[ecis2016.org] When it comes to buyback schemes, which are intended to protect buyers against price fluctuations, developers often insert clauses that leave buyers at the receiving end, irrespective of whether property prices appreciate or not. We look at what home buyers need to watch out for
Many developers in the market, often come out with schemes that can be deemed ‘suspicious’ and have the potential to damage the interests of home buyers. A ‘buyback guarantee’ is one such scheme, where the buyers are given assurances against market fluctuations.
You are reading: Buyback guarantee: Does it help or hurt the real estate industry?
In such schemes, the developer offers an assurance that the property would appreciate at a certain percentage (say, 30 per cent) over a certain period of time (say, three years) and if it does not appreciate to the promised extent, the developer would then buy the property back at the promised appreciated price.
Such offers violate the SEBI guidelines, which state that no one can guarantee investment returns in India, unless they are a financially regulated entity, which none of the builders are. The government has also expressed concern over such schemes and proposed a law -‘Banning of Unregulated Deposit Schemes’, which is expected to put an end to such practices in the Indian real estate market. The bill aims to clamp down on realtors, jewelers and other deposit-seeking entities, as they will henceforth, need to be registered with the designated authority, provided under the proposed law.
Buyback schemes: The risk for investors
Buyback guarantees are also risky from an investor’s standpoint, when the market is appreciating or when the prices have corrected.
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Take the case of Akanksha Saxena, a home buyer in Gurugram, whose property price appreciated more than the promised buy back guarantee between 2007 and 2010. However, when she wanted to sell the property and book the profit, the developer claimed that according to the contract, the first right of refusal rested with the builder.
“The developer promised a buyback with 30 per cent appreciation. However, if I am getting a better price in the secondary market, why should I sell it back to the developer? It is a trap where the developers arm twist the buyers to sell it back to them only and not in the open market, when the prices have appreciated way higher than the price at which the developer would force you to sell,” complains Saxena.
[ecis2016.org] Should home buyers trust assured returns schemes?
The situation is no different, when the property’s price does not appreciate. In such cases, builders look for excuses to deny the buyers the promised buyback. Siddharth Chopra bought a ready-to-move-in apartment in Ghaziabad, in 2012. As part of the deal, the builder offered a buyback guarantee that if the property’s price fell 10 per cent or more below the sales price, then, the developer would buy the property back.
As the property market started nose-diving and fell below 10 per cent of the sales price, Chopra approached the developer for the promised buyback. The property had already been registered against Chopra’s name. The developer, then, put a clause that he needed six months’ time, to honour the buyback. Moreover, Chopra was asked to bear the registration and stamp charges for the new buyer, whom the builder would bring to the table.
Buyback guarantee: A double-edged sword
- Buyback guarantee is a double-edged sword, which has the potential to hurt home buyers equally, when the market appreciates or depreciates.
- If property prices appreciate, the developer may force the buyer to sell the property back to him at the promised rate of return and not at the higher rate that the market may offer.
- If the property’s price depreciates, then, the developer may invoke a number of arbitrary clauses, to deny the buyback to the buyer.
Can buyback schemes work as a business model for developers?
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There is no denying that buyback schemes, especially in the residential segment, have dented the credibility of the sector.
Developers maintain that such schemes are often the business model of Grade B and Grade C developers. Nevertheless, several leading developers in Gurugram, continue to sell their super luxury projects, with buyback guarantees. Madhurendra Sharma, a consumer rights advocate, points out that assured returns and buyback schemes, were essentially the modus operandi of commercial real estate developers. According to him, most of the investors in the commercial segment were risk takers and many of them made money, when the market was on an upward curve.
The problem started, when such schemes made inroads into the residential real estate segment, he explains. “In the residential real estate segment, the buyers do not have much risk-taking appetite and when they get cheated, they come for legal remedies. The developers have no one but themselves to blame, for turning their real estate product into a financial product, without having the legislative mandate for it. The proposed law will, hence, pinch many of them who have to return money,” concludes Sharma.
(The writer is CEO, Track2Realty)
Source: https://ecis2016.org/.
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Source: https://ecis2016.org
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