenities and add ons.
Most people are ready to pay a premium for the latest construction and amenities.
Is it any wonder then that there is a considerable difference in price between an old and new property, despite being of the same size & being in the same location?

-Quality Parameters:
Again a very important factor.
This is owing to the fact that the Indian real estate market is disorganized and extremely fragmented.
There are many players, with more entering the market everyday. Moreover real estate is a very local game here and hence there many players who are restricted to a state, city/town and even suburb. There are barely any national players currently in Indian real estate.
This level of fragmentation allows for novices and unscrupulous elements to enter the market hoping to make a quick buck. As they are not in this for the long haul, they try to enhance their profitability by using low quality material and poor quality of construction. They are what I like to call ‘Hit and Run’ players.
Then there are those who believe in building a trustworthy brand and leave no stone unturned to create the best possible product. They use the best raw materials and employ the latest construction technology apart from ensuring that their design can compare with the best in the world.

Then there those who make average buildings with average raw materials and design for average prices.

Consequently the prices charged by developers vary substantially depending on the quality & design of the product

-Reputation of Developer

You can’t ignore this if you are buying property in India. For reasons as stated above, there is a premium attached to the reputation of the builder.

Unlike in the case of many other products that you buy as a consumer, your relationship with the developer will last for many years after purchase of the product and you will probably live in that house many years to come.

Hence it is crucial that, the developer is not someone who thinks that once the apartment is sold you become a ‘closed file’. He should believe in cultivating lifelong relationships and must continue servicing you long after there is very little tangible ROI. And since property has to last you a lifetime, there must be assurance that there are no cracks on the wall and leaks in the bathroom within a year of possession!

Developers spend years dedicatedly serving the community and building their brand before they are able to reap benefits in the form of a premium on their products. And I fail to understand why consumers grudge them this.

You never question why a ‘Louis Vuitton’ hand bag costs Rs 1.5 lakhs while a local brand will sell you a similar looking product for Rs 500. Why is it then that consumers expect all properties in the same location to be priced exactly the same?

-Product Differentiation

Again a largely Indian phenomena. You will find products in the Indian real estate market that fall in any of the following categories: Economy, Premium, Luxury, Super Luxury, so on an so forth.

Products in each of these categories come with differences in configuration, specifications, amenities etc and hence are priced differently.

You need to take into consideration all of the above factors before you decide if the property is priced right.

Tough, right? Well, it can get even more complicated. The Indian real estate market is plagued with ills such as lack of transparency, no fixed price and arbitrary fluctuations in price that make it even more difficult to determine the right price for property.

Can you get any help whatsoever in this seemingly Herculean task?

Well many believe in seeking the guidance of an experienced and trustworthy real estate agent with local expertise to take a call on whether the pricing of a property is right.

Some engage the services of a property valuator who can do a valuation based on factors such as age of construction, quality of construction, amenities, location etc.

There are many resources available online that can be of help.

But despite all of the above, the truth remains that the value of a property is what buyers are ready to pay for it.

So when buying a home, don’t let too many external factors cloud you judgment.

Factor in the considerations given above and just ask yourself if the home is the right fit for you and your family, can you see yourself making a home in the property and most importantly, can you afford it? If the answer to all of the above is yes, then you have found your dream home.

Don’t worry too much about the fluctuations in price and never try to time the market (wait for prices to fall before buy). When it comes to the stock market and the real estate market, not even the biggest expert can accurately judge when the prices have bottomed out or peaked.

Be your own judge. Happy Home Hunting!


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