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The biggest risk in under-construction projects is delay and non-completion.
Gurgaon-based developer M3M has introduced a 'Pehle Possession Phir Payment' plan, where buyers pay 20 per cent upfront, 30 per cent in the third year, another 30 per cent upon applying for the occupancy certificate (OC), and the final 20 per cent in the sixth year.
Buyers must understand the nuances of a payment plan before committing to it.
Payment plans are designed to encourage fence-sitters to take the plunge.
"Property prices have surged over the past two-and-a-half years, resulting in slower sales.
"Developers are offering flexible payment schemes to delay the start of EMIs for buyers," says Ravi Shankar Singh, managing director, residential transaction services, Colliers India.
These plans are also offered by developers to avoid a price cut.
"Price corrections remain a last resort, as outright reductions could undermine investor confidence and suppress market sentiment," says Keval Bhanushali, CEO and co-founder, 1 Finance.
Construction-linked plans
In construction-linked plans, instalments are linked to a project's progress. Buyers typically pay 10 to 15 per cent at the time of booking.
Subsequent payments become due at various construction milestones, such as the completion of foundation, specific floors, and so on.
This structure incentivises developers to stick to the construction schedule.
"Buyers also avoid large upfront payments or financial pressure at the time of possession," says Rajat Likhyani, principal partner, SquareYards.
However, buyers have to pay around 70 per cent of the total cost by the time the superstructure is ready.
"Completion of interiors and plumbing may take two to three more years," says Singh.
Understanding the construction milestones is important.
"Ensure that the milestones and payments demanded at each stage are reasonable. Also, the milestones should be for your tower and not the average progress of the entire project," says Pradeep Mishra, founder of Homents, a National Capital Region-based property consultancy.
Delays can lead to financial burdens. "Buyers would end up paying EMIs without receiving possession, causing financial strain," says Likhyani.
Possession-linked plans
These plans require 10 to 25 per cent payment at booking, with the balance paid in one or two instalments near possession.
The buyer's financial exposure gets minimised. They get time to accumulate money while the project is under construction.
"Buyers can lock in the price early while deferring major payments until the property is nearly complete," says Likhyani.
This plan suits those with upfront liquidity. Likhyani adds that buyers must ensure they have the funds ready close to possession.
They must also check that the basic sale price (BSP) charged for this plan is not higher than for a construction-linked plan.
How to choose a plan
The ideal payment plan should align with the buyer's income cycle and risk appetite.
"Buyers who prefer gradual payments should opt for a construction-linked plan.
"A possession-linked plan is better for managing cash flow efficiently while aligning payments with project completion.
"Those seeking flexibility and lower annual commitments may also find possession-linked plans preferable," says Likhyani
Points to check
The biggest risk in under-construction projects is delay and non-completion.
"Verify the developer's history of timely delivery to prevent funds from being stuck in incomplete projects," says Likhyani.
Buyers must understand the concept of "time value of money", which means that money is more valuable now than it would be in the future.
When developers defer payments, they bear the cost of financing the project themselves. It's likely they may try to extract that cost from buyers.
Compare the basic sale price (BSP) across various payment plans.
"Back-loaded payment plans benefit buyers only if the BSP remains stable or is marginally higher," says Singh.
If developers inflate the BSP to compensate for payment flexibility, the plan may not be advantageous to buyers.
Mishra suggests comparing the BSP of a deferred payment plan not just with the rate in a construction-linked plan but also with the rate prevailing in the secondary market.
He adds that sometimes it may be more beneficial to go for a construction-linked plan or purchase from the secondary market by taking a loan than opt for a deferred payment plan with higher BSP.
Likhyani says buyers must confirm whether banks support the payment structure they plan to pick.
In many payment plans being launched by developers nowadays, one milestone developers put in is "on application of OC".
Note that this is not the same as receiving the OC.
"Payment plans linked to OC application are problematic because developers can apply for OC prematurely, triggering payment demands.
"But the OC may not get issued if the project lacks essential amenities or has other issues," says Mishra.
Before choosing a payment plan, compare multiple options, negotiate terms, and consult financial advisers.
Understand the plan's nuances instead of giving in immediately to pressure from the developer's sales personnel.
"Exiting a transaction becomes difficult once a buyer commits 30-35 per cent upfront, along with stamp duty, GST, and other charges," says Bhanushali.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff.com
