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Eliminating corruption from the Indian real estate sector #2

Thursday, January 2, 2014 23:44

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Continuing from here. [This topic is extremely topical, given the new Land Acquisition Act in India which effectively accepts that the price declared to the government is about one fourth its true value.]

FIVE PILLARS OF THE REAL ESTATE MARKET IN VICTORIA

To understand how a TOTALLY FLAWLESS system operates, I would like to outline the Victorian system. There is much to learn from this extremey well-designed system. Note that each of the five pillars outlined below is crucial. If any one of them is missing, rampant corruption will be certain – even in Victoria.

In brief the pillars are:

1. Independent record of ownership of land

2. Independent collector of stamp duty

3. Independent valuer of all lands in Victoria

4. Independent private real estate agents whose licence is conditional on ensuring integrity and probity.

5. Market based salaries (and contractual accountability) of all government functionaries.

1. Ownership of land: Independent land records management (Land Victoria)

Land records are managed centrally in the state of Victoria through a computerised database. The Torrens based system issues a Certificate of Title to the owner, on production of proof of identity. The system is supported by conveyancers (legal practitioners) who complete all forms, certify the truthfulness of the facts, and lodge them on behalf of the bank/buyer. With an electronic conveyancing system now in place (the first in the world), there is no face-to-face interaction between any of the parties involved: hence also limited opportunity for corruption. An authorised conveyancer sitting in one part of the world can now easily complete and lodge all documents for transfer of land title.

2. Payment of duty: Independent stamp duty collection (State Revenue Office)

The job of the land records managers is only to manage land records (names of onwers of land). They don’t deal with money at all. Money (stamp duty) is collected by the State Revenue Office.

Duty payable is based on the market value of the property or the purchase price, whichever is greater. The government has access to the estimated market value of all lands – which is prepared by a separate independent agency: the Valuer-General.

The SRO is very fussy about what it will accept as proof of the value of a transaction. Thus:

a) If the property was sold in the open market through auction, the SRO will accept the value certified by the relevant real estate agent.

b) If a “private sale” through a real estate agent, the SRO will accept the relevant certificate of a real estate agent.

c) If sold privately then the seller will still have to hire a licensed real estate agent to provide a letter of appraisal. This could also be procured from a certified practicing valuer who is a member of the Australian Property Institute (API) or from a member of the Real Estate Institute of Victoria (REIV) with a sworn valuer accreditation.

d) This form on the SRO website allows people to self-declare but with detailed explanations. Furher, the latest council rates notice will need to be provided (which contains the Valuer-General’s estimate of the property’s value).

In this case (and in any other), the Commissioner will form his own opinion about the market value and charge stamp duty accordingly. In some cases, where the Commissioner considers the value is understated, the Commissioner may obtain a valuation of the property from the Valuer-General. If the valuation obtained from the Valuer-General exceeds the value provided in the taxpayer’s information by 15 per cent, the taxpayer must pay the cost of the valuation.

3. Valuation of all lands: Independent land valuation (Valuer-General)

This is a critical part of the system, under which ALL property in Victoria is assigned a market value by an independent Government agency. This agency doesn’t deal with ownership nor with valuation at the time of transfer. It only assesses the market value based on all available evidence (including its own valuers). A database of 3 million properties is updated each year based on a complex but empirically tested methodology. This valuation is then used by local governments (councils) to set rates, and by the government to set the fire services property levy.

4. Certification of authenticity of the complete land transaction (ownership and value): Independent real estate agents

A significant number of properties are sold through auction by agents. In Victoria, “The public clearly understand that appropriate licensing and educational standards not only underpins the best outcome for those selling, buying or leasing property but also ensures consumer protection.” [Source]

The Victorian Sale of Land Act 1962 states that:

29W Legal practitioner not to act for both vendor and purchaser under a terms contract

s. 29W

(1) A legal practitioner whose principal place of business is within a 50 kilometre radius of the intersection of Elizabeth and Bourke Streets in Melbourne must not act for both vendor and purchaser under a terms contract.

The seller’s real estate agent is paid a proportion of the sale price (generally around 4 per cent, which covers all costs of advertising and conduct of the auction). This aligns the interests of the seller and agent – to maximise the price of the property. The buyer, however, wants to pay as little as possible. This competitive tension leads to the discovery of the true market price. Since the agent is paid through the buyer, he will declare true value.

Most importantly, however, if any evidence arises (through database analysis or otherwise) that an agent has under-quoted the true price, the agent will lose his licence and entire business. I gather that this is almost unheard of, with no instance known of under-quoting.

Cancellation of licence of real estate agents

The Estate Agents Act 1980 allows for the licence of a real estate agent to be cancelled if:

S22 (2)

A person’s licence as an estate agent is automatically cancelled 30 days after the person—

(a) is convicted of, or has found proven against him or her, any offence involving fraud, dishonesty, drug trafficking or violence which is punishable by imprisonment for 3 months or more; or

(b) has, in relation to anything she or he has done or not done, a claim allowed against the Fund under Part VII or any corresponding fund established under any corresponding previous enactment; or

(c) is made the subject of an order by any regulatory body in or outside Victoria disqualifying him or her from acting as an estate agent or agent’s representative (or an equivalent occupation under the jurisdiction of the regulatory body).

Inspection of agents

The act also provides for rigorous audit and inspection of agents’s businesses by the government.

Inquiries into estate agents

s. 24C

(1) At any time the Director or the Chief Commissioner of Police may apply to the Tribunal for the holding of an inquiry to determine whether an estate agent—

(a) has contravened or failed to comply with this Act or the regulations; or

(aa) has contravened or failed to comply with the Sale of Land Act 1962; or

(b) is of good character or is otherwise a fit and proper person to hold a licence; or

(c) has been guilty of conduct as an estate agent which renders him or her unfit to hold a licence; or

(d) improperly obtained, or is improperly holding, a licence.

(2) In addition to the matters listed in subsection (1), in the case of an estate agent that is a corporation, the Director or the Chief Commissioner of Police may also apply to the Tribunal for the holding of an inquiry to determine whether a director of the corporation or the officer in effective control of the estate agency business of the corporation or, in the case of a private corporation, any member of the corporation—

(a) has contravened or failed to comply with this Act or the regulations or has failed to pay any fines imposed on him or her, or any costs that he or she was required to pay under this Act; or

s. 25

(aa) has contravened or failed to comply with the Sale of Land Act 1962 or has failed to pay any fines imposed on him or her, or any costs that he or she was required to pay under that Act; or

(b) is of good character or is otherwise a fit and proper person to hold a licence; or

(c) has been guilty of conduct as an estate agent which renders him or her unfit to hold a licence; or

(d) improperly obtained, or is improperly holding, a licence.

How to become a real estate agent

You must:

be at least 18 years old.

You must not:

be disqualified from holding an estate agent’s licence or acting as an agent’s representative (or equivalent)

be a director or an officer of a company disqualified from holding an estate agent’s licence (or equivalent)

have been a director or an officer of a company when it was disqualified from holding an estate agent’s licence (or equivalent)

be a represented person under the Guardianship and Administration Act 1986

be the subject of an order by any regulatory body disqualifying you from acting as an estate agent or agent’s representative.

For more information, view our Disqualification and permissions – estate agents page

Experience

You must have gained the equivalent of at least one year’s full-time experience as an agent’s representative in the three years immediately before applying for a licence.

Education

To meet the educational requirements to gain an estate agent’s licence, you must complete either the current course:

Certificate IV in Property Services (Real Estate)

or previously have completed one of the following prescribed courses:

Certificate IV in Property (Real Estate Agency Practice)

Certificate IV in Business (Estate Agency Practice)

Bachelor of Business Property (Agency & Marketing Stream)

Advanced Certificate in Estate Agency

Advanced Certificate in Real Estate

Certificate in Business Studies (Real Estate)

Estate Agency Certificate

the 16 prescribed units or equivalent units of the Certificate of Business Studies (Real Estate), started before 1 January 1987.

Your course must be delivered by a registered training organisation.

If you completed your course more than five years ago, you must also meet the prescribed course requirements under the Estate Agents (Education) Regulations 2008.

5. Market-based salaries for officials, and contractual accountability for senior officials

This is perhaps the most important of all – that the officials managing the system are well paid but held to account. The independent agencies are managed by highly qualified and paid professionals who are held to account in a number of ways (all senior officials are on contract, with the right to be fired without notice on even the slightest suspicion of corruption). I’ve detailed this system in BFN in chapter 4, at great length, so I won’t repeat it here.

Overall, corruption is UNHEARD OF in the Victorian real estate system. [Some corruption has been reported in the issue of permits to developers, but that’s a totally different matter and I’m not covering that issue here]

Summary

The Victorian system begins by asking: Why do people behave the way they do? Then it works out methods to ensure that the DESIRED OUTCOME is achieved despite the tendency of people to behave in the manner they do.

The Indian system runs on hope and wishful thinking. That’s the key reason why it is a TOTAL DISASTER in every way.

Note that I’ve not provided all details of the system to Arvind, yet. The same five pillars, but there will need to be a few other changes as well. Even with this information I bet that he can’t eliminate corruption.

In the next blog post I’ll outline the transitional steps from the Indian system to achieve a system that will be FOOLPROOF and completely free of corruption.

Source: http://sabhlokcity.com/2014/01/eliminating-corruption-from-the-indian-real-estate-sector-2/

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