Is opt­ing for a sub­ven­tion of­fer a good idea?

Book­ing an apart­ment for a small amount and pay­ing the rest of the puchase price af­ter pos­ses­sion might not be such a good idea

HT Estates - - HTESTATES - Sachin Sand­hir

As the year 2015 un­folds, it is time to re­view your op­tions of buy­ing a prop­erty in a mar­ket al­ready bur­dened by over­sup­ply, high prices and de­layed projects. While the mar­ket is wit­ness­ing a glut, de­vel­op­ers are keen to offload their share of in­ven­tory of un­sold flats to prospec­tive buy­ers.

To push sales, de­vel­op­ers are will­ing to of­fer heavy dis­counts on the quoted price mostly in the form of semi- sub­ven­tion schemes. There are sev­eral ad­ver­tise­ments that have of­fers such as 10:80:10; 20:30:50 or ‘pay 0% now and don’t pay EMI till pos­ses­sion’. Un­der th­ese schemes, the buy­ers are ex­pected to pay 10% ini­tially or noth­ing and the re­main­ing amount at the time of pos­ses­sion. The sub­ven­tion pe­riod is usu­ally kept at 24 to 30 months.

Sim­ply put, the deal en­sures that you pay at least 10 to 20% of the to­tal pur­chase value of the apart­ment on pur­chase and the rest of the amount af­ter com­ple­tion. How­ever, while such deals seem at­trac­tive, they have their own share of prob­lems.

Let’s look at the ad­van­tages first. For savvy in­vestors and sec­ond prop­erty buy­ers, the deal may be lu­cra­tive. The ra­tio­nale be­hind the in­vest­ment de­ci­sion is that the buyer gets to book a prop­erty by pay­ing a small amount. He gets to pay the ac­tual equated monthly in­stall­ments af­ter a pe­riod of two or three years. In case the buyer (read in­vestor) is not in a po­si­tion to bear the bur­den of EMIs af­ter com­ple­tion of the above pe­riod, he can sell the prop­erty.

At this stage he still makes a profit on his in­vest­ment as the prop­erty is sold at the cur­rent mar­ket value or the re­vised rate at which the de­vel­oper is sell­ing his share of prop­er­ties. Un­for­tu­nately, such deals are not good for the realty mar­ket in the long run as they en­cour­age spec­u­la­tive deal­ings in the mar­ket and lead to cre­ation of more va­cant prop­er­ties.

Now let’s dis­cuss the prob­lems buy­ers could face be­cause of such schemes. The big­gest and fore­most risk is that of loss due to in­def­i­nite de­lay in com­ple­tion of the project. As soon as the sub­ven­tion pe­riod is over, the EMI based on the 80% or the re­main­ing amount of the to­tal value (or loan) will be­gin. This would be ir­re­spec­tive of the con­struc­tion sta­tus. In case the house is not ready by then, and if the cus­tomer is stay­ing on rent, he will have to pay both the rent as well as the EMIs.

Given that most of the real es­tate projects get de­layed, one may ac­tu­ally end up pay­ing much more than one had planned for.

What can you do?

Take a cue from the re­cently pub­lished no­ti­fi­ca­tion by the Re­serve Bank of In­dia (RBI). The apex bank has clearly said that it is not in favour of such 80: 20 or 75: 25 schemes. The RBI has taken note of the fact that banks are mak­ing up­front pay­ments to the builders and putting their money at risk. The premise has been that the home loan dis­bur­sal should be linked with the stages of con­struc­tion of a build­ing so that the money loaned by the bank does not get locked up in case of a dis­pute be­tween the bor­rower and the de­vel­oper.

So as a savvy in­vestor, look for prop­er­ties with long-term prospects of healthy ap­pre­ci­a­tion. Go for a con­struc­tion-linked plan of pay­ment. Stay in­vested for a slightly longer pe­riod. Prop­erty sold when it is ready for pos­ses­sion fetches more value than an un­der-con­struc­tion prop­erty.


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