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The Infamous 80:20 scheme in Real Estate

IndianMoney.com Research Team | Posted On Friday, October 04,2013, 06:55 PM

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The Infamous 80:20 scheme in Real Estate

 

 

What is the 80:20 Real Estate Scheme?

The cost of real estate is rising every day and the common man has no way to keep up. All his money is engaged with managing soaring inflation in food prices. Soaring inflation in real estate is beyond his reach. In order to tap the rising need of homes for the common man developers launched an innovative scheme called 80:20 to promote the common man’s dream of owning his own dream home in a city.

Under this scheme the builder asks for only 20% of the total cost of the apartment at the time of booking and the balance 80% is payable on possession of the apartment whenever it is ready. This gives it the name 80:20 scheme. The developer has the customer’s best interest in mind or so it seems,

But is this true? Are the 80:20 schemes the game changer the real estate industry is looking for?

So how does the 80:20 scheme work?

The buyer pays 20% of the cost of the apartment even before the commencement of the construction. The customer does not have to pay the remaining 80% of the cost of the project immediately but only once the construction of the apartment is complete or on the date of possession. The customer invests in the project at an early stage of construction and benefits from the appreciation in the value of the property with time The builder enters into an agreement with the customer wherein the bank sanctions the remaining amount of the loan in the name of the customer. This is a tripartite agreement involving three parties namely the builder, the customer and the bank. The builder gets the loan from the bank at a lower interest rate as the loan is sanctioned in the name of the customer and the rates would be lower.

See Also: Real Estate In India

The bank agrees to disburse the amount to the builder as the construction progresses and the builder agrees to pay the pre-Emi interest on the disbursed amounts till possession. Remember the builder pays only the interest part of the EMI knows as pre-Emi to the bank. The principal part if applicable is paid by the customer.

How does the builder finance the interest payments on the pre-Emi?

The price for the customers tends to be slightly higher in this scheme as the builder factors in the pre-Emi payments he has to make. The builder takes 20% of the amounts upfront from the customer. With this amount the builder can easily pay off the interest portions on the pre-Emi for 2-3 years.

What is the catch involved in the 80:20 scheme

  • The builder might restrict the customer from selling the apartment through a clause in the contract till construction is completed.
  • If the builder defaults on the pre –Emi payments then the bank pressurizes the customer to pay back the amount due. If the customer refuses to make the payment on the interest portions of the pre-Emi then his credit score is in tatters.

Many a time the builder makes a prelaunch advertisement without securing the necessary regulatory clearances and this might result in the project being delayed.

See Also: Black Money Is Back In Real Estate

How Does the 80:20 Scheme Become a Real Estate Ponzi Scheme?

  • Many a time the builder doesn’t make a construction. He simply collects 20% of the upfront amounts from a number of buyers. He uses this money to buy another plot of land and launches another 80:20 scheme collecting upfront amounts from the new buyers in a similar manner as the first case without making any construction. The builder cannot construct anything as all his money has gone to buy the parcel of land. The bank harasses the borrower of the loan, the customer in this case who if cannot pay up gets a bad credit score .Even if the borrower is able to make the pre-Emi payments he gets nothing in return as the construction may take ages to get completed if at all. food for thought, right?

See Also: Current Scenario in Indian Real Estate

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