Realtor promising you sky-high returns under buyback scheme? Steer clear

Such schemes where the developer promises fantastic rates of returns are a sign of his financial desperation

One clear sign of a highly risky investment scheme is the promise of a very high rate of return. Look at the State Bank of India fixed deposit rate for a comparable period. Currently, it stands at 6.80 per cent for three years. Any scheme, howsoever attractive, can at best give 5-10 percentage points higher return. But if it promises a 20-30 per cent higher return, investors should be warned about its potential risk.

A Bengaluru-based developer launched a 20-80 subvention scheme a few years ago. In April 2014, it asked buyers to put in 20 per cent, or Rs 12 lakh for an apartment that cost Rs 61 lakh. The balance would be financed by a housing finance company. The buyer would pay the equated monthly installments (EMIs), which would be reimbursed to him by the developer. In March 2017, the developer would buy the house back from the buyer at double the price, in this case Rs 48 lakh. Thus, it promised a return of 100 per cent in three years or a compounded annual return of 25.70 per cent.

In the Bengaluru project, trouble began soon. The developer first failed to reimburse buyers the EMIs. This meant that buyers were saddled with massive EMIs, which many had not anticipated and hence could not meet. The housing finance company in turn issued default notices to the buyers. Thereafter, the project also got delayed.  

Real estate experts say that such schemes are launched by developers to obtain financing at a lower cost. “The home loan rate today begins from about 8.65 per cent and goes up to about 13.30 per cent. In comparison, developers get loans from banks at around 20 per cent or more. By launching such schemes, and promising to pay the EMI on behalf of the buyer, they basically try to obtain finance for their project at a much lower rate of interest,” says Pradeep Mishra, head, Sainik Estates, a Gurgaon-based real estate consultancy. He adds that a buyback scheme is launched with the hope that prices would appreciate as the project reached closer to completion. The developer would then sell the apartments to a new set of buyers and pay the promised 100 per cent return to the first set of buyers.

Several factors may have caused the failure of this scheme, according to experts. The developer may have been already been stretched financially. Slow sales in recent years may have caused his financial position to weaken further. Diversion of funds from one project to another may have led to the failure to complete this project. Availability of loans to developers has become particularly difficult since the onset of the crisis in the non-banking financial sector since September 2018.

Developers have a better chance of pulling off such schemes when the real estate market is buoyant and prices are moving up in double digits every year. But the real estate market has still not emerged from the ongoing slump. Prices are either stagnant or have been moving up in single digits in the past few years in most cities. In such a scenario, meeting the promised 100 per cent return in three years was a near-impossible task for the developer. Many of the buyers could end up losing the 20 per cent payment they have made. Recovery, if any, could be a long-drawn process, as thousands of buyers in the National Capital Region will attest to.  

This episode has several takeaways for potential buyers. Those who have the means should preferably opt for completed projects to avoid the risk of construction delays. If opting for an under-construction project, check the finances of the developer and avoid over-leveraged ones. Finally, all schemes promising fantastic rates of returns should be avoided as they are in reality a sign that the developer is in dire straits financially.