Purchasing a house is an expensive affair. In today’s market we all are fond of the word “discount” and discount has to be the most pitched word when it comes to buying a property. And when the discount is to the tune of 10-20% of the market value of the property, only a fool would let it go, right? But, you should be careful when it comes to a project that is yet to begin the construction. Such soft launches comes with a host of issues and it may not be worth the discount.
What is a pre-launch projects / soft launch projects ?
A construction/real estate project involves many phases ranging from conceptualization and planning to completion of the construction and handing over to the buyer. Sometimes developers may start marketing their projects even before they obtain approval from corresponding authorities for the construction. At this stage, developers will provide a huge discount to buyers while marketing the yet-to-be constructed projects. The discount may range between 20 and 30 percent of the actual market rate. This is referred to as pre-launch or soft launch.
Why do a builder sell at below market prices?
At the planning stage builder usually does not have enough cash to fund the project and sometime even to by the land. This money is used for marketing and initial expenses. In some cases, builders doesn’t even have land in their name and to fund the land cost, they pool in money through home buyers. To handle the cash crunch problem, they come out with a soft launch projects, where they offer limited inventory of the yet-to-be constructed property to investors and home buyers.
Another reason for a builder to pre / soft launch project is market study. Builder spread a news through their notorious half (brokers) and sense the market. This gives them a fair idea of buyer’s response to location, price and project plans. At this stage he may just be planning to buy the land only. If the assessment result is not upto his suitability, he may just junk the plan.
Risk Attached with Soft launch projects:
- No approvals / incomplete paperwork: Most of the time builder start soft launch even before they apply for the approvals. There are very good chances that approvals may be delayed for host of regulatory issues. In some case, approvals many never come. At this stage builder may not even disclose layout plans and floor plans.
- No bank approvals: You may not have the capacity to fund the property by self and may need a home loan from the bank. Even if marketing people assure you of the tie ups with certain banks, it would be wise to double check with the bank. No bank would provide a loan assurance to a builder who does not have all the paperwork in place. So, you may have to pump in the cash by yourself.
- No clarity of allotment: When you buy in a soft launch projects, you are generally given a booking Id and may not be given the unit number etc. This is because in many cases builder himself isn’t sure about the layout plans etc. In many cases, local authorities ask the developers to amend the layouts to meet local regulations. At the end of the deal, you may be left with sour taste if not allotted a unit of your preference. In some case you may be given a preference number and at the time of booking you may be given option to choose a unit as per your turn. But, the developer may assure you at the beginning that your preference will be considered, that may not happen at the time of booking when the rush and pressure increases.
- Risk of Delay: There are fair amount of chances that project may be delayed by at least an year. Builder are known for not following the norms and unless they follow the norms or find a good fiend in authorities, the approvals would linger on. Only investors and deep-pocketed brokers have the capacity to absorb such risks arising out of a delay in projects and an average home buyer may loose their sleep.
- Frequent Layout Plan changes: Sometime to meet regulatory guidelines and sometime out of greed, a developer changes project layout plan a lot of time before getting it stamped. The tower that was park facing may become road facing. The club that was shown to you may shrunk in size many times and the big park may not be in final plan all together. Also, the area of the flat also varies. You would have booked a 1500 sq ft apartment which would magically become 1700 sq ft when it is finally allotted.
- Broker Menace: It is well settled argument that something a developer can’t do legally, he will get it done through brokers. Brokers are a mess, let’s face it. Most of the booking in Soft launch projects is through brokers. They would offer you a unit of your preference if it it’s booked or does not even exist in the plan. Builders are known for washing of their hands for the mistakes committed by brokers.
Why do people still buy Soft launch projects?
There is little knowledge or realization about the associated risks among investors and buyers. Most of the them focus on the discount only. People with tight budget tend to buy soft launched to meet their requirement. Another lot of buyers are those with deep pocket and risk appetite. Also, real estate market is full of speculators and people are looking for quick profit. Because the Soft launch projects price is significantly lower than market price, there are chance of handsome profit because final launch shall happen at market price. This is where investors sells their unit and exit at market rates.
How to safeguard if you still want to buy for discount:
- Check for approvals and paperwork. Do investigate about builder’s past and only go with big developers because they have a reputation to safeguard.
- Check for exit clause. If you are looking for short term investment, ensure there is no lock-in period. Builder discourage home buyers from selling their unit in market so that he can continue to sell his inventory.
- Ensure you are given a written assurance of your unit and other apartment details.
- Pay the upfront money via cheque or demand draft as these are legal proof of payment.
- Avoid until the project is approved by major banks.
- Try to book directly from builder and avoid involving any broker.
Is it Legal: No, Soft launch projects are completely illegal exercise. There have been thousand of cheating cases in the past and governments have issued notification in this regard. But, do we really have respect for laws and regulations in this country? What is the use of notifications when you do not have will power to enforce them. For example, Noida Authority keep issuing notification that projects without approved layout plans are illegal, however, every another project in Noida is sold on soft launch basis. Below is one such notice by Noida.
“The Logical Buyer” suggest that buyers must avoid soft launches. Given the state of our judicial system and bureaucracy, there is no one would could save you if something goes wrong.
Good luck, be a Logical Buyer!