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Sep 19, 2011, 04.46 PM IST
Since the last few years, group buying has been touted as a viable option for home buyers looking forward to get attractive discounts.
Utopia Builders is a real estate company. The company has just built a housing complex comprising of 55 flats. Since the real estate market is down, Utopia could not sell all the flats and is left with 25 flats still up for sale! Utopia is ready to give heavy discounts if someone can buy in bulk, say 5 flats. Quite a few builders are in a similar situation as Utopia. In spite of the heavy discount for a bulk purchase offer, there were no takers as why would anyone want to purchase 5 flats in one go?
Ramesh, Shan, and Sayeed are software engineers at Pune, Mumbai, and Bangalore respectively. They know that the market is down and want to make the most of this situation to buy a home. However, they are not able to find a good property deal with attractive discounts in such a subdued market.
How can Utopia Builders and potential home buyers like Ramesh, Sayeed, and Shan get in touch with each other? It seems obvious that if these potential buyers and Utopia Builders got together, a mutually beneficial arrangement can be worked out!
Group Buying – a new trend in real estate buying
This is where the group buying concept comes into the picture. Since the last few years, group buying has been touted as a viable option for home buyers looking forward to get attractive discounts.
Here is how it works: Potential home buyers connect with one another through a common platform, usually provided by a third party or a group buying company (referred to as company hence forth), and form a group. The company then goes to the builder with a couple of orders and negotiates for possible discounts. The builder, sensing a good opportunity to sell a number of his properties, agrees to the discount. Typically, there is negotiation on discount but the discount is higher than what is offered in individual cases.
There are exclusive platforms such as http://www.groupbookings.in/ , dedicated to group buying of homes, which help individuals to sort themselves out into like-minded groups, who are interested in bulk purchases of certain properties. Once a group is formed, the company negotiates with the builder on the group’s behalf to get better discounts.
Compelling proposition for property developers
One of the reasons for the popularity of group buying is the advantage it offers to builders. Usually down payment in group buying is higher and hence developers who are just starting to build the complex get much needed cash. In the era of high interest rates and uncertain stock market, the higher down payment comes as a blessing for cash strapped developers.
Moreover, developers get a readymade market to sell their properties in bulk without spending anything in customer acquisition and marketing. This reduces their cost of selling. This savings can be passed to the home buyers in the form of extra discount.
Group buying also helps developers sell the properties faster and focus on the next venture.
Advantages of Group Buying for Home Buyers
The typical home buyer is in constant search for a better deal. As individuals, home buyers cannot negotiate for a better deal since it will not make economic sense for developers. The transaction cost with each individual will be high for developers. Also, an individual home buyer will not have bargaining power in a market dominated by real estate developers. By coming together and forming a group, the individual buyers can increase their bargaining power and hence will be able to bag a better deal!
For example, suppose Xanadu developers’ prices 2 BHK apartments in its residential complex at 2800 per square feet. The company can negotiate the price and bring it down to 2300 to 2700 per square feet for group buying of apartments. This discount will be much more than what an individual home buyer can negotiate with the builder.
Typically, the company which negotiates on behalf of the home buyers will probably be able to get a 4% to 10% discount on the price of the property. This means if the price of your dream home is 40 lakhs, you can save up to 4 lakhs in discount!
Another advantage is that the group can share common services needed to complete the transaction such as a home loan, lawyers’ fee, and compliances. In these areas the individual home buyer as part of a group, will have more power for negotiation.
Here are some group buying examples:
How does it work?
Let’s see how group buying works. Essentially, there are two ways.
Buyer initiates the deal
In this case, the potential home buyer posts his or her wish to buy a home in a housing complex. The deal is then listed on the website and potential home buyers are encouraged to form a group if they want to buy a house in the same housing complex or from the same real estate developer. The home buyer can also visit the office of the company and get the required information. Once the group reaches the critical number, the sales team contacts the home buyers, aggregates the demand and submits the bid to the builder. The deal is then negotiated, and finalized. The home buyers get the agreed group discount.
The other way buyer can initiate the deal is to provide his or her requirement to the company. The company looks at its database and find out home buyers with similar requirements. Based on their requirement, the company proposes some of the housing complexes. Once a critical mass accepts the recommendation, the sales team negotiates with the builders and gets the discount as applicable.
Broker Company initiates the deal
In this case, the company posts a potential housing complex that will come up or an existing one. The deal is displayed with discount on offer at the website of the company. The deal also has an expiry date after which buyers cannot form the group. The buyers are encouraged to form a group to avail the discount. Buyers typically register and then show interest in the property posted by the company.
Once the group achieves the critical number, the company submits the bid to the builder. The deal is then negotiated, and finalized. The home buyers get the agreed group discount.
While as a home buyer you need to consider all important aspects typical to a home purchase process, you have to consider the following additional points:
The broker company is likely to charge for the services. The charges could be up to 1% of the price of the property. The charges vary with brokers though and hence you should compare and check with companies that provide group buying. You should factor these charges to the total cost of buying your home. Usually charges will only work out to be lesser than the incremental discount you get from group buying. In some cases, the group buying company doesn’t charge anything from home buyers but gets its service charge from the developer.
You may have to shell out higher upfront or advance money to a developer. The money asked upfront is usually more than what you pay in case of an individual buy. The amount could be twice as much.
Building critical mass of people to buy houses in a specific location and housing complex takes time. The buyers should like the place; should have the same requirement; should have convenience of communication to their office, and should meet many more requirements of individual buyers.
Assimilating all such buyers to form a group will take time and hence home buyers should be ready to wait for the deal to materialize.
Last and most important, read the deal and all its features carefully. In a group buy, most of the buyers think that others have read the terms and conditions and hence do not bother to read it. Do not make such mistakes. Ask if you do not understand some features. This is the most important aspect that you need to provide maximum attention to! When it comes to doing the due diligence, think like an individual not as if you are the only one buying the home and take utmost care to ensure the credibility of builders, papers, and possession.
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