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8 things in Real Estate Regulations Bill which can affect Property Prices

by Manish Chauhan · 29 comments

It has been 5 yrs when the first draft of Real Estate Regulatory Bill came and then there were many amendments in it over the years. However on 4th June 2013, it was passed by cabinet and now the next step is to table it in parliament this monsoon season and if our country people are really lucky, it will finally become a ACT of law.

real estate regulation bill

Real Estate Sector is hugely unorganised and against buyers

We all know that real estate sector is so much unregulated and unorganised. There is no proper guidelines on any thing and builders use this to make maximum out of the situation and take buyers for the ride at every level. Builders and Politician nexus is very known and from last 10-15 yrs, the real estate prices has crossed the level that a common middle class family would never be afford their own house.

In this scenario, the real estate regulations are not just a requirement, but a big need of the industry if our economy and society needs to some stability over long term. In this article we will discuss all the major points in real estate regulations. There are many good points in the regulation and it will help the industry, however like any other law, this bill also have many loopholes and many rules can be exploited by the builders. This bill whenever becomes the final act, will only be applicable to new real estate projects, not the ongoing and completed projects.

From last few days there has been a great amount of discussions over various news portals and discussion forums on how this regulations will be a great thing and how it is just another failure. So lets see major highlights of the regulations

1. Mandatory to acquire all clearances before the launch

As per the bill, it would be mandatory to acquire all the required clearances from relevant authorities and govt bodies before formally launching the project. Right now builders launch the project when there is nothing more than plain land on the site and have no permissions for anything. They give rosy pictures to investors, start taking the money from public and then start the overall process of acquiring the land, getting approvals, and coming up with the structure. This means there will be obvious delays and lots of confusion and frustration for investors.

With this, the concept of “pre-launch” offers will vanish and you can expect the prices of the property be high on launch. A lot of people are saying that because of this, their might be slowdown on supply side, because right now a builder keeps launching new projects. Another requirements is that, these permissions taken are to be displayed on the website of the developer.

2. Use of Photograph of actual site for advertisements

As per the bill, the builders will have to use the actual sire pictures or the actual construction work pictures for advertisements for the project. Right now builders do not use the actual pictures for promotional purpose.

Its easy to create an illusion by using graphics and shiny pictures and that is what happens most of the times. Builders use classic graphics image of the project site which is full of greenery and nature around it and the feeling it gives you is that its an oppurtunity one cant miss. However in reality the project site is quite different. It might happen that there are buildings around it and no trees or any natural habitat. The roads around might be bad and the elevation of the project site might be high or low than the normal.

If a builder is found to be putting up misleading or wrong advertisements, then there can be a jail term of up to three years, if its done repeatedly.

3. Sale of property as per prices linked with Carpet Area

The bill says that any sale proceedings should be using the prices which are linked with carpet area and not super built up area. Generally builders use “super built up area” as the parameter and define the per sq ft price as per that. Carpet area is the net usable area which can be used for living purpose (imagine you lay down carpet, then how much area it will cover), however super built up area (or salable area as called by many builders) is combination of net usable area, area covered by walls, doors, parking area, staircases, temple in side the project, gym, garden and everything you can imagine which is part of your package (divided per buyer). So super built up area becomes high and the per sq ft price looks small, however if you divide the whole cost by the carpet area, then you will realize how much you are paying.

You should also know that even in agreement, only carpet area is mentioned. However builders quote the pricing only on super built up area.

4. State Level Regulators and central appellate tribunal to be set up

The bills also says that a central appellate tribunal should be set up as a central body and each individual states should also have state regulators. This means that there would be some central guidelines for real estate sector and builder and each state will focus on regulating their states real estate builders. There might be few rules different from states to states. I personally feel that there might be some confusion due to this.

5. Real Agents/Dealers needs to register themselves

Right now, real estate agents and dealers are not at all registered with any central/state body and hence due to highly unregulated environments, they do not have any code of conduct or service standards defined. Now they will have to register themselves and will have clear responsibilities and functions. Consumers will be able to demand their rights from agents and dealers for the amount of commissions paid to them.

6. Separate bank accounts for every project

As per the bill, A builder will have to maintain separate bank account for each and every project and upto 70% of the funds for that project has to be there in that same bank account. In the previous drafts, this number was 100% (means no money for Project A can be used in Project B) , but looks like the builders and politicians lobby has been successful in diluting the quality of the bill wordings and in new draft now the number is 70% or less. It does not serve the protection for buyers because builders will still be able to divert 30% of the funds from one project to others.

Right now, the way it works is that a builder when faces a severe cash crunch launches a new project and uses the money collected in other project to complete the old project and this cycle goes on. This creates a lot of issue for home buyers because there are huge delays at times. Firstpost did an excellent article on this topic and concluded that real estate is a kind of ponzi scheme

7. Builders cant take more than 10% advance without a written Agreement

A builder will not be able to take more than 10% advance money from buyers without a written agreement. Right now a lot of dealings happens by paying a huge advances and the agreement part is delayed by many. In many cases agreements happens after many months or years, as lots of transactions happen on trust basis. This might help in curtailing some part of black money transactions. However only you guys can tell some real life cases which this clause might not help and fail.

8. Full refund with interest, if property not handed over time

As per the bill, the builder has to refund your money along with the interest, if he fails to deliver the project on time. At this moment, this point gets added in the agreement and almost all the times, builders make sure that this point is omitted in the agreement and if its not there, you have to file a consumer court and after a long time, you are rewarded your right. However the bill will make it a standard rule or clause.

The Bill rules applies to project over 4,000 sq meters in size

The biggest worry about this bill is that its applicable only to projects which are of 4,000 sq meters and above size overall and if a project is bigger than 4,000 sq meters, the bills allows to break the whole project into different phases and see each phase as different project. Now this clause itself destroys the protection layer for consumers. Because a builder can always break the whole project into different phases and show them as separate project. Many builders anyways run various projects under different companies name to save on tax. So running two or more sub projects on different names (which are actually just one project side by side).

The old draft of the bill had this number at 1,000 sq meter, but this current recent bill has it at 4,000 sq meter, so again someone has been able to influence the bill.

No Single Window Clearance for Approvals

One of the major challenges and problems builders face is about the govt clearances and various approvals . This takes a lot of time and opens up the gate for bribes and bureaucracy, the bill does not address this problem at all. It would be great if there would be a separate govt department which would have a single window clearance. This would help in defining the project completion time with more accuracy.

Will all this reduce the property prices or not ?

This is the million dollar question which is in every body mind, that with this bill, will the prices of real estate come down or not, which is the biggest issue common man is facing right now, compared to any other issue. Delays and consumer exploitation is all fine if prices are normal and affordable, but if prices itself are so high that its out of reach of common man, then every other problem is secondary.

Here is a copy of the Real Estate Bill which I got from Moneylife article

There are many implications of this bill and tons of factors and variables which can affect real estate prices. Some are saying that prices might go up and some are saying pricing might come down. But It would only be clear when the bill becomes a reality.

However, we would like to hear what you think about this real estate bill and how it might impact the real estate prices?



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{ 29 comments… read them below or add one }

1 jeetu ojha June 13, 2013 at 10:59 am

Dear Manish

Good Article .. :) it helps us to know better view about real estate law.

Regards
Jeetu Ojha

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2 Manish Chauhan June 14, 2013 at 10:53 am

Thanks Jeetu

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3 Hemant June 13, 2013 at 11:12 am

The old draft of the bill had this number at 1,000 sq meter, but this current recent bill has it at 4,000 sq meter, so again someone has been able to influence the bill.— I dont think this will be ofany use as the laws will be there on books but who would implement them. This statment above is killing the soul of bill. Always there woiuld be very rare projects above 4000 sqmt, means bill remains in books.

Again the nexus of Builders and politicians are there to make sure common man is looted and i clearly can say,,, this will take prices upwards since there is no clause about price part of property,, the profit limits by builders… nothing so it ramains again one more useless law.

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4 Manish Chauhan June 14, 2013 at 10:53 am

Thansk for sharing your views on this topic Hemant !

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5 Hemant June 14, 2013 at 2:32 pm

Thanks Manish,

But mine are own fristarations out of experience to buy a propoerty.

Inspite of all inteligence and knowledge,, we have to become fool to buy a property which hurts.

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6 Manish Chauhan June 22, 2013 at 10:44 am

Can you share your case Hemant

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7 Sambaran Mitra June 13, 2013 at 11:30 am

A thought provoking article, Manish. I am against bringing in real estate regulation. There was a discussion on the same topic in subramoney.com about a year back. I agreed with the views of one ‘pravin’ in the comments section of the following blog:
http://www.subramoney.com/2012/03/need-a-regulator/

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8 Manish Chauhan June 14, 2013 at 10:53 am

I saw your points on subra article , I agree to them :) . Anyways this bill will take a lot of time to come :)

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9 S S Subramanian June 13, 2013 at 11:49 am

Nothing will work unless there is a proper machinery for implementation of the rules and regulations. Indian laws are fantastic in their reach and scope and can be compared to the laws of any developed country. But the problem arises when the implementation comes. The dispute between the promoters and buyers of real estate is a civil matter and if a case is filed by the buyer, the case may not be heard till the great grand children of the buyer. That is the reason why many buyers just accept the deal of the flat promoter and keep quiet. Unless there is single window scheme for clearance of the project it may take several years for all approvals to be obtained. The existing Land Ceiling Acts in the various states is the single impediment for the real estate industry. The second impediment is the stamp duty. These two or the main reason why the promoter never holds the land title in his name and always works with a power of attorney from the original owner. When there is a big project there will me multiple owners and the promoter will be having several PAs for the various bits of land. Unless these basic issues are solved this bill will be another piece of non-implementable legislation, which will help neither the promoter nor the buyer.

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10 Manish Chauhan June 14, 2013 at 10:52 am

Yea . I agree that single clearance window is such an important thing needed in real estate industry ! . thanks for sharing your views on this topic !

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11 udaykiran June 13, 2013 at 12:35 pm

“Sale of property as per prices linked with Carpet Area”

- The builders would increase the per sq.ft price obviously.

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12 Manish Chauhan June 14, 2013 at 10:51 am

Not sure why . They will just convert the numbers to look like same . The point is to give a fair feeling to buyer !

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13 Simple Bhandia June 13, 2013 at 1:10 pm

The law is not at all consumer friendly.
As far as the bigger projects are concerned, normally the builders to get all the approvals sooner or later because otherwise they cannot continue with new projects forever as their reputation will be at stake.
The problem is with smaller projects where many a promoter is known to disappear after selling the property and the buyers realise later on what issues there were with the land or permissions etc.
To top it all the larger builders in such a scenario would have to pay interest on their investment of land and holding on to the property till all permissions are received and they will naturally cover this by increasing the price. However it may well happen that if properties dont get sold, then the prices go down. But that seems improbable as real estate is seen to be the best investment option possible for most of Indian upper middle class.
With smaller builders, they can fool their customers into believing that their investment costs are higher due to the new laws and charge higher as most people dont go into the details of the laws but only just have an overall picture and that too seldom.
So all in all it seems that prices will rise and the beneficiaries are going to be the builders again.

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14 Manish Chauhan June 14, 2013 at 10:49 am

Thanks for sharing your views on this topic

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15 Kunal June 14, 2013 at 3:47 pm

On the contrary, Smaller builders complete and hand over the project quite swiftly. Bigger developers HDIL, Nirmal, Lodha, Hub town, DB all have projects running more 4 yrs behind schedule and still nowhere near completion.

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16 Anil Bilawala June 13, 2013 at 1:36 pm

I agree that we need good regulation to organise the Real Estate sector as well as protect the consumer.
However, the views and article seem to have a ‘victim’ feel to it. I think we like to blame someone for our own ignorance or greed. Let me explain …
Ever wondered why Real Estate is an Unorganised sector even though it is one of the top employers in our country … Manish your views on this
Even though price are HIGH …. money keep flowing in … WHY?
Significant part of the problem is that as a society we like to deal in CASH and we accept corruption both lead to Real Estate being a parking ground for undisclosed wealth.
Will add more thoughts later …

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17 Manish Chauhan June 14, 2013 at 10:49 am

Yes . Thats good point . Consumers are as much to blame as anyone !

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18 angan chandra June 13, 2013 at 3:25 pm

The cabinet approve real estate regulation bill. Looking to the bill a common man will surely be happy because all the point related to consumer are protected in the bill. But wait a minute, they keep open the government part, i mean the approval process of any project. It usually takes almost 2-3 years to get any project approval & after getting approval it again takes around 2-3 years to get the project completed. So almost 6-7 years it will take from approval stage to completion stage. So if a builder apply for a project in year 2013 he will be in a position to hand over the final product to any consumer at the year 2019-2020. The prices of material,land will be up everyday, then who will bear that cost???? Builder obviously transfer this to the consumer. So ultimately consumer has to pay more.
And the bill has passed, to get it executed it will take long time!!!!

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19 Manish Chauhan June 14, 2013 at 10:44 am

Thanks for sharing your points in details . I agree to those at some level

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20 Praveen Kalyani June 13, 2013 at 9:47 pm

This is a small leap taken to regulate the the sector. There are loopholes like
1. sub-division of the project – which will really make this whole bill useless. 2 No single window (as there is SEBI for Stock market & RBI for Banking) as different states have their own policies.
But if implemented correctly, prices may comedown.

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21 Manish Chauhan June 14, 2013 at 10:41 am

Thanks for sharing your viewpoint . I would say lets wait more for this bill to change, I am sure it will still take few months/years :)

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22 Anil Bilawala June 14, 2013 at 3:01 pm

As a general public we are beneficiaries of many scams in our daily life …
1. Insurance – ULIP scam/ mis-selling
2. Chit Funds – Sahara/ Shardha
3. Stock Market – Over pricing of IPOs & price rigging by mid-cap promoters
4. Telecom – Raja
5. Coalgate
6. IPL
7. Visit http://en.wikipedia.org/wiki/List_of_scandals_in_India for a comprehensive listing

So the onus is on YOU to be smarter … thats what Jago Investor is endeavoring to do

Can you depend/ reply on the Govt or Judiciary or Regulation to protect you????

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23 Manish Chauhan June 22, 2013 at 10:42 am

Thanks for your point

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24 Sarvesh Soman June 14, 2013 at 4:41 pm

Dear Manish / Jago Team,

Your articles and the topics you choose are irresistible to read. Despite time constraints, i still glance at all your emails. This one – which i read till the last word is simply great. Good work. Keep it up.

Regards

Sarvesh Soman

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25 Manish Chauhan June 22, 2013 at 10:41 am

thanks Sarvesh :)

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26 Satya Gupta June 14, 2013 at 7:36 pm

All things such as carpet area etc. which give misleading picture to the prospective buyers are OK in bill. But single window is the need of the hour which is missing from the bill. Apart this there is strong need for Central regulator such as IRDA. TRAI etc. In fact state level / local politicians do not want to loose to control over this sector hence this provision. The same is the reason for not having single window clearance of the project. Regarding the dilution of the 1000 sq ft to 4000 sq ft, it can be ok but with a safeguard side by side projects can not be split into two or more project just to evade this provision. Lastly allowing the use of 30% money of one project to other projects is too high it should be more than 10% just to allow project not to suffer from cash crunch with the provision that money is deposited back to the other project’s account whose money is utilised within a stipulated time period say 90 days or 120 days.

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27 Manish Chauhan June 22, 2013 at 10:13 am

True .that the most important thing real estate needs right now

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28 ajay June 19, 2013 at 4:32 pm

Dear Manish / Jago Team,

i have one question but not able to find the appropriate space on the site so i am posting it here.

I purchased an under construction property and financed it from HDFC. now i want to sale it before possasion from the builder (now property is ready to move condition). can you please tell me what will be the procedure of closing my home loan and what i need to see carefully do i need to pay any pre closing charge.

Thanks,
Ajay

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29 Manish Chauhan June 21, 2013 at 11:49 am

You need to shift it to the new buyer, if he is ready to take it , else you take the full payment from the new buyer and pay the home loan in one shot. Note that only bank will be able to guide you on the exact procedure !

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