Can the real estate regulator control agents?
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Manish Vashisht, 41, an assistant finance manager, works with one of the big four accounting companies in Gurgaon, Haryana. He booked a 2-bedroom-hall-kitchen apartment in an upcoming residential project in Noida in December 2013, through a real estate agent, for Rs.3 lakh (10% of the apartment cost). But after that, for one year, he did not receive any further demand from the developer. His agent told him that due to some issue, construction of the project was delayed, so there was no demand. The agent then told Vashisht that the same developer had launched a new project in a nearby location, and that if Vashisht wanted he could transfer his booking.
Vashisht went to the site of the new project, where he found the location to be better and construction on, and he decided to transfer. At this point, the agent told him that he would have to pay the booking amount for the new project first and after that the money he had paid for the previous apartment would get adjusted against subsequent demands for the new apartment. He made the payment.
Trouble started a few months later, when he started receiving demand notices for both units. “I did not want to buy two units, and it was almost impossible for me to pay for both,” said Vashisht. Several follow-ups with the agent led nowhere, which is when he approached the developer, whose customer representative told him that the company had no policy of such a transfer. The agent also stopped responding to Vashisht’s calls, and asked him to deal with the developer on his own.
Thankfully, after rigorous follow-ups with several executives of the developer, Vashisht finally got a settlement—after almost a year. And as it happens in most cases, the real estate agent was not penalised in any way.
Free for all
There are many instances in which home buyers are cheated by real estate agents through wrong commitments, false information and unfair practices. “Unregulated brokers have a free reign, and a countless number of them were instrumental in adding to the burden of misinformed customers who suffered at the hands of unscrupulous builders and investors,” said Anuj Puri, chairman and country head, JLL India.
Given that there is no entry barrier in the real estate sales and brokerage industry, anyone can become an agent. “Up till now, countless people, (even) at the level of street vendors, were clandestinely operating as property agents,” said Puri. High commissions, low capital investments, and almost no minimum qualification requirement, attract a lot of people to the sector. For instance, in the primary market, developers typically pay 4-8% of the property value as commission to agents. So, if an apartment costs Rs.50 lakh, an agent can make Rs.2-4 lakh as commission. The percentage can go even higher (8-10%) if the agent is able to sell a substantial number of units for the developer. Some big property agents even go for underwriting a large number of units (20-25% of total units) before a project is launched and get even higher commission. All this attracts many into becoming agents, and considering the high amounts involved, they do not hesitate in resorting to unfair practices to convert a lead into a sale.
Even developers think that agents have a big role in spoiling the sector’s reputation. “Rapid expansion in the realty sector increased the competitive environment in the brokerage business, leading to certain unethical practices or mis-selling in some cases,” said Vivek Singhal, group president, M3M Group, a Gurgaon-based developer.
Since commissions are high, some agents even offer pass-backs to homebuyers. This is not a new practice; agents in several sectors, mainly financial investment products such as insurance and mutual funds, have resorted to such practices. In real estate, pass-back is a common practice among brokers in the primary market. Such commitments are commonly known as ‘credit notes’. “I was offered a total of 4% discount on the basic sale price (BSP) by my agent—he gave me 2% discount upfront and mentioned the same on the application form, by reducing the BSP. He gave me a credit note for further discount,” said Vashisht. However, in most cases, credit notes are not honoured or entertained by agents. Vashisht’s agent did not give him the money saying he hadn’t been able to meet his sale target, and so the developer had not given him enough commission.
Typically, credit notes are issued on a plain sheet of paper or letterheads of a brokerage firm. These have no legal standing unless they are framed in the form of an agreement and stamped. Regulators in other sectors consider such practices illegal and there are provisions against the agent who indulges in them. But in real estate, there are no rules against such practices as there was no regulator, so far.
How a regulator can help
The Real Estate (Regulation and Development) Act, 2016, which was implemented from 1 May, states that to render their services, all agents have to get registered with the regulator. The developers are also liable under the Act to disclose the names of authorised agents who are allowed to deal in a particular project. Each agent will be provided with a registration number by the regulator, which they have to mention in each sale made. “This is expected to bring clarity and transparency to an otherwise close-knit market and ensure that the buyer’s interests are paramount,” said Shishir Baijal, chairman and managing director, Knight Frank (India). Agents are also required to maintain books of account, and records and documents related to every transaction done through them. They are also not supposed to make any false representation, whether written, oral or by visual representation. Also, agents are required to share all information and documents about the project that the buyer is entitled to at the time of booking of an apartment.
Once a real estate regulator is in place, it would not be easy for agents to take homebuyers for a ride. “Agents and agencies will either have to register themselves with the regulator and render themselves 100% accountable for their business activities and practices, or stop operating entirely,” said Puri.
The real estate Act provides for penalty and imprisonment if an agent does not adhere to rules and regulations. “The Act will ensure that, in the long run, only serious participants remain. Real estate agents will have to pay a fine of Rs.10,000 for violating any provisions of the Act, for each day the violation continues, or face imprisonment for up to one year,” said Baijal.
What should you do?
Real estate agents are an important part of the sector. They are also the easiest way to get access to houses that are on sale. Since it may be difficult to completely sidestep going through an agent, it is important to cross-check or inquire with the developer about the authenticity of the agent. If possible, check with other buyers if the information shared about the project by the agent is correct. Once a regulator is in place, it would be easier to avail authentic information about a project. This is because developers will have to periodically update details on the regulator’s website. They will also have to put up the names of authorised property dealers. However, at present and even after a regulator is in place, a homebuyer should insist on written commitment by an agent.
If all the things mentioned in the real estate Act are implemented, the home buying experience will be transparent and thus, better. But all this is still a long way off. If you are planning to buy a house in the near future, make sure you check the credentials of the broker as well.