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Property Purchase: Possession-Linked Vs.
Construction-Linked Plans…!
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By Mr. Om Ahuja, CEO –
Residential Services, JLL India
The current market scenario
clearly reflects the market mood. Developers are extending many offers to
attract demand, clearly indicating that buyers are in wait and watch mode.
Various press articles have
been suggesting price correction for over last three quarters, but we have not
seen any serious correction in prices (with a few exceptions in some markets).
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| Mr.Om Ahuja, JLL India |
Developers are proffering
bundled offers instead of negotiating prices. One such offer is the
possession-linked payment plan, in which the buyer pays 20% to 25% of the
apartment cost in advance and the rest on possession.
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% to 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..!
1.
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.
2.
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.
3.
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 to 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% to 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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