Partnering with the right broker can have a large impact on your property purchase decision, ensuring you pay right and also find the right property basis your needs. Hiring the right agent also ensures you have a peaceful property management or renting experience post purchase.
There are 3 broad scenarios while we engage a broker/agent:
a. Buying a property from a developer (Primary sale)
b. Buying a property from an existing owner (Secondary/Resale)
c. Renting a property as an owner or tenant
In this post, we will focus on the primary sale scenario of buying a property directly from developer.
Buying a property from a developer (Primary sale)
This is one of the scenarios where a buyer needs to exercise utmost due diligence in identifying the right broker. A key reason is that the broker earns their commission from the developer and not from the buyer. It is human nature the loyalties are often skewed towards one’s paymaster. When there is a conflict of interest between your needs and the property the broker intends to promote, you might at times end up being second priority.
Types of brokers
Firstly, let’s look at 3 primary broker categories and understand how their operations differ:
a. Large Institutional broking agencies
b. City-level large broking firms with teams
c. Your neighborhood broker running a broking shop
Large institutional brokers are those like Proptiger (Australian REA backed) and Square yards who have national and international level presence and work with most leading property developers in the country. They have specific teams catering to different cities and categories of developers. Their scale of operations is massive, often selling 2,000 – 6,000 crores of primary real estate every year pan-India. These are typically funded by international investors/VCs or other institutional backing and hence lean towards generating adequate returns on capital employed through high levels of standardization. Even leading developers today make a beeline for these agencies as they control a significant chunk of distribution leveraging their technology-led approach. This category of brokers focuses largely on primary real estate sales as they prefer to deal with developers and this segment offers best scalability and return profiles on investment.
City-level large broking firms are large players too but within a specific city. They typically have a team of 15-100 members and largely homegrown and run their operations from internal cash accruals. They also form a significant distribution engine for all developers at a local level. This category of brokers typically works on both primary deals and resales.
The neighborhood broker is the individual or agency with small teams largely catering to a single locality or one specific part of the city. They are one of the least standardized and more unorganized but offer you personalized attention as every customer is important to them. This category of brokers typically does all primary, resales and rentals but largely focus on rentals and resales.
Higher the brokerage, higher the push for a project
The fundamental principle of distribution is that the distributor tries their best to sell the product that earns them the highest commission. Your LIC agent uncle has been doing this for ages in the pretext of being an insurance ‘advisor’ Bank RMs hard-sell insurance as insurance firms pay banks 30-40% of first year premiums as commissions. Mutual funds used to sell only regular plans (with ~1% distributor commissions loaded) until the regulator SEBI came up with direct plans in 2013, lowering the cost for end consumer. Similarly, the principle of skewed interest exists when your broker recommends you a property.
As in any other industry selling products, developers incentivize brokers with higher brokerages depending on project type, stage of project (high brokerages paid as project inches towards completion) and market/location dynamics. Well-designed and well-located projects typically have lower brokerage rates as developers need not indulge in a ‘push-sale’ model. While the typical developer brokerage pay-out varies between 2 to 3% for every transaction, this can go even up to 8-10% for lesser known developers or slow-selling projects/inventory.
Many brokers in the market, typically the larger organized ones, decide on which developers/projects to market basis the brokerage slabs offered by developers. Their teams are given explicit targets to promote these projects ahead of any other project – typically the sales teams at large institutional brokers have specific ‘Projects of the month’ which they are expected to prioritize and sell basis their commitment to the particular developer. As a buyer ploughing your hard-earned lakhs or crores, this means that your interest might be jeopardized when you blindly decide by the brokers’ project recommendation. Why should your choice as a buyer be constrained by the brokers’ roster of projects?
What’s the implication for buyers?
Many broking firms might not be unbiased advisors in enabling your property decision. Yes, they try to offer you pros and cons but it can never wash away the inherent conflict of interest when solely relying on your broker for a purchase decision. Beware of dubious developers and projects that get hard-sold by many of the larger brokerage houses. Some brokerage firms earn brokerages of 5 – 10% from selling these ill-reputed offering to firm up their return profiles and report good revenues to their parent investing firms but we retail buyers might be left holding a delayed/stalled/poor quality asset. The broker has negligible skin in the game.
Liability of brokers to buyers in property purchase
Pre-RERA, broking business was a free-for-all, no-barriers-to-entry business. Employees doing day jobs could moon-light or even day-light as individual brokers. After RERA came into force in 2016, all brokers needed to be registered with the respective state’s RERA authority adding some credibility despite the business still having very low entry barriers.
RERA places limitations on advertisements to buyers by developers to ensure more accurate representation of project claims in marketing materials. RERA also has a provision that developers can be held liable if there is any mis-representation done by their agents towards any project sold to buyers. Unfortunately, there is limited liability on the broker in cases of potential mis-representation or mis-communication.
How do we prevent being a victim of mis-representation?
In most cases, cases of mis-representation happen verbally than in a written document. The broker/agent typically uses the marketing material provided to them by the developer and hence mis-representation in any printed marketing content makes the developer liable and not the broker. Most cases of mis-representation or mis-communication by brokers happen on a verbal basis. Should you receive any verbal commitment or representation from your broker, please insist that the same be given to you in writing with the developer’s team in loop. Otherwise, the developer can choose to not entertain a potential concern in the future since there is no documented evidence of the representation among you, broker and the developer.
Even if developer is aware that there might have been a mis-representation on brokers’ part, many might be hesitant to take any harsh action unless there is documented evidence, as developers strive to keep good relationships with brokers for their distribution efforts. As a buyer, you are worth only one transaction but the broker has the potential to bring another 100 transactions to the developer. Harsh truth as a consumer, but real state of the ecosystem.
RERA does have adequate provisions to penalize a broker for mis-representation for non-registration with the authority but the penalties for potential mis-representation are less clear. It is our ultimate responsibility of buyers not to reply only on brokers’ due diligence unless the broker offers you to undertake due diligence for a fee and represent only your interest in the transaction.
Should you take a pass-back from your broker?
Pass-back is the concept where the broker pays you back a certain portion of the brokerage he receives from the developer. Typically this is 1% back on a brokerage of 2-3% earned by the broker and in markets like Gurgaon and Noida, this can go up to 3-4% as brokerage rates are higher. Rosy as it might sound to you as a buyer, cleaner developers and brokers try their best to avoid this practice. The reason is simple – the more pass-back a broker gives back, the higher brokerage he would want from the developer to avoid losses. The developer’s brokerage costs increase, so in order to retain their margins, they raises prices. Who pays this higher price? You. The only winner in this game is the taxman who collects higher taxes on a bloated agreement value.
The pass-back amount is dangled by many brokers to buyers who want to ensure the deal goes through them. Good deal as a buyer but remember, the developer does not bear any responsibility if the broker does not honor his commitment. Many buyers complain to developer teams and RERA forums etc. but are largely unable to recover this pass-back because it is an unethical practice in the first place with not much recourse. Brokers who start the conversation with offering you a pass-back before even discussing the value that they can add in your property search and decision-making are best avoided.
The pass-back practice started in Delhi-NCR (as most shady real estate practices originate from) by a bunch of unscrupulous brokers and unfortunately they have pushed the practice in almost all major property markets today.
There is no harm in reducing your ultimate cost as a buyer by taking a pass-back as long that is not a key factor in evaluating a broker and as long as you do not expect any recourse if the broker defaults on their commitment.
Large broking firms or your neighborhood broker?
During property purchase from developer, both these categories of brokers try to lure you. During sales launches, the large broking firms have an upper hand in getting more business as they have the wherewithal to make large marketing spends online and through other media.
In most Indian cities, each locality typically has a handful of reputed neighborhood brokers who believe in building long term relationships and ensure buyers’ needs are not compromised.
Tricks of the trade
Every trade has its tricks and the brokerage business is no different. Let’s list a few one needs to know as a buyer.
Micro-sites and clicks
When you search a project name or a generic key word like ‘Whitefield 2 BHK’, you get a bunch of links as Google ads and also top of page sites basis SEO rankings. More often than not brokers run their own micro-sites mirroring the developer’s project website with the only difference being the contact details of the broking firm. Many a times, brokers outspend developers in ensuring their websites top the Google ad listings. The cleaner brokers try to keep the content on these websites consistent with the developers’ advised content but some try to add their own claims to gather better buyer interest on their site. As a buyer, one might not have any recourse to incorrect claims seen on a broker micro-site as typically these micro-sites are turned off by brokers after a sales launch/certain quantum of inventory sales.
How does one identify a broker-run website from a developer’s own website?
As per RERA, the broker website needs to contain a disclaimer mentioning that the website belongs to an authorized broker along with their RERA agent registration number. Many brokers do not display this disclaimer though.
The developer’s website runs a cleaner interface without many banners and call-to-action elements (Contact forms to take your details).
Sub-standard language and communication including grammatical errors in the copy. Content focuses more on site visits rather than building knowledge about the product.
Mention of discount offers as developer websites seldom use the word ‘Discount’ on promotional content.
Anchor effect
The oldest trick in most realtors’ books. Basis your needs, they will take you first to a property which is typically in the highest price range in the specific locality and which might or might not meet your needs. This is to anchor you to a certain high price point in the market so that you will feel the next property shown is a ‘value deal’ while it might be still trading above fair valuation. These are optical effects to ensure you close and close soon enough.
The low price click-bait
Many brokers post online ads with a low price, say 5-10% below the actual listing/selling price advertised in the market. While you contact them, they mention that the inventory is sold out or they just listed the basic price and did not list the other charges. This is not essentially a red flag but one needs to be aware of such practices.
Under-written transactions
Well this one is not a trick but a feature of real estate markets – large brokers under-writing inventory from the developer at a lower-than-market price and selling them onward to retail buyers like you and me. These projects are a double-edged sword and one needs to exercise caution on who is the legal counter-party to transactions and what is the extent of legal liabilities to the broker and developer in these cases. Typically, developers who do not have in-house selling capability or have a slow-selling project or who want to report faster sales in the market (again a shady practice from the NCR region) try to make these deals with brokers.
It is best to avoid these deals as a buyer as brokers generally have limited legal liability if things go south.
How do we identify the best brokers?
Not all brokers bat only for their partner developers. There are many brokers in the market with the philosophy of placing the buyer’s interest first while ensuring they run a successful brokerage business.
Let me share a few common traits of the best brokers I have come across and interacted with:
They start with your needs and probe you to understand the nuances in what you are looking for in a project, irrespective of residential or commercial asset class.
They respect your shortlist and acknowledge the good, bad and the ugly in your shortlist set. If a broker rubbishes your shortlist without unearthing reasons for your shortlisting, look for a more objective broker.
Transparency about project limitations even for the projects they recommend. They are transparent in communicating the experience of their other clients with these different projects.
Transparency about pricing and acting in your best interest during negotiation. Large branded developers do not negotiate on pricing but with the second rung of developers, brokers have the option to represent your interest in negotiating on commercials.
They keep in touch beyond the sale completion, attend to any service needs and strive to build long-term loyalty/relationship.
Brokers need to drive decision urgency in this business but the best brokers do give you necessary time and space and enable you with required objective information to take the right decision for yourself. Avoid brokers who often exert undue time pressure without contributing to your decision process.
In summary, brokers are an essential part of our property purchase journey as a buyer and have the ability to handhold us in making the right purchase decision. We need to identify and engage with brokers who ensure our interests are represented best, uphold transparency and intend to build a long-term relationship beyond a transactional sales approach. It is best to probe brokers on their reasons to recommend specific properties and insist on offering a reasonable choice that maps to your needs.