Evaluating buying opportunities in the Resale markets

This is the last in a series of three posts I started writing three weeks ago. In this post, I will evaluate buying an apartment through the resale market including its advantages and disadvantages.

For a complete understanding of which option is most suitable to your circumstances, I recommend you read the preceding two posts regarding buying in a soft launch and a hard launch.

Defining resale option: For the purposes of this post, when I refer to resale options, I would point towards apartments which are still under construction and therefore currently not available for possession. The time to possession would vary from one option to the other and could vary between 6-24 months.

In the current RE environment in India, the resale market offers some very lucrative choices as compared to the options available in soft launch and hard launch.

Advantages:
1. In the current market environment in the NCR (excluding Delhi), resale market offers some of the best deals on buying a new apartment. Infact, the slowdown in sales has prompted a lot of speculators/investors to exit their holdings so as to enable them to meet financial commitments made elsewhere. Tip:During the last 2-3 years, a lot of speculators/investors purchased apartments with the intent of selling them for a quick profit. A lot of these investors have exited their holdings but some of them have been holding on to their stakes in the hope that markets will go back to the accelerated growth rates of the boom years. However, since most of these speculators/investors have other financial commitments, they may not like to hold on too long. Infact, a lot of them have been selling over the last several months (remember, these investors bought them much cheaper and are still selling at a profit) opening up very attractive options for a new set of investors and end users.

2. In the current market environment in the NCR (Faridabad and Gurgaon in particular), resale prices on apartments are cheaper than apartments being offered in hard/soft launch by anywhere between 15-30% (psf rates). Tip:Since an apartment available in the resale market was launched earlier and will (most likely) be completed earlier than a new launch, to purchase an apartment in the resale market you will have a higher upfront outflow. Let me explain further through an example:

Scenario I (Buying in resale market)
Size of apartment =2000 sq ft
Price in resale =Rs.4000 psf
Total price of apartment=Rs.80, 00,000
Installments paid to developer (A) =Rs. 40, 00,000
Profit to seller (B) =Rs.5, 00,000
Brokerage (1% of purchase price) (C) =Rs.80,000
Total outflow for buyer at time of purchase (A) + (B) +(C) =Rs.45, 80,000

Scenario II (Buying in hard/soft launch)
Size of apartment=2000 sq ft
Price in hard/soft launch =Rs.5000 (this is in a comparable development in the neighborhood)
Total price of apartment=Rs.100, 00,000
Payment requested by developer (10% of purchase price) =Rs. 10, 00,000
Total outflow for buyer at time of purchase=Rs. 10, 00,000

Therefore, when you compare scenario I and II, you can see the reason why developers price the apartments higher than comparable options in the resale market. As a buyer in scenario I, you will start paying interest on a much larger amount as compared to scenario II. However, always remember that, down the line you will end up paying the same amount towards interest in scenario II as the developer begins to demand future payments. Tip:In scenario I, you are paying a higher amount towards interest but the apartment is probably 12-18 months from possession. In scenario II, you are not paying anything towards interest now but the apartment is probably 36 months from possession. In addition, you are paying 25% more towards the base psf price in scenario II. If you can afford to pay the equated monthly installment (EMI) in scenario I right away, it is certainly a better economic decision than scenario II. Remember that in scenario II also you will have to start paying EMI’s -maybe 6 months from the time you make payment towards booking the apartment.

3. Since you are purchasing the apartment in resale market, the developer has probably already started construction on the project. This gives you the ability to go see the construction activity before buying and therefore gives you a sense of confidence about the capability of the developer. This is in direct contrast to soft/hard launch where you may not be able to gauge a developers capability. Ofcourse, this is relevant incase the developer is a completely unknown entity and has no past record.

Disadvantages:
1. A significant percentage of deals that are closed in the resale market in India have a “non-cheque” component attached to them. This is the component that needs to be paid to the seller of the apartment in cash! The buyers like to take a part of the payment in cash so they can avoid paying taxes on the capital gains. As a buyer of the apartment, you have the following disadvantages of paying part of the payment in cash:

(a) The bank will not finance the cash component of the apartment towards home loan. Therefore, the component to be paid in cash will be part of your contribution (in addition to the 15% down payment you have to shell out). This is one of the biggest reasons why some end users choose soft/hard launch option even though it may be more expensive-there is no cash component involved in soft/hard launch. Tip:Some sellers may be willing to take the entire amount in cheque. However, to accommodate this request, they will increase the psf price marginally to offset the incidence of capital gains tax they will incur. Ask your broker to negotiate this on your behalf.

(b) If you make part payment in cash, you may have a problem with capital gains incidence at the time of sale. Let’s take an example- say you buy the apartment for Rs.80 lacs (70 lacs cheque and 10 lacs in cash) and you sell after 3 years for Rs.100lacs. Therefore, your profit is Rs.20 lacs. However, if the buyer of your apartment wants to pay the entire amount in cheque your capital gains incidence will be on Rs.30 lacs (Rs. 100 lacs less Rs.70 lacs). If you had not paid any amount in cash at the time of purchase, your capital gains would have been on Rs.20 lacs.

Resale opportunities in NCR in the current market
1. I believe there are significantly discounted opportunities available in the resale market in Faridabad and Gurgaon. Tip:Options in the resale market are currently available at a discount of between 15-35% compared to new launch prices in the same area. Consider options in sectors 78-89 in Faridabad and Sohna road in Gurgaon.

2. To evaluate a good opportunity in the resale markets, compare psf rates with comparable new developments. Tip:A discount of 15% or more to comparable new launch prices may be a strong buy signal. Ofcourse, you must consider other points I have highlighted above to make a final decision.

More later,
Ashish