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Negotiation- How Much and When Should You Negotiate

03-09-2024

When purchasing property, it's natural to assume that builders have significant profit margins, leaving room for negotiation. Given the substantial investment involved in buying a flat, many customers aim to negotiate the lowest possible price. However, understanding the builder’s perspective—particularly the difference between revenue and profitability—is crucial before entering negotiations.

Understanding the Cost and Profit Equation

Let’s break down the costs and profitability involved in a typical flat purchase.

Example Scenario: A Flat Priced at ₹50 Lakhs

From a customer’s viewpoint, ₹50 lakhs is a significant amount, often leading to the belief that the price is inflated. However, profitability needs to be understood in the context of the following factors:

  1. Land Cost:
    The cost of land varies depending on whether the builder owns the land or if it's a joint venture (JV) project with landowners.
  2. Cost of Construction:
    Construction costs range from ₹1,800 to ₹2,200 per SQFT, depending on the amenities, quality, and complexity of the project. For this example, let's assume ₹2,000 per SQFT.
  3. Other Costs:
    These include office, marketing, sanctioning, legal, documentation, accounting, and loan interest costs, which can range from ₹350 to ₹450 per SQFT.
  4. Average Price of the Project:
    The average price is influenced by the total costs and desired profit margin.
  5. Profit Margin:
    Builders typically aim for a profit margin of 20-30%, depending on the above costs.
  6. Price Band:
    A builder generally prices units within a +/- 5% range around the average price to maintain profitability. For an average price of ₹5,286 per SQFT, the price band can range from ₹5,000 per SQFT at the launch to ₹5,500 per SQFT at project completion.

Scenario 1: Builder-Owned Land

Cost Breakdown:

  • Land Cost: ₹1,667 per SQFT (assuming ₹60 lakhs per Gunta).
  • Construction Cost: ₹2,000 per SQFT.
  • Other Costs: ₹400 per SQFT.
  • Total Cost: ₹4,067 per SQFT.
  • Profit Margin @ 30%: ₹1,220 per SQFT.
  • Average Price: ₹5,286 per SQFT.

In this scenario, if the builder owns the land, they would aim for an average price of ₹5,286 per SQFT, yielding a profit of ₹1,220 per SQFT.

Scenario 2: Joint Venture Project with Landowners

In a joint venture (JV) project, the landowner typically receives a share of the revenue. Let’s assume the JV ratio is 40%, meaning the landowner gets 40% of the total sale proceeds.

Cost Breakdown:

  • Average Price: ₹5,286 per SQFT.
  • Land Cost (calculated as JV ratio * Average price): ₹2,114 per SQFT.
  • Construction Cost: ₹2,000 per SQFT.
  • Other Costs: ₹400 per SQFT.
  • Profit Margin: ₹772 per SQFT (17% of cost).

In a JV scenario, profitability drops to 17% as the landowner’s share increases the land cost.

When and How to Negotiate

Knowing the builder’s cost structure helps you understand when and how much you can negotiate. Here are some tips:

  1. Check for Ownership (JV or Builder-Owned Land):
    In a JV project, the builder’s profitability decreases due to higher land costs, making it harder to negotiate a lower price. Knowing this information can help you get the right price.
  2. Check Unit Sales:
    If a significant number of units have already been sold, the builder is less likely to negotiate below the average price (₹5,286 per SQFT). They will aim for higher rates to maintain their profit margin.
  3. Early Bird Advantage:
    If you’re among the first buyers, you have a better chance of negotiating closer to the lower price band, around ₹5,000 per SQFT. Negotiating below this would be challenging, as the builder needs to cover their costs.
  4. Stage of Construction:
    The most negotiation happens during the initial phase (launch and up to RCC work completion).
  5. Location Matters:
    In prime locations, negotiations may be limited due to higher demand. A simple way to gauge demand is to observe if the builder follows up with you after your first visit. If the builder doesn’t call you within 1-2 weeks, they are likely in talks with other interested buyers.
  6. Upfront Cash or Higher Payment:
    Offering a significant upfront payment might give you leverage. The builder may provide a discount on the interest component, potentially reducing the price by ₹25-50 per SQFT, depending on the project’s status.

Conclusion

Negotiation is an art, especially when it comes to high-value purchases like residential flats. Understanding the builder’s cost structure and profitability can give you an edge in securing a better deal. The key is to negotiate strategically, considering factors like sales progress, location, and payment terms to achieve the best possible price.

Nishka Group