[ecis2016.org] While some schemes appear to protect you from the cyclical nature of the real estate market; there are associated risks and buyers need to be diligent when opting for such offers
With the real estate sector slowing down, developers are offering various kinds of schemes to garner sales. Of these, two common ones are buybacks and assured return schemes. Let us examine their risks.
You are reading: Should you opt for buyback offers and assured return schemes?
Buyback: The developer promises to buy the product sold to you today — a plot or an apartment — after a specific period of time, at a specified higher rate. In effect, the offer is a guaranteed rate of return in the current weak market conditions.
Assured return: The developer promises a specific return on investment which commences at the time of purchase and continues till possession or for a specified period of time.
Why offer these schemes?
For a developer, money available for projects, has become increasingly tight. In light of the banks’ own high levels of NPAs (non-performing assets) and the difficulties within the realty sector, institutions have become tight-fisted about lending to developers. In fact, smaller builders are finding it difficult to raise money from conventional sources. They are turning to non-banking financial establishments and other sources for loans, where the rate of interest can be as high as 24-25%.
By offering these schemes, developers are essentially turning to buyers to finance their projects. Even if a developer offers a 14-16% return on these schemes, he still gets money at a cheaper rate than he would from other sources.
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Watch out for
Buyback schemes and assured return plans are a sure sign of the fact that the developer is facing financial distress. When a buyback scheme is offered, the developer is betting on the possibility that the realty market will improve in the next three years. He is even presuming that the market price of the apartment will be higher than the price that he is offering. If this happens, the buyer will prefer to sell his apartment in the open market rather than avail of the buyback scheme. So, the developer would have raised money now without having to meet his commitment in the future.
But what if things pan out differently? What if the current downturn continues for another three years? This is not such an impossible assumption any longer. A downturn in the realty market tends to last quite long. Will a developer, who is in a precarious financial situation now, only two years into the downturn, have the financial capacity to meet his commitment in another three years? If he reneges on his promise, you will have no alternative but to go to the courts, where proceedings can be long-drawn and messy.
What you should do…
Conservative investors should avoid buyback and assured return offers altogether. If at all you decide to invest in projects offering such schemes, study the developer’s financial situation closely. If it is not sound, as is likely, avoid the scheme. If at all you invest, stick to the larger and more reputed developers.
According to Sanjay Sharma, MD, Qubrex, a Gurgaon-based real estate consultancy, “In trying to raise money from retail buyers, developers have today converted their apartment into a financial product.” What Sharma is alluding to is that the focus of a developer’s sales pitch is on the rate of return and not so much on the attributes of the apartment. However, you should not lose your focus. You should buy an apartment or plot for its inherent merits rather than the rate of return offered by the developer. Do all the due diligence that you would in the course of a normal purchase. Check if the location is attractive and whether the per-sq-ft rate is it on par with those prevailing in the area.
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