Real Estate Bill – Protecting consumer interests

File picture of a construction site taken from http://www.thehindubusinessline.com

On 9^th November 2011 Ministry of Housing & Urban Poverty Alleviation (MHUPA) of Government of India released a draft real estate bill to regulate the real estate sector which is largely unregulated so far. MHUPA needs to be appreciated for their efforts and for showing intent to protect the consumer interest. Once again, it’s time for the political class of this country to stand-up and show some political will that promotes public good. The bill will be tabled in the parliament in winter session and MHUPA has invited comments from industry and civil society for a period of 1 month. The draft real estate bill is a small 29 page document and responses can be sent to responseonrealestatebill@yahoo.in

This bill is a breath of fresh air since the hapless home buyer is effortlessly muscled down by real estate developers. It was long overdue and am glad that finally at least the draft has come.  On the face of it, the real estate sector has welcomed the move behind a façade that some unscrupulous, fly-by-night developers indeed cheat the consumers and the bill will help restore credibility to the sector.  However, almost all, including the most reputed players in this sector quietly continue to squeeze the hapless home buyer in many ways that we are all aware of.

Let’s discuss the most vicious of the exploitation case and then I will quickly summarize what I have understood about the bill, and then close this post. 

The most vicious case according to me is when the developer accepts part-payment from the buyer and commits a delivery date for handing over the possession to the buyer.  However, when the developer is unable to make the full sale of the property he intends to develop, he holds to payments he has received and completely stops work (or works extremely slowly) on property development. Worst thing is that, the buyer, who has made the payments, is pestered by the banks for their pre-EMIs and the developer refuses to return the money. So the hapless home buyer, for no fault of his, continues to lose money and doesn’t even get his dream home. On the other hand, if the buyer defaults on payment he is charged a 18% to 24% penalty. Why should the developer’s inability to sell the remaining property become a buyer’s liability?

Now let’s discuss why the developer is not able to make the sale and achieve financial closure for the project. This is largely because he is legally safe and does not have a legal obligation to deliver the house on time. It’s sort of only a moral obligation which developers hardly care about.  The developer exploits this loop hole by dictating a certain price for which he finds no buyers.  But he still holds on to that price because he wants to protect his margins and continues to legally hold on to other people’s money without any liability. Why on earth would he then hurry to finish the sale? After all, he is not the one who is losing any money. That’s precisely the reason why real estate prices hardly ever reduce in metros like Mumbai. The supply-demand argument IMHO is a hogwash and largely untrue.  The real estate sector in India is largely run like blue line buses in New Delhi where the driver and the conductor stop and pick up from anywhere and wait until the bus is full with passengers. Instead it should be run like the BEST buses in Mumbai, where the bus halts only at the designated stops and is quickly on its way. 

Now, the real estate developer community is a bunch of smart people and they realize the damage to their reputation if they continue doing so for a prolonged period. So they invoke this strategy only when there is a slowdown in the economy. During boom time they have enough buyers and hence have enough motivation to complete projects, however during slowdown they adopt strategy mentioned above and use the projects completed during boom-time as their shield to deflect questions on their integrity.  For many, buying a house is once-in-a-lifetime event and the buyer is blissfully unaware of all these strategies and gets needlessly grinded.

So, how does the bill change or at least propose to change all of this?

The salient features of this draft bill are :

• Each phase of the project will have to be registered separately with the government (So now the developer won’t be able raise any unauthorized structures and sell them to naïve buyers)
• The builder will have to submit details such as size of plots, layout plan, and facilities proposed in the project. (So now, a builder will have to build all the fancy things that he promises but never ends up building.)
• Builders issuing misleading advertisement for sale of flats or unnecessarily delaying projects will also come under scrutiny
• Three years imprisonment or a fine up to 10 per cent of the project cost, if any builder “wilfully” develops or constructs projects without first registering it and obtaining a certificate from the proposed Real Estate Regulatory Authority (No construct-it-first-and-regularize-it-later business – a straight attack on corruption)
• 70 per cent of the amount taken from allottees from time to time will have to be deposited in a separate (bank) account and can be utilised only for that particular project.(No more juggling money and also it will prevent errant builders from collecting money when they are not authorized)
• The bill only deals with regulation and development of real estate. It doesn’t say anything about pricing (So you still can’t do much about obnoxious prices, but hopefully once you enter a deal you will have legal protection from this bill and a weapon to nail the errant builder)

I would say that’s a good start. Am keeping my fingers crossed and hoping that the parliament passes the bill without any dilution and consumers get their long awaited dues and don’t have to feel helpless in front of powerful builders.

That’s all I have for today.  Would love to hear your thoughts and opinions. Please, do comment.