Be wary of property deals

Investment in real estate is loaded with multiple risks
Be wary of property deals
Representational Image.Source: Pxhere

Even as the outbreak of the coronavirus pandemic brought a wide range of miseries to the people on health as well as the economic front, it simultaneously created opportunities for better living. Among other things, people started eagerly looking for avenues to secure their financial health and be future-ready to face any distressful situation.

In the last two years of pandemic, amid huge job losses and drastic fall in their incomes, millions of people boarded various investment platforms as first-time investors in a bid to ensure their improved financial health.

Surprisingly, equity markets remained in festive mood with a rush of millions of first-time retail investors at a time when the virus was taking a heavy toll of life across the geographies. Meantime, we also witnessed a large number of raw retail investors trying their hand on other classes of investments.

When we talk of other classes of investments, it’s the real estate sector that tops the list. So, let’s today specifically deliberate upon investment in the real estate sector. The real estate sector is considered one of the most attractive investment avenues.

Over a period of time, the investment pattern in real estate has undergone a significant change where footfall of raw investors has increased with an objective to make ‘hefty’ profits in a single deal. These raw investors in the sector have been dealing particularly in buying and selling of residential properties to pocket big profits. They fervently believe buying a house or a piece of land as an investment.

Of course, it’s an investment. But the question is how good this investment for a raw investor is?

Apparently, investing money in sale and purchase of immovable property, for instance in the context of residential property, doesn’t bear the risk of losing the investment. Generally, the sector is prone to price escalation and rarely do we see an investor facing depreciation in his capital investment. But, this is also a hard fact that investment in real estate is loaded with multiple risks.

Let’s discuss it in the context of our place (J&K). Whatever the circumstances, real estate has outperformed almost all investment options. The margins in real estate deals are so attractive that once an investor parks his money in the sector, he stops looking at other investment opportunities around him. This they do despite the fact that real estate is an asset form with limited liquidity and is highly cash flow dependent.

However, the problem with this sector is that even a commoner tries his hand in real estate investment to make not quick but big bucks in a single deal. He hardly acquaints himself with the risks associated with this kind of investment. What I have observed is that these raw real estate investors get themselves into negative cash flow for a period that is not sustainable. This immediately forces them to resell the property at a loss. In many such cases I have seen people going bankrupt.

Negative cash flow is an investment situation where cash expenditures to maintain an investment (taxes, maintenance, etc.) exceed the cash income received from the investment. In other words, when a company spends more than it receives during a set period of time, the company is said to have a negative cash flow. This is often viewed as an indicator of financial ill health.

So for the lack of knowledge about the real estate market dynamics, these investors make big losses instead of accumulating big bucks!

The common real estate activities at our place are sale and purchase of built houses and land. Investing in land is a very different ballgame. With new market drivers coming in, investing in a plot of land having appropriate dimensions for residential/office purposes in an area has become an investment attraction.

We see a lot of such areas here, especially in the periphery of Srinagar city and even beyond that where real estate investors have been developing plots for residential colonies etc. and have begun to saturate. This saturation has led to increase in value of the plots manifold and has also turned the real estate market into a seller’s market. Precisely, it’s the seller who dictates the price of a plot or any other property in such conditions.

Does this mean investing in land is a magical investment? Investing in a piece of land is not as simple as it appears. There are risks associated with it and may remain hidden till an investor falls into a trap. The first thing which an investor has to bear in mind is that there might be a series of legal requirements to meet and procedures to follow before a piece of land is converted into a saleable item.

Let me explain – we have agricultural and non-agricultural land. As far as agricultural land is concerned, you cannot construct any kind of structure on it. It’s simply banned. For non-agricultural purposes, you still need clearance from the various authorities to build on it.

You also need to avoid investing in land which is included in some other developmental plan drafted by the government. You can own the land but will have no right to do anything with it. Even, maybe, you cannot sell it.

Remember, there is no getting around the government’s prerogative of eminent domain. There is a high risk when you consider investing in land situated in the cheaper rural areas. Precisely, when you decide to invest in land, you should ensure that it has a clear title and is demarcated properly. Land gains value only over periods of time. If left unattended, encroachments take place and this raises legal issues. So to keep the land marketable, you should not overlook developing it further, even though it was already developed when you owned it.

Precisely, the investment in real estate turns into a nightmare when an investor is not able to sell it on time to meet any exigency. While most of the investors will be aware of this risk, it is something they haven’t felt the impact of, until they are confronted head-on with unpleasant circumstances.

So, the best thing for an investor will be to take liquidity chances of his real estate asset, be it an apartment, house, land or shop, into account. There are chances that the asset will not get liquidated within his timelines. So, there is a need for alternative plans to meet any exigency to be put in place to mitigate such liquidity risk.

Then there is risk in value discovery. Normally, the value of a property is estimated on the basis of other recent transactions in the same area. Here the experts point out that the estimated value can go widely off the mark at times, leading to both value erosion as well as financial delay to the attached goals.

Lastly, you should seek knowledgeable guidance for investing in real estate if you want to mitigate the risk of being cheated. You need to engage the services of a real estate consultant in the case of sale or purchase of land. It’s the consultant who only can foresee all the difficulties that can emerge with any kind of property which you intend to own. You should know the person fully from whom you are purchasing the land or a built house – be it a property dealer or an individual.

(The views are of the author & not the Institution he works for)

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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