Are you planning to buy property? Buy property in a project A or project Z to double your investment in 18/24 months. I am not suggesting you buy property in these projects but sharing excerpts of a pamphlet on my doorstep. Coincidentally, the same day two readers of this blog posted a query wherein they were trapped in a similar scheme. I tried to find out more about these schemes and thought of sharing my findings with the readers of this blog.
Firstly, let me ask honestly do you really think that someone can double your investment in just 18 months or 24 months. If the answer is NO then i am sure that no one can trap you in these schemes. As i keep highlighting that with each passing day, it is becoming difficult to generate double-digit returns for the investors. If someone promises to double your investment in 18 months then it means annualized return of 58.67%..Wow !!! It’s whooping. I will sell all my assets and liquidate all my investments to Buy property that will double my investment. Unfortunately, it is not true. Let’s check out.
How the Customer is Trapped?
The biggest problem in India is financial illiteracy. I keep highlighting this from time to time. Always remember that financial mistakes can potentially wipe off your entire savings of life. If someone is telling me that i can double your investment then in 99.99% cases as an investor i will not ask HOW?
Similarly, in these schemes of doubling the investment, the answer of HOW is to just BUY Property. Hold on, here HOW means how the builder will double the investment in such a short period? Is he anticipating demand to pick up manifold, some land acquisition by govt or infrastructure project coming up in the area? If there are NO GROWTH drivers then he is simply fooling around.
As i shared in my posts that another major problem is that builders are not willing to share the terms and conditions of these schemes till token money or booking amount is paid. After the payment of booking amount, the buyer is stuck. In 99% cases, the detailed terms and conditions come as a shocker to the buyer. The same thing happens if you buy property to double your investment.
How these Schemes Work i.e. Buy Property and Double your Investment?
These schemes are a new type of subvention schemes with brilliant marketing communication. Most of these schemes to buy property are 10:80:10 scheme. Under the scheme, you need to pay 10% at the time of booking. For balance 80% you have to avail home loan and is paid by the HFC. Therefore, it is sort of mandatory to avail Home Loan. Rest 10% is payable at the time of possession of property. This scheme is offered on property nearing completion i.e. possession is due in next 18/24 months.
I observed that banks are not offering this scheme barring a couple of them. Reason being, bank insist upfront 20% buyer contribution. Whereas in a scheme to buy property and double the investment, the buyer has to pay 10% at the time of booking. Balance 10% is paid by buyer at the time of possession.
Assuming you buy property worth 50L. You will pay 5L at the time of booking . HFC will pay 40L and balance 5L you will pay at the time of possession. Let’s say the scheme is for 24 months i.e. your investment will double in 24 months.
Here comes the catch, at the time of possession builder will offer you to either pay balance 5L and take the possession of flat or double your investment of 5L i.e. will refund 10L along with 40L disbursed by the HFC. Whereas buyer is under impression that he will get 90L i.e. double of 45L that include 5L (Self contribution) + 40L (Disbursed by the HFC). You will feel cheated but legally and technically, the builder is correct. He is doubling your investment and your investment is just 5L in the project.
Why should you not buy property in this scheme?
Going by the same example, you will get additional 5L if you decide to surrender the property at the time of possession. Still, you might feel happy with the return of 5L. Hold on, you forgot to add home loan cost in your calculation.
(a) The upfront cost of availing home loan is approx Rs 30,000 including processing fees etc.
(b) Home loan interest will depend on payment schedule but it will be approx 6L in the normal scenario if you opt for Pre-EMI at 9.5% interest rate. In the case of FULL EMI, it will be approx 2.2L. Typically for under construction property, you pay Pre-EMI interest.
Therefore, the total cost is approx 6.3L under Pre-EMI whereas you received 5L as a return. Generally, the buyers invest in such scheme for investment purpose but it is loss making proposition until unless there is a sharp appreciation in the property.
Even if you opt for Full EMI, your annual return is dismal 2.74%. Therefore, by any calculation, it does not justify to buy property under such schemes.
There is another question mark whether builder will buy back the property or not. In other words, whether he will honor his commitment to double the investment or not even if it is 5L only.
Why is builder offering such schemes?
There are multiple benefits to the builder. Through these schemes, builder hit 2 birds with one stone
1. Offload Inventory:
The biggest problem for builder today is to offload inventory. Through smart marketing gimmick, the builder can easily trap buyers to buy property and offload the inventory.
2. Cheap Source of Funds:
As i mentioned in earlier posts also that cost of borrowing for builders can be as high as 18% to 24% for builders. Through these schemes, the builder gets access to a cheap source of funds. In the example cited by me, builder borrowed 45L for 24 months by paying interest of 5L (Commitment to double the investment of buyer). Though the disbursement will be staggered but normally such projects are nearing completion. I shared that under construction projects delayed once the superstructure is ready.
Therefore, it is more beneficial for the builder to ready superstructure and then launch a scheme to buy property and double your investment. He can demand disbursement of up to 90% in such cases. The cost of borrowing for the builder is approx. 5.40% compared to 18% to 24% i.e. commercial cost of borrowing.
Words of Wisdom:
Post demonetisation, you should be extra cautious if you are planning to buy property. I shared my thoughts in this regard in my post, Impact of demonetisation on the property market. I am only expecting few pockets to hit hard by the demonetisation. Therefore, you can expect similar schemes in the impacted pockets i.e. pockets with high black money circulation.
Before the panic selling trigger, the builder will try to offload the inventory through innovative marketing schemes. Before you buy property, you should always go through the fine print of the agreement. Last but not the least, always remember that oral or verbal commitments do not have legal standing. Therefore, only what is mentioned in your agreement is legally binding on both the parties. To avoid being cheated, Try to read between the lines :)
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