The Times of India today reported a story titled Flats booked but no land in NOIDA. The managing director was arrested but in his defense he says he started selling it since he had made advance towards purchase of the land. The police in the investigations found no proof for advance made towards land purchase while the builder had collected booking advance from around 400 investors since 2011. The investors lodged a police complaint for cheating in March 2014 after seeing no construction since 3 years. The police in its investigation found out that the builder did not even had land forget the approval for selling and developing the project.
Pre-Launch Flats booked but no land
If you think this was the first case of Pre-Launch Flats booked but no land you are absolutely wrong. This is a common fraud/scam that keeps getting into media time and again. Cash-strapped builders often come out with schemes that can generate more money for them.
What are Pre-launch offers?
A pre-launch property has no physical existence and mostly exists on papers. Construction on such project is promised to start sometime in future. Before a builder starts construction the builder needs to purchase the land, get the necessary approvals and then start the construction after arranging for necessary funds required. Lawyers have often expressed concerns over legality of launching schemes before the approvals. Since these projects are not approved investors will not be able to get a bank loan for the investments made in such schemes.
Why do builders launch pre-launch schemes?
It’s all about money. A builder may need money to:
- Builders have a fixed credit line and no bank will loan them infinite money hence they often use this route to generate money. Often secondary market lenders charge lot of interest hence this seems to be an easy route to generate cash.
- Fund one of its other existing project.
- Fund purchase of a new land somewhere else
- To run its business like paying salaries.
- Pay back loan the builder has taken from some lending institution.
- A fraudulent builder may just launch it as a scam.
- There are lot of reasons why a builder may launch a pre-launch project but the real underlying need is the builder needs money.
Why do investors fall for a pre-launch offers?
Investors often see a project being launched at a cheap rate. It has been seen projects being launched at a big discount of 30-40% of the market rates. Often these rates are many percentage points below the existing market rate of the property in the same area. Investors invest in greed for making most of their investments. Some investors also look at these opportunities to use their black money.
After all is it not wise to stay away from buying a home that does not even have a foundation yet?
What are the risks associated with a pre-launch offer?
- Often these pre-launch offers are not signed as a contract It is just a written letter on a letter head, raising serious doubts on the legality of such receipts and letters that talk about intent to allot you a flat unit once the project is approved. The reason for not signing a proper legal contract is simple the project is not approved yet hence builders cannot sign a legal contract.
- If the land is not bought yet the land may not ever be bought.
- The timeline the builder is giving you to start the project may not hold good as approvals are beyond control of the builder and depend solely on government agencies.
- Since layout, floor plan is not yet approved it may not even get approved or changed without any notice.
- Since the builder has not yet got other approvals in place it may not even come or it may be considerably delayed.
- If the builder is launching a pre-launch offer to generate money for one of its other existing projects you may face the same situation that your project will be delayed as builder does not have money to finish the project.
- At this stage no banking institution has yet approved the project as project itself is not approved. There is no guarantee that in future the banks may offer you loan on the property.
- If the builder has launched a pre-launch project just to raise money after exhausting all the other available credit lines the builder may just be nearing a bankruptcy.
Should you invest in a pre-launch real estate project?
NO. Unless you feel you have the required skill and time to understand points mentioned in the next section. I would recommend an average person to stay away from such schemes. After all is it not wise to stay away from buying a home that does not even have a foundation yet?
What are the skills required to understand a pre-launch offer?
- Ability and time to recover money from the builder if you start getting a feeling that you were duped with an offer.
- Ability to understand and interpret laws related to real estate, approvals etc…
- Ability to read and understand the title deed of the land.
- Ability to read and understand the approval documents for construction
- Ability to understand the financial standing of the builder, if the builder goes bust later your money will be too difficult to recover.
What if I still want to invest in a pre-launch scheme?
Go ahead take the plunge at your own risk! Make sure you get all the necessary papers scrutinized for validity through various government agencies before making the first payment. Take legal help if required. There are lawyers near the registration office of each city that specialize in such activity for a fees that befits your project cost.
DISCLAIMER: This article is being written for the sole purpose of consumer awareness. This is not an advice on real estate or investments.
Photo by shiwalijain