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Analysis of 20:80 scheme by builders

CA Vinay parmar 
on 02 July 2013

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You all know that sales of residential property are down in every city, the slow down in sales and liquidity problem has forced the all over developers to come with such kind of scheme that can lure the buyer's/ Investors etc and here they are wat they exactly wanted too, a complete promotional tools to market and sale the flat with a scheme known as 20:80 scheme. Before i take you further about the advantages, disadvantages and all, let me tell you first what is this 20:80 scheme all about.

20:80 scheme:

Under the 20:80 scheme, the property buyer has to pay only 20% of the cost of the property upfront. For the balance 80% the buyer will get home loan sanctioned by the bank. The bank will disburse the loan amount to the developer but the EMI for the loan will start only after the buyer gets the possession of the property. In short, you can by a home by just paying 20% now and further payments to be made only after possession.

This scheme was originally designed to make facilitate people staying in rented houses to buy under construction property by taking 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 position on the property and sale the same on getting the possession. In the past, investors have made handsome gains using this scheme. For eg. under this scheme apartments are offered say @10,000 per sq.ft. A 2 BHK apt measuring 1,000 sq. ft. would cost one crore for which the buyer will have to pay 20 lacs only and no further payment till possession. The apartment is ready in 3 years by which time the rate is say 15,000/-. The buyer now sells it for 1.50 cores thereby making a profit 50 lacs on initial investment of 20 lacs. This works out to whooping 2.5 times in 3 years.

The 20:80 scheme is a win-win 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.

Well this is how the 20:80 scheme is presented to everyone, but now let us get into more deep into it ;-

1) Under the above scheme the buyer's has to purchase the flat at premium rate then compare to normal rate if the buyer goes for a normal bank loan scheme. i.e if the flat booking price is Rs.9500/- psf under normal scheme, then under 20:80 scheme the price will be Rs.10000/- psf, its means the buyers has to pay Rs.500/- to opt for this scheme.

2) Under this scheme, all though it is said that it is win-win for all the players involved .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.

"But when you talk about the Risk, then who is barring risk in this whole scheme, whether its Builder - No ways he is totally risk free from every angle, Whether its Bank who will be bearing Risk - Again the answer is same No way, becoz bank has every rights to recover the money from the buyer, it can even seal the property, then who is left its the property buyers, how that i will explain you below.

3) Under the normal scheme the builder is to get the money depending upon the completion stage of Building,  that is you see visible signs of progress, and there is a noticeable correlation between what you are paying for and the development of the project, in other word builder has to complete the project faster so that e can demand for the money from the buyers.

But now under this scheme, the buyer will 20% of his contribution at the initial stage, and the builder will disbursed the bal 80% money from bank at one go, or in 2-3 installment as per his requirement, although the builder has not yet started construction, it means build nothing but got everything i.e. 100% money in hand, doesn't it sound good, and if we talk about interest rate than home loan interest rate they will get around 10.15%. Just imagine 100% money in the hand of the builder before construction. High Risk factor.......!!!!! don't you think

4) Further If we go through the scheme it is said that builder will pay the pre-emi till the date of possession, now my question is if the builder defaulted in paying the pre-emi, or stop paying pre-emi, then what?, Here is the risk to the buyers, because there is no liability on the builder, it is not the builder who has taken the loan it is the Buyer who has taken the loan. the buyer will be forced to pay the pre-emi.

5) If every thing goes well and if the builder is not defaulter then i too agree that its really a win to win situation for every one, just by investing 20% and you sale it as soon as you get the possession, you donot have to pay any bank EMI, all you will enjoy is only profit & profit.

6) Further to add, the bank are even very curious about the risk factor involve on the hand of the builder, that why these scheme are only available to the very reputed developers only and not to the ordinary developers, like Rustomjee, Indiabull, Hubtown etc., in that way the risk factor is less.

7) Last but not the least till now i have told you that the buyers is at the total risk in this scheme, but if he wants he can transfer the complete risk to the bank and to the builders, In case of Default, if the bank insist the buyers to pay the Emi, and the builders has totally defaulted or you got totally helpless, then the buyer can simply knock the door of Court and file the case of Fraud against the Bank and the Builder, stating that the bank has already tied up with the builder, and the policies prepared by the bank and the builder was not at all in favour of the customer, the policy prepared was just to cheat & lure the customer. because in law if any policy sold the customer are not in their favour or wherein the customer safety is not consider, and the policy was just to lure the buyer's and make their internal profit, then it is nothing but a fraud to the customer.

Impact of this scheme: People are taking this scheme as an opportunity to earn more profit specially the investor.

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

Very soon I will come up further detail and clarification on this detail.

Regards

CA Vinay Parmar


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