Why Should Avoid New Versions of 80:20 Real Estate Schemes?

 In case of project delays, the entire equated monthly instalment (EMI) burden might fall on property buyers' shoulders

Gold coins & Jewellery were not the only things aggressively marketed this April 21, 2015 Akshaya Tritiya.

Indian Real estate developers / promoters were also pushing new variants of the once-frowned-upon 80:20 or / 75:25 schemes to lure property buyers.

Some of the schemes include variants such as 10:80:10, 2:92:6, 6:88:6 & even 10:10:70:10.

Many experts suggest such schemes are nothing but 80:20 or / 75:25 schemes - scrapped by the Reserve Bank of India (RBI) in 2013 - in a new avatar.

Under such schemes, property buyers can purchase properties with financing from a bank or housing finance company (HFC).

A small upfront amount is paid by the property buyer to the developer / promoter. The developer/ promoter / builder, then, pays the EMI for a specified period of, say, 2 or 3 years, or till the buyer gets possession of the property.

This works under a tripartite agreement between the buyer, the developer & the bank/ HFC.

For example, under the 5:80:15 scheme, a popular scheme being pushed these days, buyers will pay 5% of the flat cost at the time of booking and additional government charges like value added tax (VAT), service tax, and stamp duty. The developer will pay the EMIs to the bank until the time of fit-out or possession. The buyer then needs to pay the remaining 15% at the time of possession.

These schemes are used by developers to manage their cash flow. Developers / promoters get a funding at about 10% to 11% instead of the 18%-20% they would otherwise have had to shell out.

Mr. Ashutosh Limaye, Head (Research) JLL India said, "These schemes are a good means to attract buyers in a depressed market. Buyers benefit as the upfront payment is small and they can save on interest cost for one-and-a-half to two years"

Mr. Mudassir Zaidi, National Director (Residential Agency), Knight Frank said,"Such schemes can be good if the project is 2-3 years away from completion & all the necessary approvals are in place," said

However, the irony is that such schemes are typically available only for projects that are just launched or in the early stages of construction.

Property Buyers might need to be aware of gimmicks & additional costs associated with such schemes.

For example, an advertisement of a township in Palghar, a town close to Mumbai, says ready-possession flats are available for Rs. 18.11 lakh including stamp duty, registration, VAT & service tax.

Customers just need to pay 10% down payment and would get 90% in home loan. The marketing executive, however, reveals the housing loan will be on agreement value, which will be Rs. 14.5 lakh. The buyer needs to pay the remaining money of about Rs. 3.6 lakh partly in cash & cheque.

Another advertisement for properties in Pune and Goa markets a 10:70:10:10 scheme. The sales staff says the payment will be in 4 tranches.

A property buyer will need to pay 10% upfront to book the house, while the Bank or HFC will release 70% in loans. The customer will be charged EMI on this amount. While taking the keys, the customer will need to pay an additional 10% & the lender will release the remaining 10% to the developer/ promoter. The customer's EMI will go up in the same proportion.

Developers / promoters have a tendency to jack up prices of properties where such schemes are applicable to cover their cost of paying interest. So, if the property is available at, say, Rs. 4,700 a sq ft, the developer may sell the flat at Rs. 4,900 per square feet under this scheme.

"Property Buyers need to check the rates for the flat if they do not opt for the scheme & compare it with those when the schemes come into play. In all likelihood, the rates are likely to be different as the developers will try to recover the interest payment from these higher rates," says Mr. Limaye.

These projects are prone to accelerated disbursements. There may be cases where only 50% of the construction is complete but 80% of the disbursement has taken place through banks/ HFCs, according to industry observers.

Mr. Divakar Vijayasarthy, Co-founder, MeetUrPro said, "If the borrower or customer wants to exit at this stage, he will have to find a buyer who is ready to pay 80% upfront for a 50% completed property. Also, all the transfer charges will be on the completed value of the property,"

For example, if someone had purchased a property at Rs. 5,000 a square feet with a 3 per cent exit fee and he exits the project when it is 50% complete, he ends up paying an exit fee of Rs. 150 a square feet (3% of Rs. 5,000) on an investment of Rs. 2,500 or 50% of the total cost, amounting to an effective exit fee of 6%.

If the developers / promoters / builder delay, the entire burden of the home loan falls on the shoulders of the property buyer who is yet to have the home.

In case of default, there could be further complications. "The developer / promoter may be bearing the interest burden, but the housing loan is taken in the name of the buyer.

If the developer defaults, any delay or / default will appear in the credit report of the property buyer for no fault of his. The property buyer will also be forced to pay interest once the specified period expires even though the property is still under construction," says Mr. Vijayasarthy.

Since these schemes are applicable for under-construction projects, buyers will not be able to take the Income tax benefit immediately. The deduction for the interest paid up to Rs. 2 lakh for a self-occupied property during the pre-construction period can be claimed in 5 equal instalments commencing from the financial year in which the construction of the property has been completed.

However, if the property is not constructed within 3 years from the end of the financial year in which the home loan was taken, the interest benefit would be reduced from Rs. 2 lakh to Rs. 30,000.

According to Mr. Harsh Roongta, Director, Apna Paisa, the original 80:20 schemes had no housing loan component.

"In the original 80:20 scheme, buyers had to pay 20% upfront and the rest on possession. The scheme was later tweaked to bring in the housing component. Property buyers should not opt for schemes if the loans are involved or / where they come under any sort of liability," says Mr. Roongta.

REALTY CHECK...!

1. Variants of 80:20 schemes work under a tripartite agreement between buyers, developers & banks
2. Schemes can be in property buyers' interest if the project is 2 to 3 years away from completion
3. Developers / promoters may raise prices of properties under such schemes to cover cost of paying interest
4. If the developer / promoter / builder defaults, any default will appear in the property buyer's CIBIL report
5. Developers get a funding at 10% to 11% instead of 18% to20% they would otherwise have to pay
6. No immediate income tax benefit for property buyers since these are mostly under-construction projects.

Src; Ashley Coutinho & Tinesh Bhasin, BS

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