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When Arun Kumar Pathak booked a flat in Noida four years ago, the
builder had promised to hand over possession within 18 months. He
had even offered a hefty 9% discount if Pathak paid the entire amount
up front. Not convinced, Pathak opted for a smaller 2% early bird
discount and paid only 30% of the price at the time of booking.
"The rest 70% is payable only when I get possession," he says with a
sense of relief. That is because the project is still not finished and there
is no saying when possession will be handed over.
Pathak was lucky, but thousands of other buyers are not. Delay in
projects has become a common thing across the country. The best
option of buyers is to opt for a construction linked payment plan under
which they pay as work on the project progresses. This way you don't
lock up your money in a project that is not moving ahead.
Pranshu Gupta opted for a construction-linked plan when he booked a 3-BHK in Gurgaon in 2013. Till date, Gupta has paid
only 30% of the price of the flat. The rest will be paid in tranches of 10% when the construction reaches specific milestones.
Though construction-linked plans cushion buyers against delays, they may not fetch you the attractive discounts that
cash-strapped builders are offering. Faced with a debilitating slowdown in sales, real estate developers are luring prospective
buyers with innovative payment options and freebies. Each option has its pros and cons and only suits buyers in specific
financial situations. This week's cover story examines the arithmetic behind each payment option and explains which of these
suits you best.
1. Construction-linked plan: Cushion buyers against delay in projects
This is a very common payment plan and is offered by most builders. Under this option, the first 2-3 instalments are calendar
based and subsequent payments are linked to the progress in the construction of the project. You may be asked to pay 5-10%
at the time of booking, another 5-10% within three months and 20% within six months.
The remaining 60-70% is paid when the construction reaches predetermined milestones. There was a time when the payments
were time-based but after delays became endemic, these construction-linked plans became popular. "Initially time-linked
payment plans used to be the norm. This changed to construction-linked plans due to delays faced in many projects," says Amit
Oberoi, National Director, Colliers International (India).
Construction-linked plans are good because they cushion the buyer from the delay in the project. He is not required to block a
huge amount in an under-construction property. Pranshu Gupta is glad that he has paid only 30% of the price of his flat.
"Construction was supposed to start from the 13th month, but two years have passed and even the digging has not started," he
says.
For Gupta, the silver lining is that he didn't opt to pay the entire amount up front by taking a loan. The delay would have pinched
him more if he was also paying a hefty EMI on the loan.
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Builders will not pay interest out of their pocket. What they spend on subvention schemes is passed on the buyer by increasing
the price of the property.
* Savings have been calculated assuming interest rate of 9.5% at present value
2. 30:70 subvention plan - Requires a small 3 downpayment
In many ways, this is also a construction-linked plan because the buyer makes a small downpayment of 10-30% at the time of
booking. The only difference is that he also takes a loan for the remaining amount, though the builder pays the EMIs till
possession. The lender pays the builder construction-linked payments on behalf of the buyer. For the buyer, EMIs start either on
possession or after the specific period prescribed in the agreement.
Earlier, builders were offering subvention for fixed periods. But due to delays in projects, the subvention got linked to
possession. "If you are looking to buy through a subvention plan, go for possession-linked plans rather than time-linked ones,"
advises Oberoi.
Such schemes may appear attractive but they are not all that great. The interest cost absorbed by the builder during the
subvention period is eventually passed on to the customer by way of higher prices. The price per sq. ft under this option is
higher than what you would pay under the construction linked plan. "Since the developers need to pay interest to banks, they
charge customers a premium to compensate for this," explains Ramesh Nair, COO, Business & International Director, JLL
India.
Who should go for it
Just like construction-linked plans, these suit buyers who don't have too much surplus cash. However, don't get enticed by
offers of a very small downpayment. "Schemes that require a very low up-front payment (say 5%) show the level of desperation
of the builder," warns A.S. Sivaramakrishnan, Head Residential Services, CBRE South Asia.
If construction gets stuck for any reason, there is a high chance that the builder will default on interest payment to the bank.
These schemes are a good way for developers to raise money for construction. But keep in mind that the loan has been given
to you, not the builder. "In the subvention plan, builder is taking loan against your balance sheet," says Agarwala. So if there is
a delay in pre-EMI interest payment by the builder, it will impact your credit score.
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