The apartment I booked in 2008 for Rs.3000/sq.ft is now going for Rs.4500/sq.ft in 2018 ten years later. A grand CAGR of 4% for a 10-year investment. Even a simple fixed deposit has given higher returns. Don’t know whether to laugh or cry at this price stagnation.
Read on for the full journey of my apartment purchase that I narrate with great hilarity whenever friends ask me about it. The tragedy is that the story involves so much waste of money that could have instead made us financially independent by now. I suspect there are a lot of people out there with even worse scenarios than mine so I hope young people reading this don’t repeat our mistakes.
Timeline of Buying till possession- 10 year long nightmare
YEAR 2008: Shortlisting the apartment to buy
So off we went in year 2008 on one of my visits to India to scout apartments in the “IT corridor” because we had heard in the news that those were the “up & coming places”. We quickly realised that it made more sense to look for an apartment in the same neighbourhood where my parents had rented for 20+ years since we knew it intimately. The only problem was that all the completed apartments in that neighbourhood were very expensive . We managed to find one affordable place in the vicinity. The reason it was cheap was because it was a barren plot of land on which no apartments had been built yet! There was only a model flat and a sales fellow handing out brochures with “computer-generated graphics” of the apartments to be completed only by year 2012, four years from the launch date. See below.
The price was too good to pass up. So I booked a 2BHK flat using my savings to pay 25% mandatory down-payment to sign the construction agreement. I then applied for a home loan for the remaining amount from a leading bank that had tied up with the builder. We took a lawyer along with us to review the construction agreement to make sure the land was in the builder’s name. Problematically the builder expected to get approval from the housing development authority only in August 2009 meaning they sold apartments without getting the approval to build! But the price and location made us overlook such red flags. I returned to the U.S not realising that the builder was about to take us on a roller-coaster ride for the next 10 years. I was 27 years old at that time.
YEAR 2009: Dealing with Builder’s mischief
The first sign of trouble came in mid-2009 when the builder unilaterally increased the floor plan size of all the flats and gave an ultimatum to all buyers who had already signed the agreement : Either pay extra lakhs to keep the same flat or downgrade to a smaller flat or get a refund of the booking amount. We decided to pay the extra lakhs needed since it was all going to paid via loan anyway(!!) and kept the same flat unit as the extra space seemed like a blessing in disguise.
The next update we received from the builder was around August 2009 saying that the building plans had been submitted to the housing development authority and approvals were expected by year-end. This was a shock to us because the builder had earlier told us earlier that approvals will be in hand by now. We could now see the connection between the builder increasing the floor plan size earlier in the year. It looked like they had waited to submit the “expanded” plan for approval. This meant that the builder would not be able to lay a single brick until the approvals came through from the city.
YEAR 2010: Nightmare begins!
Year 2010 rolled by and we heard nothing back from the builder. Out of the blue in early-2010 the builder called for an owner’s meeting to update them on the status. My parents were excited to go to the meeting as they felt it must have something to do with the city approving the project plan and the project finally moving forward.
I was sound asleep when my mother called from India and woke me up. She was crying and I was scared because I’d told my parents to wake me up only in an emergency. Turns out that the builder called the meeting to discuss whether or not we wanted a swimming pool among other such trivia. A group of frustrated buyers called the police & T.V stations and got the builder’s executives arrested for zero progress after 1.5 years of booking the apartment. Now my mother was worried that our booking amount worth Rs.10 lakhs was going to be forfeited now that the builder’s people were jailed. Whew! Thank God. This was not an emergency! I reassured my mother that I’ll make back the money even if it was lost forever and that I was glad it was not their savings at stake and went back to sleep 🙂 The fact I had nightmares in my sleep is a different story 😉
YEARS 2011-2012: Builder breaks delivery date promise
The builder emailed us later vehemently denying allegations against them saying the approvals were delayed due to unforeseen reasons. But by now it was clear that the builder did not respect the buyers very much and would continue to take unilateral decisions tilted in their favour. Approval from the city came in August 2010 a full year beyond what the builder had communicated to us. The foundation was completed only in mid- 2011. So definitely the apartment was not going to be ready by the promised move-in date of 2012 🙂
YEAR 2015: Finally got Possession of my flat
My builder finally handed over the apartment in mid-2015, three years past the promised delivery date and 7 years since we first booked the apartment. By this time I had returned to India permanently, was married and living in Goa. I spent extra money to do up the interiors so I could rent it out instead.
After spending all that money on interiors, I was forced to give it out on a very low rent because other owners who had gotten possession at the same time were also competitively renting out their units depressing the rental value.
I consoled myself that at-least the builder was selling the remaining apartments at Rs.8500/sq.ft in mid-2015 making me a crorepati on paper for a brief period.
Year 2015- till Present: Multiple events cause a real estate crash
The nice feeling ended just a few months later when a natural disaster in the city caused prices of real-estate to collapse overnight. Fortunately our apartment complex was not affected physically but its value dropped as a result of the real-estate market crash.
Later with demonetisation & RERA, the current going rate of the apartment as determined by the market and not the builder is now stuck at Rs.4500/sq.ft
That’s my story of buying a flat for Rs.3000/sq.ft in 2008 and seeing its value stagnate to Rs.4500/sq.ft ten years later in 2018.
Lessons learned the hard way:
1. Don’t buy a house when you are young. Focus on your career instead:
- I was 27 years old when I booked the apartment in 2008
- I’m 37 years old now and this apartment saga has been running in the background of my life for the last 10 years and is still going on.
- More than once, I did not make the necessary career moves because I wanted job stability to pay the huge outstanding cost of the apartment.
- It was a waste of time & mental space worrying about ongoing issues with the apartment.
- Focus on your career and making more money instead of ruining your earning potential by taking up a huge home loan EMI at a young age.
2. Renting is a better option until you are old enough to settle in one place for good:
- 3% : that is the return I receive from rent after subtracting for property/water tax, maintenance, association dues, annual repairs etc.
- 2-3% is the rental yield in most parts of India because real estate prices are way too high. You can confirm this by visiting any real-estate listing portal and comparing the cost-to-rent and cost-to-buy for the exact same advertised property.
- So why not take advantage of this and rent when you are young instead of buying . Invest the savings towards buying a house later in life when you are ready.
3. Save up the entire amount to buy a house instead of home loan EMI:
- Most people only save up for their downpayment. Sometimes parents front the 20% downpayment but the young couple is stuck with the EMI for the remaining 80%
- Instead save up the entire amount of the house rather than take a loan. the returns from such savings will match any real-estate price increase that happens later. You’ll not be “missing out” on any real estate project. Someone will re-sell it eventually.
- With EMI you’ll be paying double the price of the house. I’ll write about this soon.
4. Buy only a “ready to move-in” apartment that is atleast 3 years old:
- By doing this, you’ll be buying what you see thereby avoiding the problem of builder delay and poor quality construction. none of that silly business of paying EMI on a delayed under-construction apartment and also paying rent where you are currently staying
- In 3 years you’ll see what kind of place the apartment complex has turned out to be in terms of : construction-quality, association, community, amenities etc.
- In my case, 3 years after possession there are two different associations each claiming to represent owners while the builder is using the lack of unity to further delay promised amenities. These two associations call for weekend meetings every month and my old parents head down there every month since I don’t live in the same city. Plus there is a WhatsApp owners group that lights up daily with security issues, property tax questions, lift repair, playground issues, water quality issues, noise issues, association fights, water-logging, mess by pets, latest surprise by the builder, legal issues etc.
- My tenants on the other hand are blissfully out-of-the-loop about these issues and I’m envious of them 🙂
- Bottomline : Don’t rely on the new RERA act to protect you “after the purchase”. Protect yourself by being smart “before the purchase”. Simply treat a house purchase like how you would buy a car or T.V and buy only what you can see, touch, feel, smell & hear.
5. Live as a tenant in the neighbourhood or apartment complex before buying there:
- In my parents’ apartment complex many former tenants have now become owners in the same apartment complex. That is the smart way to buy a house. Because you’ll experience all the hidden issues only when you live there.
- Buy a house only in a locality you know intimately. Don’t go by what you read in the news. Try renting in that neighbourhood for a few years before deciding to buy.
6. Your expenses don’t end with just buying a house:
- Upon possession from the builder, you’ll only get 4 walls with electrical & plumbing. Even light bulbs and ceiling fans have to be fixed by only you and not the builder.
- It can cost upto 20-30% of the apartment’s cost to set up the house interiors one-time : modular kitchen, air-conditioners, geysers, false ceilings, modular wardrobes, T.V unit, living room & bedroom furniture etc. It all depends on how fancy you want to get and how many rooms you have to furnish.
- Then property tax, water tax, maintenance, association dues, repairs and annual renovations add up to the recurring costs. So don’t think you’ll be saving on rent by buying a house. These recurring costs are like rent only.
- Expect the house to deteriorate in quality from the state it was purchased requiring annual repairs. Expecting anything different is fooling yourself knowingly.
7. Buyers should always be skeptical of Builders:
- Don’t blindly believe any estimate the builder tells you. Definitely don’t make future life plans based on their estimate. Always add a minimum 50% extra buffer to their time & cost estimates.
BLESSING IN DISGUISE
The silver-lining in all of this was that I did not use the home loan I applied for since there was no apartment being built on the ground! Instead I was setting aside a large portion of my salary each month in anticipation of the payment requests from the builder. As you can imagine I managed to save up nearly the entire amount while waiting for the builder to finish building. This was the second best thing to happen to us: that we did not pay loan EMI. Only problem was I kept all this money in my savings account in the hope that the builder will ask for the money any time. It was stupid of me to not even invest it in F.Ds that can be broken any time. That was a lot of earning potential wasted due to lack of awareness and foolishly expecting the builder to stick to their promised timeline.
- Please share your experience as a home-buyer in the comments especially if you took a home loan EMI to buy your house.
- Also if you are a believer in real-estate I would love to hear your side because I’m a big skeptic now.