Assured Returns In Real Estate
The investment may not be as safe as a fixed deposit
, but if done prudently, will certainly benefit the small investor
The stock-market crashes worldwide that accompanied the recession have alerted many an investor to actively seek low risk investment options.
Assured return schemes (ARS), such as fixed deposits and public provident funds, have long been popular with investors who favour safe investment, strategies. The vey term assured returns suggests that investors know beforehand the exact amount they stand to earn from their investments, thus leaving little room for uncertainty. However, it is only recently that ARS are being offered in the realty sector.
The real estate sector in India, growing at a healthy rate of 7 per cent per annual, is witnessing a revolution of sorts when it comes to innovative ideas and projects. ARS when introduced were first offered by developers for commercial properties, but are lately being offered for residential properties too an interesting trend no doubt.
When a developer choose to raise money for building its proposed project directly from buyers by offering them an ARS, the interest rate at which it has to pay monthly returns between 10 per cent 12 per cent PA. of the propertys purchase price. Lets contrast this with the 16 per cent 18 per cent p.a. rat of interest the developer has to shell out if it opts for a loan offered by commercial banks instead. Moreover, ARS are offered on properties yet to by constructed.
Having witnessed the flurry of project abandonment during the recession, banks now tread cautiously when it comes to granting loans for projects that exist only on paper. By offering ARS to buyers, developers can easily raise credit by alternative means without keeping collateral security, as well as benefit from savings of a significant 6 per cent to 8 per cent on rate of interest.
Typically, the developer signs an Agreement for Assured Returns (Agreement) with the buyer wherein the parties agree that the buyer will make an upfront down payment of 90 per cent of 95 per cent of the propertys purchase price at the time of booking / within a few days after such booking. After receiving this payment, the developer commences paying assured returns of paying assured return of 10 per cent to 12 per cent pa (or other agreed percentage) of the propertys purchase price paid on a monthly basis. These fixed percentage payments continue till such time the developer leases out.
the property to a lessee and payment of monthly rent commences. The remaining 5 per cent to 10 per cent of the propertys purchase price is paid by the buyer upon receiving possession of the property.
In case the actual lease rent (at which the developer leases out of the property) varies from the percentage of assured returns, the original purchase price of the property as mentioned in the agreement is accordingly adjusted. If the monthly assured returns, the original purchase price stands accordingly increased. In such case, the buyer has to pay the difference in amounts to the developer. Vice versa, if the monthly lease rent is lower than the monthly assured returns, the original purchase price stands accordingly decreased. Here the onus is on the developer to pay back to the buyer, the difference between the original purchase price and the adjusted purchase price.
At the outset, ARS may appear as lucrative as the assured return is in addition to whatever may be the .
appreciation in value of the property. But one must take note that property ARS are very different from conventional ARS such as fixed deposits. Property ARS are not cannot rule out the possibility of non-payment of ARS by the developer. The recession brought about a spate of project cancellations, leaving many buyers in the lurch and embroiled in long-drawn recovery suits often, the only option for recovering their investments.
However, some basic precautions can help minimize the risks associated with property ARS. For instance, doing a comprehensive background check of the developers project, keeping in mind the track record for completion of projects and payment of ARS in previous projects; obtaining a title search report for the property to make sure its free from all kinds of claims and legal encumbrances; and checking (whether the project is located) has all requisite sanctions, licenses and permissions from the competent authorities.
The investment choices one makes depends largely on the individuals risk appetite. Nevertheless, when contemplating investing in a project with ARS, one must tread cautiously and thoroughly explore the various schemes on offer.
Courtesy:- ht estates dtd May 29, 2010
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by: nitu
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