PRICE TRAP FIVE – THE VALUE TRAP

How did ABHIMANYU feel when he found himself in the Chakravyuh or the TRAP laid by the Kauravas. 

I am sure, he felt no different than an Indian Home Buyer. An Indian Home Buyer too has traps laid down for him at every step

We addressed four such traps earlier,

  1. The Big Brand Builders
  2. Location
  3. Heavy Marketing Push&
  4. Cosmetic Improvement in Design

Today, we address the 5th Price Trap – The Value Trap.

Read on and do not let yourself fall prey.

So you are the bargain hunter? Well, be ready to fall prey to what one would call VALUE TRAP”.

“Too good to be true” is the phrase that hunts you down. Sometimes there are projects in the market that are promoted at very attractive price – rather at “too good to be true” prices. What adds weight to the offering is that the said projects might be promoted by known and/or relatively big sized entities/developers.

Mostly, the projects are in pre-conception phases and the market is fed with misinformation toget bullish with a lot of speculative appetite. The prospective buyers are willing to believe this propaganda.

Pressed with time, are you?

Pressed with time, are you?

This aggressive and rather predatory pricing naturally creates an attraction for the buyers who are starved of right priced products and are struggling to buy their dream homes, shops, offices etc. Taking advantage of this internal and very strong desire the “Value Trap” is laid.

The next step of the process is to create very limited-availability window for these under-priced projects.This creates a lot of time pressure. The thoughts of the buyers are being made to go in 1 direction i.e. only focused on the “Price” without any mention of underlying risks.

The modus-operandi

 

The modus-operandi

This is how it works. The promoter comes up with a sub market and a lucrative price. The operators (big distribution houses) pump up the market with high spend marketing, thereby creating a price hook for a short time and the buyers cave into the pressure.

What is amusing is that caution gets totally thrown to the wind. No one even asks basic questions relating to the delivery of the project. Questions are considered blasphemous and met with disdain. Let alone due diligence questions, even basic queries are summarily rejected.

Questions such as

  1. From where the developer will procure or pay for the land which is being or has been contracted to be paid for the project.
  2. From where the developer will purchase the required “Raw Material” and how they will contract the labour required to complete the construction.
  3. How the developer would meet other routine administrative expenses.
  4. How the developer would make any profit at all and if there is no profit why they would be in business.

Remember this feeling!

Remember this feeling!

The above questions are either not answered or are answered by broad statements such as

  1. The developer is trying to capture market share in this project and would make profits in the next project.
  2. This is the starting price and there would be an averaging of price going forward to be viable.
  3. The developer has in house construction and hence would be able to muster construction at very low costs.
  4. The land purchased is very old and hence it is at a very low input cost.

And many such general statements that have no logic or basis.

Now these may or may not be valid explanations but to again re-assert here that the price being offered is UNREASONABLY, UNREALISTICALLY low & hence UNVIABLE. In short, most of these explanations do not make any sense. Yes, I mean they are nonsense.

CASE STUDY

For illustration purpose – in the year 2011, ERA Landmarks offered a starting price of Rs. 2600 per sqft on the Dwarka Expressway. That time the development cost was Rs. 3500 per sqft plus (not taking into accountthe profits).

Similarly, BTPL offered a project at the price of Rs. 2300 per sqft in the similar area.

In the year 2007 “M Tech” had offered a price of Rs 900 per sqft when the market cost viability was Rs 1400 per sq ft.

Now most of the projects of these builders have faced a uniform fate – A TOTAL DEFAULT or SUBSTANDARD DELIVERIES, in complete violation of what was promised.

Hence whenever there is an aggressive down marking of the price in an otherwise bullish market it is pertinent to ask these questions.

How would the promoter ever be able to pay its vendors and suppliers at the selling prices being quoted?

Even if the construction is super efficient, the construction costs at best can be pared down by 20% but a real cost still does exist.

Still looking for their Hidden Agenda?

Still looking for their Hidden Agenda?

The biggest question to be asked is that when the market is supportive and bullish, why is this developer ready to under-price its project. What is the reason for providing such attractive prices? I am sure philanthropy is not the reason? So what is the catch?

In most cases, the hidden agenda in such offerings is as follows.

  1. The builder needs to pay for the land itself and is collecting money under an unapproved residential scheme.
  2. The builder has already plans to siphon off the money to meet outstanding expenses or to pay for another project where he is stuck.
  3. The builder never plans to actually launch a project and is planning to commit an outright fraud and is supported by a buoyant market sentiment.

Hence whenever a Developer offers a very attractive price which is at a significant discount (say anything equal to or more than 25%) to the market then please exercise caution. Better would be to stay away when they are under construction projects.

At times, in sluggish markets, one may find attractively priced projects, especially in the ready to occupy stage.If there are no legal/technical encumbrances, after exercising a lot of due diligence, such projects can be potential multi baggers in due course.

To summarise, it can be said that a low price is for sure an attraction but if the fixation is just low price without caution then it usually ends up in a trap. More so in Bullish markets.

Still thinking, Abhimanyu? Time to be a Arjun!