Buying a house? Mitigate risk with possession linked plan
Feb 23, 2014
Source : The Times of India


DELHI: With sales in the real estate sector slowing down, developers are coming up with a variety of attractive offers to persuade customers to buy. One innovation that the current slowdown has spawned is the possession linked payment (PLP) plan. Until recently, the most popular plan was the construction linked payment (CLP). Here, the payment to developer, either by the buyer or the bank from which the loan is taken, is linked to construction milestones.

While this plan appears attractive, developers have found a way to circumvent it. By the time the super-structure is ready, the buyer or his bank has paid 80-90% of the apartment's cost. Next comes the stage when the interior and finishing have to be done. Normally, this stage should take between six months and one year. It is at this stage that the developer begins to delay the project, stretching it from two to five years. Having collected most of the apartment's cost, he now diverts the buyer's funds to other projects or to buying land. It is this bit of chicanery that the PLP plan aims to address.

The benefits

Under the PLP plan, payment is made in two stages. While 20-25% of the total cost is paid at the time of booking, the balance is payable after the buyer has received the property's possession. The plan's biggest advantage is that it reduces the development risk—the risk that the project may be delayed or not be developed at all—for the buyer. Says Sanjay Dutt, executive managing director, South Asia, Cushman & Wakefield: "Under this plan, the onus is on the developer to complete the project on schedule so that he can collect the balance money from you." Since the buyer has paid only 20-25% of the total cost, he has lesser money at stake than under the CLP plan.

This plan also offers monetary benefits. With 20-25% of the total cost in your pocket, you can book an apartment. Thereafter, you get two-three years—the time it takes to develop the project—to accumulate more money. This means that you don't have to take a large loan. Under the CLP, the buyer takes the home loan at the time of booking. During the construction period, he has to bear the burden of the pre-EMI (the interest component on the loan) as well as the rent. With the PLP plan, he saves on the pre-EMI cost entirely.

Watch out for...

While the PLP plan is an improvement over the CLP, home buyers should look closely at a few things before opting for it.

> Does the developer have the financial strength to complete the project?

> Is the cost under PLP the same as under CLP?

> Have all the necessary approvals for developing the project been obtained?

> Does the project's location justify its cost?

> Does the developer have a track record of delivering projects on time?

> Is this the 80:20 scheme in disguise?

Developer's financial strength

Under the PLP scheme, a higher proportion of the risk is transferred to the developer. Hence, the buyer should ensure that the developer has the financial strength to complete the project and has received funding from a bank.

Cost difference

The total cost of the apartment should be the same under both PLP and CLP plans. Says Om Ahuja, CEO, Jones Lang LaSalle India: "If the price is different for the two, then the developer has already included the cost of funding in the PLP plan." If this is the case, pass up the offer.

Karun Varma, MD, DTZ India also warns that developers usually build in a 10-15% premium over standard rates while offering the PLP scheme. Bargaining hard on the apartment's price may not be possible when you opt for such a scheme, adds Varma.

Exercise due diligence

The due diligence associated with the purchase of an apartment should not be overlooked. Are all the approvals for developing the project in place? Does the location justify the cost? How good is the developer's track record regarding timely completion of projects? What will be the carpet area of the apartment as opposed to its super built-up area? Also, make sure that the developer has not cut down on the quality of facilities and specifications to reduce costs.

Is it the 80:20 scheme in disguise?

In September 2013, the RBI had banned the 80:20 scheme. Most buyers, who hear of the PLP plan, ask whether this is the 80:20 plan by another name. No, it is not. Under the CLP plan, your made the down payment from your pocket, while the bank paid the balance upfront to the builder. As an incentive, the developer paid the interest on the loan to the bank while the project was under development. The PLP plan is different since the bank doesn't come into the picture at all.

Go for the pure PLP plan

This means that there should only be two payments, one at the time of booking and the other on possession. Says Pradeep Mishra of Gurgaon-based Sainik Estates: "The developers' need for cash is so high that they will offer you all sorts of enticements." One way in which developers are trying to circumvent the ban on the 80:20 scheme is that the buyer opts for the CLP plan and takes a loan from the bank.

The developer pays the interest on the loan till possession to the buyer, and the latter pays the money to the bank. Such agreements with the developer are fraught with risk, warns Mishra. What if he does not pay you the interest? If you default on the bank loan, the liability is entirely yours.

Finally, the PLP plan is the result of the slowdown in the industry and developers' need to push sales. It may not be offered once the market picks up, so make the most of it while it is available.


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