THINK !: Assured Returns on Property

As the customers have become wary in the recent times while buying properties, builders have come up with new ideas to woo customers. Out of many innovative ideas, one is Assured Returns on the property.

One can easily size up the kind of desperation the builder is in by checking the amount of assured return he is ready to offer on his properties.

The selling point in the Assured Return Scheme is that the returns are higher than the Bank F.D.s. Well that may be true prima fascia, but one needs to specifically understand that the builder is returning back the same money in installments which was paid to him initially by the investor, over a period of time agreed in the buyer/builder agreement. To service the interest payouts the builder jacks up the price of the new project which might not be necessarily in sync with the current market prices.

It is also quite possible that the builder

has other ongoing projects in the vicinity, which will correct in price and his reputation will be questioned if the newly launched project is launched at a lower price than existing ones. By doing so, he not only manages to keep the existing customers happy and prove to them once again that the property prices are moving northward, but also manages to lure new customers into buying his project by showing returns on existing projects over the years.

But the as new elevated price of the new project isn’t aligned with the prevailing market rates; builder then starts offering discounts by giving freebies along with the standard equipment. If this doesn’t even work then he starts offering discount in cash by way of assured returns.

Though the assured returns are higher than the Bank F.D.s it surely comes with a higher risk.

India is infamous for untimely delivery of real estate products. Untimely completion means that the builder can always back out of interest payments. Whereas the bank will pay on time and risk involved with a Bank Term Deposit in India is close to negligible.

Another major fact is that the builder won’t release interest payouts until the full payment for the property is done, whereas a Bank Term Deposit can be placed with any amount.

Bank F.D.s can be encashed at any time whereas while buying a property one enters into a buyer/builder agreement. To exit from such an agreement is not only a lengthy but a very tedious process. The only way to exit then is, to wait for the project to complete.

In assured returns scheme the builder may propose to pay interest only for 24 / 36 months and if the project gets delayed the interest payouts shall stop. One can be rest assured that this won’t happen in case of a Bank F.D.

The modus operandi of the builder is that while launching a new project he only releases a few units at a certain price point. After say three months another set of units are released but this time at an elevated price giving the pseudo impression to everyone that the prices are heading north. The builder is heavily dependent on the sale of these new units at an elevated price as this only will help him pay interest payouts to existing customers. This all sounds good and works well if the new investors keep pouring in. This worked well when he property market was booming in the last decade. But if the new investors shy away in a weakened economy, not only the builder but the existing customers are left high and dry. The builder doesn’t get enough funding and finds it difficult to complete the projects on time. Delay in completion meaning the investors are left in commotion.

This doesn’t mean that all builders are cash starved and don’t live up to their promises, but the risk of not selling new units and untimely completion of projects is omnipresent in the case the project is not completely funded.

The builder might also tell the investor that is cheaper for him to take loan from investor @ 11-12% rather than taking a loan from a bank @ 18%. But frankly speaking builder margins are anywhere between 30-50% depending upon the brand/location/quality of finished projects etc. And it will be always beneficial for the builder to take loan from a bank in lump sum rather than scouting individual customers and wooing them into buying his project thereby risking the completion of his project.

The banks only fund a project to about 60-70% and that too after looking at the builder capacity to fund the remaining 30-40%. However, retail buyers jump into the band wagon and give upfront down-payment seeing mouth-watering returns without creating a fuss about security and checking into builder financials.

If the bank doesn’t want to fund a builder then why you as an investor should? THINK !