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Sunday, February 2, 2014

Buyers benefit the most in possession-Linked Plans

The current scenario in Indian real estate market clearly reflects the mood of buyers. Developers are extending many offers to improve the demand, which clearly indicates that buyers are in wait and watch mode

Various media reports have suggested price correction for over last three quarters, but not much major correction in prices (with a few exceptions in some markets) has taken place. 

Developers are proffering bundled offers instead of negotiating prices. One such offer is the possession-linked payment plan, in which the buyer pays 20-25% of the apartment cost in advance and the rest on possession, says Om Ahuja, CEO – Residential Services, Jones Lang LaSalle India.

 The Benefits Of Possession-Linked Plans

A critical point here is delivery risk and exposure of credit to developer. Buyers see immense benefits in paying just 20-25% to the developer while booking and paying the balance amount on possession. This eradicates the risk of developer not completing the project on time, and of the developer going bankrupt and not having to pay for a product that is not yet ready. 

We are seeing buyers favouring this option against the construction-linked plans. In the developed world, builders have to complete the product before they can sell to their buyer. Selling before completion is called ‘off-plan’ and this can be approved by the local regulator, but only on the basis of a special request and the overall credibility of the developer. Such checks are missing in India. With possession-linked plans, the benefit to buyers must always be seen in the light of multiple risks.

Points To Check Before Opting For Such A Plan

Three critical safeguards that buyers must put in place before investing into such offers are:

Ensuring that the developer does not have two different pricing structures : (i.e. one for construction-
linked and another for possession-linked plans).  If there are two such different pricing offers, then the developer has already built in the cost of funding that is applicable for a possession-linked plan. This effectively means that the buyer is indirectly funding the developer, and that is not an attractive scenario.

Establishing that the developer has all necessary approvals in place : Buyers funding the developers without approvals is like any another non-approved deposit collection scheme that can catch the eye of financial regulators like SEBI and RBI. Buyers need to use caution while investing in any project where approvals are yet to come and there is a assured-return type of structure. These are very risky structures and have high chances of default and delay in terms of payments.

Reading the fine print : Laypeople generally do not read those critical few lines at the end of the document before investing, but there is a huge risk of losing money by such oversight. For instance, the connotations of terms such as ‘Act of God’ as well as other obscure verbiage in the terms and conditions present a risk to buyers that do not understand them. Any condition that de-risks or absolves the developer can be perceived as a risk of losing the 20-25% of the initial investment. It is therefore prudent for the buyer to review all points mentioned in such an agreement.

What Happens If The Buyer Defaults On Payments?

The developer will cancel the sale agreement and basis the agreement has the full right to forfeit the initial payment of the buyer. Reputed developers only forfeit part of the initial amount, not the full amount. This is normally captured in the options agreement that the buyer will sign with the developer.

Risks Involved In Possession-Linked Plans

Many times, buyers go for construction-linked plans and developers draw 90% of the amount from the bank providing home loan. Delay by the developer in terms of delivering the finished product can sometimes extend to 2-5 years or more, and for various reasons. Buyers continue to bear the interest cost for the amount that the bank has funded the developer with, but cannot enjoy the finished product.

In a possession-linked plan, the risk involved is limited to the initial capital of 20-25% that a buyer pays to book the apartment. Buyers clearly stand to gain from a possession-linked plan as it reduces their risk and ensures that they do not have to bear the cost of funding the developer with multiple open risks.
 
Because of various potential policy changes after the elections, these plans may not be available very long. It is therefore a very good time for buyers to invest in projects that offer possession-linked plans.  

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