In my previous post i discussed Why Under Construction Projects get Delayed? In continuation of same, lets find out how Possession Linked Payment Plan help to reduce the risk of project delay. Currently the most popular payment plan for property purchase is Construction Linked Payment Plan in which certain % of payment is released as the project progress i.e. at every stage of construction. Construction Linked Payment Plan is mutually beneficial for both buyer and the builder. In my opinion, It favor builder as 90% payment is released when super structure is ready.
Possession Linked Payment Plan is a desperate attempt from builders to offload inventory. Builders are playing with psychology of the customer by projecting Possession Linked Payment Plan as 80:20 scheme i.e. Pay 20% now and rest 80% at the time of possession. Most of my readers misunderstood Possession Linked Payment Plan as 80:20 scheme. Let me clarify that Possession Linked Payment Plan is not a 80:20 scheme. In 80:20 Scheme, 20% down payment was made by the buyer and rest 80% was paid by the bank (Home Loan contribution) even before the construction was completed. The builder pocketed 100% payment in advance thus exposing bank to high risk. Though builder was suppose to bear the interest cost still it was cheap source of fund for builder as builders borrow at commercial rates of 15%-18%. The risk of default was very high in this scheme in case of any dispute between either of 3 parties . RBI came down heavily on 80:20 scheme and banned such schemes in Sep, 2013. In short, Possession Linked Payment Plan is not a 80:20 Scheme.
Another misconception on how to avail Home Loan for Possession Linked Payment Plan. Let me add that Banks / HFC’s don’t have any role to play in Possession Linked Payment Plan. In simple words, this scheme is only for buyers / investors who have sufficient funds to buy property on their own without any Home Loan requirement. The buyer pay 100% payment in just 2 installments. In 1st installment, 20%-25% payment is made to the builder at the time of booking. 2nd full & final installment of 75%-80% is due at the time of Possession. The biggest advantage of Possession Linked Payment Plan is that probability of delay from builders end is minimal as builder. The stake of builder is high as 80% payment is due till possession.
Another advantage from buyer’s perspective is that the overall Cost of Property is low compared to a buyer who buy a property on Home Loan. You will save on 100% interest component. Though its purely because of funds availability but still any upfront fund availability will indirectly yield returns equivalent to Home Loan Interest Rate i.e. 10% plus in today’s scenario.
There is no marketing scheme launched till date which does not have any catch. The biggest catch of Possession Linked Payment Plan is that property sold under this plan is normally 20% costly compared to construction linked payment plan. Builder try to recover upfront the cost of delay in 75%-80% payment. It is always advisable that before showing your cards, its better to check the rate/cost under various payment plans like Possession Linked Payment Plan, Construction Linked Payment Plan or 100% upfront payment. It will give you fair idea on rate differential between various payment plans. You should disclose payment plan preference only after negotiations and finalizing rest all details.
Last but not the least, Possession Linked Payment Plan should not be the only criterion while finalizing the property. It is one of the important consideration. Most of the times, only one factor specially financial factor like Possession Linked Payment Plan outweigh rest all considerations which should not be the case. In case of Home Loan, The legal due diligence is done by Banks/HFC’s but in case of Possession Linked Payment Plan, you are all alone. It is always advisable to hire local competent Property lawyer specially when you are not buying a property through Home Loan.
Hope you liked the post !!!
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Dear Bhatia Sb,
Really I was not aware of such scheme but i would prefer not to go with such scheme untill and unless you are sure about builder’s credibility and reputation.
Even 20% in a big amount now a days and can put us in a difficult situation in case builder defaults or project delayed.
We dont know why the property prices are going so high and when they will make a hault.
I am expecting something like USA/ Euro zone crises is appraching India also.
Thanks In Advance,
kamlesh Kumar
Very valid point and agree that builder’s credibility and reputation should be checked. As i mentioned in my post, Possession linked payment plan should be one of the criterion & legal due diligence is critical before committing to any such scheme.
In India, the core issue is land scarcity because of which land cost is very high. Secondly, real estate investment provide both financial & psychological security therefore property prices will never come down..You may check my following post on same
https://www.nitinbhatia.in/real-estate/endless-wait-for-property-prices-to-fall/
SIr,
These days we see that possession linked plan are offered in the form of 35-30-35 by most of the builders. in this case a buyer is supposed to pay initial 35% within 120 days. Then 30% once the Super structure is ready.So I just wanted to know if it is possible to involve Bank through Homeloan to fund the remaining 30% when super structure is ready and 30% on possession after the buyer has paid the initial 35% within 120 days.
Also is there a lock in period for the buyer? Is it possible for the buyer to decide whether to stick with it or sell the property when the super structure is ready based on the market rate which will be obviously be higher in 3-4 yrs.
Subvention Schemes are normally offered by HFC’s not by builders. Builders prefer it over possession linked plan as builder receive upfront money. You need to check whether this scheme is of builder or by HFC. I will not prefer such schemes. Pls check following post
https://www.nitinbhatia.in/real-estate/7-risks-associated-with-subvention-scheme/
Looking to invest in possession linked plan in Delhi NCR. Please suggest any thing with (25:75) or (30:70)
I only provide consultancy service. You may approach local real estate agent / broker.
Hi Nitin,
I have booked an under construction flat fot 45 lacs including reg in hyderabad.
Only last payment of 8 lacs is pending to builder. Builder has delayed june 30 possession date and has a 6 month grace till Dec 2015.
Last date of registration as per TRIPARTITE is 13 DEC.
Q1 : Can I delay last payment, till builder complete project and give possession
Q2 : Will there be any late payment charge on my part for delaying the last installment.
Q3 : Will bank release the last payment, given project hasnt got OC yet ?
Thanks in advance
Kamal
1. It depends whether payment is construction linked or time bound
2. Yes. Builder do charge late payment penalty
3. It depends
Sir, Central Park-3 Sohna is offering PLP plan (40-60). Wanted to know if i can get bank loan in PLP? I was thinking to pay like this: Out of first 40%, I’ll pay 20% and bank pays 20%, this will make my bank EMI to be just 20% amount till possession. Then at the time of possession (maybe after 2 yrs) bank will pay rest 60% to builder and my EMI will then change to 80% of the project cost. Please suggest if my understanding is correct or not. And guide further on this.
As i mentioned in my post that banks don’t approve home loan for possession linked plan. PLP is only for investors.