Is that to-die-for real estate deal being offered on inflated prices?

Before rushing into these schemes, find out the benchmark price of similar properties in the area

In addition to price discounts and freebies, developers are also trying to entice prospective buyers this festive season by offering deferred payment plans. In markets like the Delhi-National Capital Region, they are also offering porting schemes to buyers stuck in stalled projects. While these schemes do appear enticing at first sight, and may well be beneficial, buyers need to understand their risks and then make a considered decision.

Deferred payment plans

Developers are advertising 10:90 and 20:80 kind of schemes heavily this season. The buyer makes a small upfront payment of 10-20 per cent to lock the price and block a property. He pays the balance 80-90 per cent at possession. “These schemes mitigate the risk of delayed completion or non-completion in under-construction projects as only a limited amount of the buyer’s money is at stake,” says Piyush Bothra, co-founder and chief financial officer, Square Yards. Paying later is also beneficial due to the time value attached to money.  

One point to watch out for is that developers may charge a higher price in such schemes. “Buyers should find out the price of similar properties in that area. It may be okay to pay a small premium for reducing delivery risk, but it should not be very high,” says Bothra.

Since you wouldn’t want to lose out even the upfront payment, select your developer carefully. “Go with an established developer with a track record of timely delivery, and someone known to take care of his customers in case of a delay. Also, make sure that he is not in financial difficulties,” says Gaurav Kumar, managing director, capital markets and residential business, CBRE India.

Plan your finances such that you are able to pay 80-90 per cent of the price at the time of possession. If you invest in such a scheme aiming to sell it at a premium and exit, that may be difficult to pull off in a slow market and you  could end up forfeiting your down payment.   

Some developers are also allowing deferred payments of up to 12-18 months in ready-to-move-in (RM) properties. Check the quality of the property. Such schemes are at times offered in properties that developers are having difficulty in selling. Also, by paying later, you save on the interest cost on home loan, which you pay at a later date. Make sure that any premium you pay for the property does not exceed what you save on home loan interest.    

Porting of property     

In these schemes, buyers purchase a property from a developer while handing over their property in a stuck project to him. The developer deducts the amount paid for the stuck apartment from the price of the new apartment. For someone whose money has been stuck for long, this scheme offers a way out.

One catch in these schemes is that the developer will ask you to invest in a property worth three-four times the amount invested in the stuck property. If you had invested Rs 30 lakh in a stuck project, you may have to invest in a house worth 1.2 crore (4x) with the new developer. One way to look at the offer is that the buyer gets a 25 per cent discount in the new project.

Once again, buyers need to do their research and establish the price benchmark for similar apartments in that area, so that they know if they are being charged a premium. The developer will not take an apartment in a stuck project off your hands for free. “You should be able to quantify any premium you are paying,” says Kumar.     

Developers are offering benefits like stamp duty, parking, etc free that could amount to as much as 10-12 per cent of the value of a property. “When they offer the porting scheme, they don’t offer those discounts. So, the benefit of, say, 25 per cent you have got gets reduced by 10-12 percentage points right away,” says Bothra.

The buyer is also expected to make a significant upfront payment in these schemes. So, if the new property is worth Rs 1.2 crore, and Rs 30 lakh is the amount paid for the stuck property, the developer will demand 40-50 per cent upfront for the Rs 90 lakh the buyer has to pay.

Porting is a legally complicated scheme, so buyers need to go only with reputable developers. They should also get the purchase agreement vetted by a lawyer before signing it. “It would also be advisable to enter such schemes for ready to move in properties only,” says Kumar. You don’t want to go from one developer’s stuck property to another’s.       

Upfront discount beats assured rental

• In assured rental schemes, the developer promises to pay rent for, say, 18-24 months
• There are risks. The promised rental could be lower than prevailing rates
• You may have to chase him for payments
• Also, rental income gets added to your income and is taxed at the slab rate
• To mitigate your risk, get an estimate of rental rates in the area
• Insist on post-dated cheques from the developer
• Calculate the net present value of rental flows and ask for an upfront discount on the property price