How To Assess Assurances And Buy Back Guarantees

As the real estate markets have been stagnant for a while, many marketing gimmicks have become common. Such schemes make real estate a better asset class to invest in. If you have considerable savings, when you are promised assured returns or a buy back guarantee, you would not want to miss the opportunity. This is exactly what the Singapore-based business analyst Mahesh Chandran thought too. But it was not very pleasant experience for him.

Construction linked plans, subvention schemes and other customised payment options that developers offer have lured in many potential buyers. Developers and buyers alike benefit from such schemes. The customer is promised that his money parts from him only when he has the product in hand. Such schemes also make it easier for the developer and promoter to sell. Buyers are usually comfortable with the installments. However, with stagnant demand, many developers found it difficult to finance their under-construction projects. At the same time, they could not lose face and had to deliver what they promised. Some others could foresee this situation much earlier. For all such developers, assured returns and buy back guarantees have become a strategy to pull in customers and keep them happy.

There are two ways of looking at this. One, you need not look at all this with suspicion. With construction costs rising every day, there should be certain strategies that help the developer without compromising interests of customers. However, the rising number of scams suggest that all that glitters is not gold.  

Chandran is one of the many victims. A few years back, he had invested Rs 50 lakh in a 3BHK unit in Manesar. He did not come to India with the intention to buy, but when assured rentals were rolled out as an offer, there was no question of saying no to such lucrative offers. “I had almost made my retirement plan, but now I am active on most real estate forums to figure out whether I can find a way out of this,” says Chandran. Many others who are in a legal tiff with the developer join him.  Multiple trips to the country in the hope of getting back some of his precious savings may turn out to be fruitful. But that is far away in the future.

If you want to go for such offers, read all clauses that the developer maintained carefully. Understand what is at stake, and weigh the pros and cons. If the cost of the property is high, say Rs 2 crore, and the developer has gone back on his words of say, buying it back at 10 per cent within two years, you may lose nearly Rs 20 lakh. How comfortable are you with this?

One of the most important checks when it comes to investing in real estate is that you make about the developer. Developers with a clean track record usually win our trust.  This is why when projects are delayed for up to a year and a half, homebuyers in India usually stay calm. When a project is delayed further, homebuyers know that a 'good' developer would either try to wind up the project or willingly pay the penalty.

There are many other tricky situations. For example, a renowned developer with an under-construction project in Sector 168, Noida recently called a buyers' meeting. He proposed that if they paid his firm completely, he would ensure that the tower is fully constructed before March 2017. If he does not keep his word, the penalty would be extracted at 18 per cent. This is much higher than industry standards. There are salaried buyers who had opted for various construction-linked plans. Should they go for it, or opt out and protest? The developer says that such deviations in the plan had already been mentioned in the list of clauses. The project is already three years behind schedule. No penalty was proposed for this tenure, because the delay of a year and a half could be blamed on the National Green Tribunal.

If the market is bullish, the possibility that buyers may want to go in for attractive buyback guarantees is bleak. While the developer may be offering 25 per cent above the cost of purchase, the market may be yielding a 50 per cent. So, such strategies work only when owning a house in a stagnant market looks like a necessary evil. Buyers need to be guaranteed that if something goes wrong, not everything goes wrong.

Additionally, a good location will always work well for the investor. You need a guarantee only when you are left in the lurch. If the property you have invested in has excellent social and physical infrastructure, the payoff in the future may be high. However, if infrastructure projects are delayed and urban policies go wrong, you need assurance. The Supreme Court holds that if the developer defaults, the consumer can approach the civil court or the forum under the Consumer Protection Act. Everything agreed upon between the builder firm and the consumer should be documented. Make sure that there is a bank that does due diligence in ascertaining the legality of the project.