The year 2000 saw real estate developers and landlords heave a sigh of relief. Commercial properties saw frenzied activity in both sale and leasing as the IT, financial and service sectors aggressively started expanding. This brought to end the three-year lull that had plagued the property market.
In India, real estate has been one of the most unorganised industries. No formal rules and regulations were in place to govern the functioning of the industry. However, a recent development suggests that this scenario is unlikely to last for long.
The Maharashtra Government has taken the first step to streamline the industry. The state government recently announced its intention to streamline the real estate business by issuing licenses to those agents who register with the local revenue office.
The proposed Legislation:
Issuing of licences to real estate agents: This will mean that the broker will have to pay initial licensing fee and a renewal fee annually.
Fixing the commission that real estate brokers can charge to the client against the service rendered.
The proposed legislation has already sparked off resentment from the broker community.
Need for entry barrier:
The legislation is a boon for the buyers. A glance at the current market reveals that there are over 1 million real estate agent/brokers in the market. How many of them are really qualified, professional and deserve to be in the market is anybody’s guess. There is no doubt that the real estate industry today is over crowded with unprofessional brokers.
The reasons for overcrowding in the industry are:
No prerequisites / entry requirements to be a broker: Just about anyone can become a broker - an agent or a professional or a trader or an actual builder. There is no specialised training that is required to be a broker.
There are no minimum criteria, which sets a professional broker apart from the rest. This makes it relatively easy for anyone to become a broker, which makes the industry highly competitive.
Of course, there are plenty of professionals working in the field who have survived the rough patches. There is a need to identify some criteria that will help consumers to segregate between a professional and unprofessional broker.
An entry barrier of some kind is a must for the industry. It can be in the form of taking a qualifying examination, in form of paid up capital, in terms of infrastructure and minimum qualification. This will help weed out the unprofessional brokers and be of great help to the relatively ignorant buyers. Even the professional brokers will get their due recognition. The unprofessional broker will either need to improve their service standards or close down shop.
The buyer:
The licensing of real estate brokers by the state would mean government endorsement of the broker’s performance and credibility. State endorsement of brokers will boost the buyer’s confidence, as he is assured of a certain level of service. Also, once this system is in place, buyers will have avenues to get redressal for their grievances against brokers. Of course there are a few real estate associations where they can complain, but there is no guarantee for justice as brokers themselves run these organisations.
Fixing the commission rate:
The second aspect, which has sparked off much resentment in the broker community, is the fixing of the brokerage fee. At present there is no fixed brokerage rate in the industry. It is either on the percentage basis or a fixed amount basis. The standard practice is to charge 1% to 2% of the entire transaction amount (depends upon the mutual agreement between buyer and broker). However, brokerage for larger value deals is generally less than the small value deals. Over and above the agreed amount, service tax of 5% of the brokerage amount is also payable. This goes to the Government of India in the form of service tax.
Fixing of the commission rate that can be charged by brokers will go a long way in imparting more transparency in the real estate deals. Buyers can rest assured that what they are paying as brokerage is as per the industry standard.
Fill empty coffers or improve the industry?
But fixing of commission by government would mean regulation. In the age of liberalisation, why is the government going back to the age of ‘licensing raj’! Why should the government want to fix a price for a service provided by the broker? Let the market force decide the actual charge a broker service is worth. The intense competition in the market will certainly keep the brokerage at a realistic level.
This makes one wonder and puts a question mark on the government’s intention. Is the State Government really interested in streamlining the real estate industry and brokering business in particular? Or is the government just eying the revenue that it will collect in the form licensing and renewal fees? Only time can tell.
But one thing is for sure, overall licensing is a welcome move only if:
It increases transparency in real estate dealings by compulsory disclosures and registrations.
It introduces discipline among real estate participants - brokers/agents, builders, buyers, sellers, etc.
It enhances credibility to real estate participants and provides value add to consumers in the form of service, transparency in price and responsibility.
And last but not the least it is administered and monitored by independent and professional body with representation from all sections of community whose task is not to collect the license fees but to improve the state of affairs in the real estate market.
