“Sir it is an investor flat“, My broker told me last week. I was posing as a dummy buyer for my story to find the real truth behind Investor flat. The entire building of 130 units was vacant even though it was ready to move in. The broker tried to put a brave face and told me that all the flats are bought by investors except 4-5 units are with the builder. As an end buyer i would have been quite impressed but as a real estate professional, it made me more skeptical. As i shared in my previous post on Property Price that most of the brokers are now channel partners of the builder. They push the projects at a higher price. The commission is directly linked to the sale price. In my case also, two projects in the area of my research were the common recommendation from all the brokers. Personally, i didn’t like any of them.
Now this love story between the builder and the real estate brokers/agents become triangular. The so called “investors” complete the 3rd angle of this love story. Logically speaking every buyer is an investor. The investor flat i am referring in this post are “special” investors. These are mostly dummy investors like friends and family members of the builder. Their role is only to push up the property prices. At macro level, there can be four price points of a property
Category 1: Builder Price Point (Highest among all)
Category 2: Investor Flat Price Point (No 2 in the list)
Category 3: Serious Seller’s / End Users Price Point
Category4: Market Price Point
Normally the deviation between price point in a category no 3 and 4 is minimum. As i suggested readers in my post, Buy Resale Under Construction Property to buy under construction property in the secondary market. Basically, i was referring to category 3. In most of the cases, the buyer is trapped in category 2 i.e. investor flat. Though investor flat is available at a slight discount compared to builders price point but still much higher than the market rate. It all depends on who is controlling the inventory in the project. The nexus between Category 1 (Builder), Category 2 (Investor) and the brokers/agents ensure that property price remains at artificially inflated levels. The prices will be more realistic in projects with more no of buyers in category 3 i.e. End Users.
Some time back i shared a post on Residential Project Size. I mentioned that due to large scale/supply, the prices remain near to market price point. Another reason is that in a large scale project, the builder is not able to control the inventory. If there is a fair demand for the project then category 2 i.e. so called investors cannot dictate the price. The only exception is if the project remains unsold. Like in the case of a particular township near Mumbai. According to sources, the project is sold only 25% to 30%. Balance inventory is unsold thus i received hundred of calls for the same project. Whenever i check about the seller, the answer is standard “Sir it is an investor flat“. Trust me real investor will not keep a flat vacant for more than 2 years after receiving the possession. Another possibility is that real investor is not able to sell. In both the cases, you have every reason not buy the property.
Investor Flat and Risk Hedging
There are 2 types of investors i.e. dummy investors and real investors. Through these investors, Builder tries to hedge his risk. The first and foremost objective of a builder are to recover the cost of the project. Assuming, i am planning to construct 100 flats. Out of these flats, i should sell say 40 flats at Rs 5000 psf to recover my cost. The real investors are very shrewd and they also hedge their risk. I will discuss it in my future posts. If i could not find real investor at Rs 5000 psf and drop the price to Rs 4500 then as a builder, i need to sell more no of flats i.e. 45 flats to recover the cost. Therefore, i need to find out the optimum price to maintain profitability by selling least no of flats. A builder may or may not find real investors. Real investors are normally HNI’s and buy 5/10 or more no of flats in a project depending on builder’s reputation and size of the project. Therefore, real investors help builder to hedge financial risk.
A project always carries a risk of being tagged as UNSOLD or oversupply in the market. Therefore, if i sold 40 flats to real investors then i will show a sale of 45 flats to dummy investors. Dummy investors don’t have long term commitment and are willing to invest a small amount for predetermined returns. In the case of small builders, these dummy investors are friends and family members. Technically, 85% of the project is SOLD on papers before the actual booking starts. This is the reason when you check the builders list of flats, you will find almost 85% to 90% flats marked as SOLD. Though, in reality, all of them might be available. Therefore, dummy investors help to hedge the risk of the project being tagged as UNSOLD and keep inventory in control.
In many markets like Delhi and Mumbai, the big brokers/agents also double up as investors. Therefore, it is highly likely that your broker/agent is a dummy investor for the flat. If you ask who is the owner of the investor flat, this info is never shared till the deal is finalized. Many readers of this blog reported that at the time of agreement they realized that broker/agent was dummy investor. How it works is that these broker/agent/agencies, reserve fixed inventory at predetermined price by paying a nominal amount. Now they aggressively push to sell at higher price and earn profits. Builder is not concerned about the profits of brokers/agents. In a sense, it is good for him. Brokers buy time frame of 6-9 months to close the deal. For example, in the case of one my acquaintance in Delhi. They closed the deal at 89L for a flat in Dwarka. At the time of registration, they came to know that original seller is some other person. The dummy seller bought the property for 85L from the original seller by paying 2L. Therefore, he made a cool profit of 4L on investment of 2L token money. My acquaintance felt cheated in this whole transaction. Practically, he paid a premium of 4L.
The examples quoted are for reference purpose only. The values may change depending on the demand of the project to manipulate the price. By following above mentioned strategy, the price can be manipulated even for unsold/newly launched projects.
Investor Flat and Pricing
As we observed that “Investor Flat” in the project help the builder to control the inventory. At any given time only 10%-15% inventory is released from the builder’s quota. In the case of land owner’s, builder buys marketing rights of landowner’s flat to maintain tight control on inventory. The reason for controlled release of inventory is to control the pricing. The pricing is done intelligently. It’s a marketing strategy. There is NO standard definition of High and Low price. You must have read following example in the books on strategy. You draw a line A on a paper. Now draw line B. If line B is shorter than line A then Line A will appear longer than line B. On the other hand if line B is longer than line A then line A will be perceived as a shorter line. Similarly, if the builder’s rate is Rs 6000 psf and investor flat is available for Rs 5200 psf then the investor flat will be perceived as a cheaper. This exactly is price manipulation.
When the builder throws highly unreasonable price like Rs 6000 psf, he is not expecting any sale. You can make out the same from his body language. His end objective is to make buyer perceive that investor flat is cheap. Out of 100 buyers, a couple of buyers may buy at builders price whereas the fact of the matter is that market price is Rs 4500 psf. Therefore, investor flat though perceived to be cheaper but costlier than the market price. It is smart marketing move executed by following “investor flat” strategy. A buyer is trapped at a higher price.
On the contrary, the real investors must have entered the project at Rs 3000 psf and they will not mind selling the property at market price i.e. Rs 4500 psf. Depending on entry price of a real investor, they may sell even at a lower price to maintain liquidity. Moreover, there are not too many buyers in the market. Like stock investors, real investors have fixed profit margin in their mind. Once they reach that level, they exit and look out for new investment opportunities. The real investors never stick to a project. They keep buying, selling and book profits. Though it may not be true always.
Words of Wisdom: It is important for a buyer to identify real investor and dummy investor. Currently, the property market is going through a slowdown, therefore, it is dominated by dummy investors to keep neck outside water. It creates an artificial feeling of “all is well”. I am not discouraging buyers to purchase investor flat. The key concern is that the investor flat should not be a part of a love triangle between builder, agent/broker, and the investor. This love triangle is a trap. It is impossible to find out these details till you close the deal. The only way to find this trap is to check the difference between the price of an investor flat and the market price.
Therefore as a buyer, you should focus your research on market price. If you feel that investor flat is priced at a high premium compared to market price then better to leave the deal and move on. Always remember that it is not a last flat/property in this world. It is better to regret today for a lost deal rather regretting after few years on the wrong financial decision. At the end of the day, the days of extraordinary returns from real estate is a thing of past. The current market is more of pick and choose in select pockets in every city. There are multiple other options to generate returns equivalent to real estate returns.
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Very Good informative Post again !
Apart from Delhi & Mumbai what’s your opinion on Bangalore market?
Bangalore is end user market. There is not much scope of appreciation. There are no growth triggers.
Thanks Nitin !!
When you say NO appreciation in Bangalore, are you saying in comparison with Delhi & Bangalore property markets OR regardless of any comparison Bangalore has NO much appreciation and it is a dull and sluggish market ?
In my opinion Bangalore is already saturated market. There are no new growth driven factors. So you can not expect much returns. If buy an apartment for fair price, may be u can expect good rents on it :-)
I agree with prasanth. I am referring to Bangalore as standalone market,
When you say market price, no one sells at market price. At the end, builders and investors are the owners of the inventory and we will have to choose one price point. So how do we find out what should be the appropriate Market price. Ex. Mira road market price may be 5000 PSF as per municipality, but none of the flats will be available at this rate.
Here market price does not mean ready reckoner rate or circle rate. It is fair market value of the property.
The only thing buyers or investors should keep in mind is to get the best product at best prices.They should not be interested in anything other than that.In real estate this is the only way to get best deals.period.
Sir, I have shortlisted a property in zirakpur ie., Mona Aeroview.It is ready to move in.What papers should I check before I buy it.Is there any fard as it is in the house to check before buying property.Please advice.
Please check my following post
https://www.nitinbhatia.in/real-estate/property-document/
it is a flat
Sir I have invested in a property under construction and a clause in the agreement (which I and many others who bought property were unaware of) stated that “The Purchaser has informed the Promoter that the Purchaser is an investor and that the Purchaser has acquired the said Unit with the intention to sell and hence the Purchaser reserves his / her right to claim stamp duty set off / adjustment of stamp duty paid by the purchaser on these presents in terms of Article 5 (g-a) of Schdeule I to the Bombay stamp act 1958 in the event the Purchaser, with the prior written consent of the Promoter assigns the benefit of this agreement and his / her / their / its interest in the said Unit to subsequent Purchaser with a period of one year”
What are the implications of the above clause???
It is difficult to conclude just based on single clause as you need to check entire agreement in totality. Prima facie, this clause means you cannot sell within one year without the permission of the builder. Builder has put this clause intelligently under the shadow of Bombay stamp act 1958.