Real estate: Soft launches can lead to a hard landing

Dec 14 2013, 14:44 IST
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Home buyers are flocking towards 'pre-launch' schemes, unaware that the risks are greater than the discounts dangled before them. Home buyers are flocking towards 'pre-launch' schemes, unaware that the risks are greater than the discounts dangled before them.
SummaryCash-strapped developers are resorting to pre-launch sales to lure buyers with discounted prices.

discount they had to give.

During pre-launch, developers do not disclose much details about the project. Buyers, however, do not raise many questions and are taken in by advertisements such as “limited period offer”, “first come, first served”, “prices to rise from next week” and so on.

“People are lured to investing in such properties and it needs to be stopped. This is deception,” says Pankaj Kapoor, MD, Liases Foras, a real estate consulting firm.

“The main reason for such schemes is that without approvals and clear title, no lender will finance the project. But legal position is clear. One cannot sell something that does not exist,” says Naresh Mehta, a Mumbai-based property consultant.

The Risks

Such schemes carry substantial risks, and it would be foolhardy to ignore them.

If the land is not owned by the developer, and in future if some legal or technical issues crop up, then the project could be a non-starter. If permissions do not come through, or some prohibitions are applicable to the plot or the project such as coastal zone regulations, then again the project will run into trouble. In such a case, the project may have to be down-sized, which means it may not remain viable anymore. The developer may abandon the project leaving the buyers to face the consequences.

If the developer begins the project with alterations and a down-sized plan, he may not keep his commitment of the pre-launch rate as it would be unviable since he has lost on his profits with the amended plan.

If the developer diverts the funds gathered from the pre-launch to another project, then be prepared for delays, and the financial consequences given the interest burden.

If due to non-compliance of any law or regulation, the properties of the developer gets attached, or auctioned off by a law enforcement agency, the pre-launch project is left in the lurch.

Factoring in these risks, the odds are loaded heavily against the buyer. Further, there is no legal document such as an agreement of sale, but only a receipt, which has no legal strength. In case the project does not take off, the buyer may get back the token amount, but after a while, but investors should factor in the opportunity cost of this deal.

There is another aspect, often overlooked. Once the project attracts significant interest at the market price, developers do try and offload the pre-launch buyer through some inducement so as to resell the

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