Every citizen in India is concerned with the rising Real Estate prices.
Buying a home is just becoming a dream for a middle class income family.
Property rates are shooting up every quarter in this lay off period. As
a property buyer we not only pay for the property we planning to own
but we also pay for the locality, the facilities around our vicinity,
announced projects coming up near us and many more factors add up to our
property price. Developers are trying their best to pull out cash from
potential customers. Introduction of various property marketing schemes
over the years has made many customers pay manifolds than they actually
should have. Lets get introduced to a popular scheme that can make you
count every single penny you own. Mid-sized developers are betting
their last buck on the 20:80 scheme to beat the slowdown in the real
estate business. The scheme, also known as the ‘subvention scheme’, is
emerging as a popular marketing tool, as the buyer has to pay only 20
per cent upfront, while the remaining 80 per cent is paid at the time of
possession. Interest subvention schemes are a modified form of financing home loans and have been part of residential real estate over the last few years. Under this scheme, a buyer of an ‘under construction’ piece of property is not required to pay monthly EMIs for a defined time-frame, or until he takes possession. The slowdown in sales has prompted developers to offer investor friendly 20:80 schemes (subvention). Such schemes help the developer to prop up sales without reducing the prices.
Subvention or 20:80 scheme is an innovative financial structuring which involves purchasing of under-construction property directly from the developer with financing from a bank/institution. Under this scheme, the property buyer has to pay only 20% of the cost of the property upfront and the balance payments are to be made in installments only after possession.
The subvention scheme is a variation of the normal home loan scheme, whereby, up to possession of the property, the EMI for the loan is paid by the developer instead of the buyer. For cash-strapped developers, the 20 per cent upfront payment gives them adequate liquidity. And there is pressure to execute the project quickly. The remaining 80 per cent is funded by the bank, which creates a bipartite escrow account that keeps disbursing the funds as the project progresses. Such schemes are popular in the Rs 25-65 lakh segment.
This is how a typical 20:80 scheme works:
• The developer approaches banks/financial institution with the project which he wants to offer under the 20:80 scheme and gets the same approved.
• The developer then bundles this scheme with the property and offers it to potential buyers.
• The buyer purchases the property by paying just 20% of the total cost.
• The buyer gets home loan approved for the balance 80% from the bank.
• A tripartite agreement is made between the buyer, developer and the bank.
• The bank disburses the home loan amount to the developer at agreed intervals on behalf of the buyer.
• The developer pays the EMI on home loan to the bank, instead of the buyer, till possession.
• After the possession, the buyer starts paying EMIs to the bank.
But is it all good when its a real estate deal ?????..... Lets understand. This scheme involves the builder factoring in the cost of pre-emi into their launch price. Say, a builder plans to launch a project at 10,000 p.sqft. They would launch the same at 11,000 p.sqft , with discounts(ranging from 500 psft to 1000 psft) offered to clients who don’t go ahead with the 20:80 scheme. This higher launch rate is basically factoring in the pre-emi that the builder will pay monthly to the bank on behalf of the customer. The bank basically charges a higher rate of interest, say 1.5% higher than the base rate for the scheme towards the customers. Builder can tie up with the bank for a period of 12, 24 or 36 months, depending on the time of possession. The customer has to pay the balance within the term period or possession, whichever is earlier (Most builders reveal this fact at a later stage), likewise the Builder will not get any other payment from the bank until the expiry of the term period or possession whichever is earlier.
In the scenario of delay in possession by the builder, there are basically two options:
1. The customer has the responsibility of paying the pre-emi to the bank until possession, if the term period stated by the builder expires & he has not given possession.
2. The builder makes the customer compulsorily sign an ADF option with the bank if he/she wants to opt for 80/20, thus enabling the builder to get the entire 100% irrespective of the possession of the building.
One of the objectives of this scheme was to facilitate people staying in rented houses to buy under-construction property by taking a home loan. They could move into their own houses once they were ready and start paying EMIs instead of rent.
However, they have become more popular with property investors who would like to take leveraged positions on the property and sale the same on getting the possession.
In the past, investors have made handsome gains using this scheme. For e.g. under this scheme, apartments in Malad West are offered say @10,000 p/sf. A 2 BHK apartment measuring 1,000 sq. ft. would cost one crore for which the buyer will have to pay 20 lakh only and no further payment till possession. The apartment is ready in three years by which time the rate is, say, 15,000 psf. The buyer now sells it for 1.50 crores thereby making a profit 50 lakh on initial investment of 20 lakh. This works out to whopping 2.5 times in three years.
Such schemes have worked well for the investors in the past since the property prices have been on the uptrend. However, if the property prices do not appreciate or start falling, the buyer will either have to exit at loss or hold on to the property and start paying the EMIs. Hence one should be cautious and invest in such a scheme only if one is in position to pay EMI post possession, just in case the market conditions are not conducive for exit.
Nowadays, most developers are using the 20:80 scheme in combination with the ADF (Advance Disbursement Facility). In case of normal home loan, disbursement is made by the bank to the developer in installments linked to construction. In case of ADF, a large part of the loan, say 80% to 90%, is disbursed in advance, ahead of construction. However, banks are very cautious in extending this facility to developers because of the potential for diversion of funds and usually only reputed developers with good track record are able to get this facility.
Another point to be noted is that under the ADF, since the large part of the loan is disbursed upfront, the interest cost during the construction will be higher. Under normal circumstances, this should not impact the buyer since the developer is paying the EMI till possession.
While on the face of it 20:80 scheme looks very attractive, one has to scrutinise the terms in detail and study the fine print to see if there are any hidden costs involved.
The main USP of the 20:80 scheme is that you don’t have to pay any EMI (interest cost) till possession. One needs to see if the developer is bearing this cost in full or passing it on to the buyer by increasing the price of the property. Taking the example referred to earlier if the property rate in Malad West is 10,000 psf and the developer is selling at the same rate under the 20:80 scheme, then it would be beneficial to the buyer. But if is selling at a higher rate say 12,000 psf then he is passing on the interest cost to the buyer. Also if the developer is availing ADF, his interest cost would be higher in which case he should be willing to bear the same.
One of the biggest advantages of the 20:80 scheme is that it puts pressure on developer to complete the project on time since they have to pay EMI till possession. Any delay in completion would result in increased cost for them. Hence this reduces the execution risk to a large extent.
However some developers offer 20:80 schemes under which they agree to pay EMI only for a specified period of time say two years from the date of purchase instead of from the date of possession. In this case, the EMIs would start immediately after two years irrespective of whether the construction is completed or not.
Considering all this, it would be advisable to go for 20:80 scheme wherein the property is being offered at close to prevailing market price and the buyer has to start paying EMIs only after possession.
To conclude, a fair and transparent 20:80 scheme is favourable for all the players involved the property buyer, the property seller (developer) and the property financier (Banks/Institutions).
The property buyer is able to buy the property with limited cash outflow, the developer is able to increase his sales and the bank is able to lend more money thereby increasing its assets and profitability.
