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A prospective property buyer was given an option by a builder - Rs 15,000 a sq ft if 20 per cent was paid upfront and 80 per cent on possession or Rs 14,000 a sq ft if 20 per cent was paid upfront and the other 80 per cent was linked to pace of construction.
The builder promised to deliver the project in three years. The question: Which is better for the buyer?
Kartik Jhaveri, director, Transcend India, a financial advisory company, has a simple answer. "For someone investing in this property, the first one is better. For the end-user, the second." Why? An investor who does not want to stay in the property is mostly interested in capital gains. So, he might not want to lock too much money at the start of the project. And, even if the project is delayed, an investor can afford to wait because he is not really looking to stay in it. However, if this property is being bought by an end-user, the second offer is better, as the bank will disburse payments based on meeting the construction goals. In addition, the financial institution will ensure the due-diligence and documentation is in place.
Real estate consultants say another important question to ask is whether you would be able to sell the property without any charges. "It is important to know this because depending on the builder, the cost of transfer can be one to five per cent. In properties which are expensive, this can be a significant sum," says one. For investors who want to make a quick buck, this can be an important question because the returns will be adversely impacted.
If the buyer expires before the possession, what would be the status of the property? "Despite the Maharashtra Ownership Flat Act specifying that if a buyer pays 20 per cent, the builder needs to get into an agreement, many builders do not want to get into an agreement if the initial payment is only 20 per cent. These issues can cause problems in the future," says Jhaveri.
The spate of such schemes comes on the back of a lackadaisical festival season. According to a recent report by UBS Securities, pre-sales of top developers have gone down 50 per cent year-on-year in 2014, pushing residential inventory to a seven-year high. No wonder, innovative schemes such as 20:80 and 25:75 are making a comeback.
In the past, developers had introduced this aggressively but the Reserve Bank of India stepped in. Earlier, the scheme was heavily loaded in favour of the builder. The developer, bank and home buyer went into a tripartite agreement. The buyer paid 20 per cent of the full value of the house upfront. The remaining 80 per cent was given to the developer by the bank. The developer would pay interest to the bank on this amount till it handed over possession to the buyer. The home owner would start paying the equated monthly instalment (EMI) once the property was delivered.
This scheme had dual implications. One, the builder received cheaper funding at interest rates meant for home buyers, a clear four to six per cent lower than what the builder would normally get from banks. Said a senior official at a housing finance company: "With home loan rates at 10.15 to 11 per cent, loans to builders come at 16-17 per cent or even more, if the builder is new. So, this was a perfect way for builders to get money at extremely cheap rates."
This scheme was very popular, especially in Mumbai and Delhi. So much so that Deepak Parekh, chairman of Housing Development Finance Corporation said in its 2012-13 annual general report: "Borrowers must not be blinkered into believing that there are no risks when developers offer to pay interest on a borrower's loan for a specified period. Borrowers have to be cautious because in the event of a developer delaying payment, the credit bureau reports will reflect this in the borrower's records, thereby impacting his or her creditworthiness."
In September 2013, former RBI governor D Subbarao red-flagged 20:80 schemes, a few days before his retirement. "Such housing loan products are likely to expose the banks, as well as their home loan borrowers, to additional risks in case of disputes between individual borrowers and developers/builders, default/delayed payment of interest/EMI by the developer/builder during the agreed period on behalf of the borrower, non-completion of the project on time, etc," said the RBI note.
It also warned banks that any delayed payments by developers or builders on behalf of individual borrowers to banks might lead to lower credit ratings or scores of such borrowers at credit information companies (CICs), as information about servicing of loans gets regularly passed on to CICs. "In cases where bank loans are also disbursed upfront on behalf of their individual borrowers in a lump-sum to builders/developers without any linkage to stages of construction, banks run disproportionately higher exposures, with concomitant risks of diversion of funds," added the note.
In its new avatar, the dice is not so heavily loaded in favour of the builder. The new schemes give an option as mentioned at the outset. Now, there is no tripartite agreement. Instead, only developer and buyer are involved and decide on the method of payment. It is important that buyers or investors take note of all these points before taking a plunge.
