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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