How to play the 20:80 game of realty scheme

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You know that sales of residential property are down in any city when builders start widely advertising their 20:80 schemes. Clearly, 20:80 schemes are launched by builders as a sales promotion tool. So does that mean that 20:80 schemes are always beneficial for consumer or investor? That would broadly be true if you are in the market to buy an under construction property.

There are three broad variations of this scheme.

The true blue 20:80 schemes

Here the investor pays 20 per cent of the purchase price and the balance is payable on possession irrespective of when it happens. The investor is not required to take a loan from any institution and this is an arrangement between the investor and the builder. This kind of scheme is normally restricted to projects at a pre-launch stage or at very early stages of construction (at which time all approvals may not be in place), which means the project is very risky from the investor standpoint. The benefit is that the investor is able to invest in a property at an early stage of its construction and benefit from the appreciation in the value of the property as the construction is completed. The price for investors opting for the 20:80 schemes tends to be higher than those who opt for the regular construction-linked plan. It is only hardened real estate investors who can take a call on whether it is worthwhile to pay the additional price to reduce the cost of project delays versus pay a regular price but suffer from higher costs if the project is delayed.

Investors opting for this kind of scheme must watch out for clauses that restrict their ability to sell their flat during the construction period.

Consumer, builder and lender

Here the bank agrees to disburse the amounts to the builder as construction progresses and the builder agrees to pay the pre-EMI interest on the disbursed amounts till possession. Also in such schemes the price for consumers opting for the scheme tends to be just a tad higher than what is available to consumers who do not take this scheme. Apart from the restriction on the ability to sell as mentioned above, consumers who opt for this scheme should also be aware that in case the developer defaults on the obligation to pay the pre-EMI interest they continue to remain liable to the lender for the pre-EMI interest. If the builder defaults on his obligations and the consumer refuses to pay the pre-EMI interest then the consumers credit record will be adversely affected. But in practice this is good scheme to reduce the costs of project delays since the lender closely monitors the progress of the construction.

A variation of the second

Here, except that the pre-EMI interest is payable by the developer to the lender for a fixed period usually two or three years after purchase and if the possession is delayed beyond that period the liability shifts back to the consumer. This kind of scheme does not provide any protection against the risk of project delays and if it is at a higher price than a normal purchase it does not make any sense. It also indicates that the builder himself is not confident of the project schedule and hence he is restricting his liability for a fixed period. This kind of scheme does not make any sense and the consumer should read the document carefully as these schemes are frequently mis-sold as the schemes in the second category outlined above.

A consumer is always much better off buying a comparable ready- to-move in property rather than buying an under-construction property. The so-called lower price of under construction property is more than set off by the increase in tax payments alone. Service tax and VAT together account for around 4-5 per cent of the flat value and these taxes are not payable on ready to move in property. Additionally,a if you take into account the risk element inherent in an under-construction project the cost will far outstrip the cost of comparable ready to move in property.

To conclude if you do want to buy an under construction property then a 20:80 scheme does help in reducing the cost of project delays and you should consider them.

The author is CEO, Apnapaisa.com. ceo@apnapaisa.com.

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