Monday, 2 February 2015

Is opting for a subvention offer a good idea?

Booking a property for a small amount and paying the rest of the purchase price after possession might not be such a good idea.

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 favor 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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