REAL ESTATE COMMON BUYING ERRORS

Having covered the prevailing myths and misconceptions in the “Finance” and “Real Estate Industry” let us move a step ahead and see what common investment errors buyers commit in real estate.

There is this wonderful book by the title “All I want to know is where I'm going to die so I'll never go there”; it is based on the idea to avoid fatal follies. Although it is utopian to think that errors would not happen, it is also a suicide to commit the errors which have already been done by others.

Let us gloss over the list, one has prepared. The most unbelievable part is that the list is formed of errors which are mostly commonsensical and do not require any specialized finance knowledge.

ERRORS INVESTORS COMMIT IN REAL ESTATE TRANSACTIONS

(A) Buying bigger brand names and without paying heed to purchase price.

This is akin to buy“blue chip” stocks without any consideration of the buying price. So a “brand name” is substituted for spending time on product research.

(B) Buying what is available nearby.

For example, for those staying in Dwarka, the first choice for investment becomes Dwarka or Dwarka Expressway. This can be a criteria but CANNOT be the only criteria for making an investment decision. Another version of this error is buying in known locations, such as, those living in Delhi have a tendency to buy in Gurgaon, Faridabad and Noida. The problem in this kind of approach is that the known location is known to everyone and hence valuations are high resulting in poor returns.

(C) Noise in the market

Everyone might seem to be talking about Golf Course Road this year and then next year the noise may shift to New Gurgaon and then next year to Sohna Road and so on and so forth. One year the idea is “luxury”, the next idea is “Golf Themed properties”, the next is “Skywalk properties” and so on and so forth. A lot of buyers base the buying decision on these aspects and assume prudence.

(D) Relying on inadequate research of online portals

Lots of time buying research is based only on property websites such as 99 Acres, Magic bricks etc. These websites are important tools but buying based on just this much of research is inadequate.

(E) Seeking personal advice rather than professional

Lots of time buyers seek and follow the advice from friends and family who are equally clueless and unqualified to dispense such advice. Closeness is valued more than professional competence.

(F) Promotions by Builders

During different times, there would be different builders promoting their products. During these marketing campaigns, it is made to seem that only the said product is the best and most sought after. This creates an availability bias and should be guarded against.

(G) Herd Mentality

A very common error is to buy what someone known has purchased. Someone known could be a friend, relative or even a neighbor. The problem in this kind of buying is that people have no idea why the other party made the purchase. In common parlance, this kind of buying behavior is often referred to as “Herd Mentality” or “Sheep Walk”.

(H) Lack of understanding of Product Life Cycle

Buyers do not spend required time on understanding the “Product Lifecycle” in Real Estate. Different products have different types of timeline based returns and behaviors. The failure to understand product lifecycles results in sub-optimal investments.

(I) Not working out detailed costs

Another major investment fault is not working the costs in detail. Buyers should try to find out each and every cost, down to the last paisa. This should not just be the costs one would pay to the seller, but should also include costs towards making the asset fit for being leased, transaction costs and ongoing maintenance costs. Surprises in costs are usually punitive.

(J) Not keeping the preferences of end-user in mind

A lot of investors buy with keeping their preferences in mind. For the sake of elaboration, a lot of time investors buy offices which they assume would be the ones they would like to operate out of. The fact remains that the choice should always be made trying to understand what an average user would desire. This removes personal choices and by extension subjectivity from the decision making.

(K) Confirmation Bias

Another common error is, to first decide and then find evidence which is in conformity with our decisions. The challenge is we also discard the evidence which does not agree with our decisions. Psychologists call it “Confirmation Bias”.

(L) Falling prey to false promises

A lot of investors usually underestimate their financial needs.The reason for this mistake is that saving and investing is a mentally and physically painful task, hence people try to save and invest in their comfort zones. The result is that they fall prey to false promises, make inadequate investments, expect superlative returns constantly and end up disappointed and eventually, usually cheated.

(M) Problem of Plenty

The mere availability of options is considered to be“Diligence”. Buyers usually generate a lot of options and then make a choice at the rolling of a dice or dices. Basically, the “Feel Hard work” factor is that options have been generated and since so many options were generated hence doing an “Akkad BakkadBambe Bo” should help in choosing the right investment.

(N) Smart Packaging of Sample Flat

Another common error is giving into the glitz of the “Sample Flat”. The furnishing and fixtures in a sample flat usually do not reflect anything except “smart packaging”. A lot of times people fall easy prey to this trick.

(O) Relying on Newspapers, TV for Real Estate decisions

If there is one very important habit which “investors” should pick then it is to stop reading newspapers, financial TV channels etc. The newspapers are in the business of selling news and hence facts are routinely distorted. The facts and information should be gathered from more direct sources such as sellers, buyers and intermediaries.

(P) Falling prey to the scheme / freebie

There are no free lunches and should never be sought. When a seller, mostly a builder is offering a “freebie or a scheme” such as a “subvention”/“buy back” etc, please always see what is the actual cost of the scheme. Do not fall for the short-term fix of the scheme. To be diligent in buying assuming the scheme was not there would you have purchased the property?

(Q) Not giving enough time

For important decisions,“Time” is needed. Time is needed to start the process, accumulate data, to process the information, to develop understanding, to complete the transaction among other things. Most of the time, investors spend a lot of time deciding to start the process and then want to wrap up everything very fast. The idea should be the other way round i.e. to take a decision to invest without hesitation and then take things slow, one by one, step by step, deliberately and without any haste whatsoever.

Although this list of errors is not exhaustive but would still serve as a reminder what should be avoided bare minimum to ensure that investments turn out to be profitable.