The Pre-Launch property game. Proceed with caution.

What is a Pre-Launch project

A pre-launch project is one for which either the entire land has not been acquired (that is, the developer does not have full legal sanction of the title), or clearances (like licences, land conversion and site plan) have not been obtained, or both. Developers are allowed to launch a project only after all clearances, and full ownership of the land have been obtained. But when a developer cannot raise the entire amount needed to launch the project from internal accruals or equity, he turns to private financiers, investors and end-consumers by 'pre-launching' it. He works on the premise that full legal sanction will come through by the time the project is ready.

Techniques used by Developers

The marketing technique used in a Pre-Launch project is quite simple. It is "Enter Early and Buy Cheap". The temptation and carrot offered by the developer to a customer mostly are:

1. You get to choose your site or apartment you want to live in before everyone else. So you can choose the right floor, best view, road side etc. etc.

2. You get the best rate possible for the property only now

3. The pre-launch rates would only be valid for about 3 months and then rates could be up by 200 or 300 rs. per square foot.

From the developers point of view , every four to six months, as the approvals trickle in, he can keep hiking the prices. Post full legal sanction he can launch the project and by then he has enough bookings in his kitty.

Perils of a Pre-Launch project

One of our customers, brought a project called "Salarpuria Senorita" in Sarjapur Road, Bangalore in 2010. The Project was in Pre-Launch. Salarpuria being a reputed builder, put up huge sign boards at the sight of the property and hoards of people walked into enquire. The project was being offered Rs.300  per square feet lower compared to launch (which was scheduled 4 months away). The promise was some one who books now, would get about Rs. 5 to Rs. 10 Lacs benefit depending on final price and size of the unit. The booking amount for pre-launch was Rs. 5 Lacs.

As the story goes, despite waiting for one year, the project was not launched. The person's money was stuck because in the interim other builders launched projects and he did not take the money back in the hope that Senorita project would launch. Salarpuria finally returned back the pre-launch booking money with bank interest, leaving the person in question flummoxed and exasperated.

This is typical of most pre-launches which do not take off. Six months would already be gone by the time you realise that the promises are not being kept and the construction is not happening as promised. By then, you would have sunk in between Rs 5-15 lakh . If you buy a plot in the pre-launch stage and the project is shelved, the only exit route is to approach consumer forums or courts, unless the developer returns the money. The riskiest move is buying into a project for which the developer has not acquired the entire land.

Checklist to avoiding perils in the Pre-Launch game

1. Check the title deed. Reputed and credible developers start the project only after acquiring 100 per cent of the land and will not shy away from showing the title deed

2. Look for the developers residential housing track record.

3. Be proactive and pull out if you start getting feelers that the pre-launch project is not going to launch in 4 to 5 months or if developers keeps giving excuses that approvals are coming shortly.

Avoid falling into a trap in real estate buying in Kerala

For those who are not aware, it was a harrowing time for all customers of Apple A Day Properties last May 2011.

The majority were NRIs, who were seeking the help of Chief Minister Oommen Chandy after they fell prey to one of the biggest real estate frauds in the state. Apple-A-Day Properties'  a builder based in Kochi, reportedly collected over Rs. 100 crore from buyers which included 125 Indian expatriates in the Middle East.

The company offered villas and apartments in the heart of the city of Kochi at attractive rates. It used the goodwill of a couple of its completed projects to rope in buyers, but after it missed many deadlines for its 11 new projects, customers cried foul. Some NRI's who invested over Rs. 45 lakh each in the project did not see completion even after 5 years of the project. The firm's Director and Managing Director went underground after the company allegedly went bust. Source: NDTV

So the real question is. How does an NRI or any investor avoid such traps and scams. Please refer to our checklist below for common mistakes.

1. Nominate or appoint a real estate consultant - Most NRIs in question were not able to track the progress of the fraudulent project. This is where services of a respected real estate consultant comes into picture. They can keep you updated about the progress of the project and even deter you from buying one if there are hidden dangers.

2. Financial Leverage - Most real estate projects which run into trouble do so because of financial leverage. Real estate being a sector with high working capital requirements, most projects are financed by banks. A project approved by a reputed bank like SBI or HDFC etc. itself shows that the bankers have done due diligence with respect to payback period etc. This actually makes it a lot safer for the investor to know that the project would be completed on time.

3. Credibility of the Builder - Credibility of the builder can be ascertained either via quality ratings like ISO or ratings by CRISIL. If none of these are available, then one of the ways is to ensure everything related to the project documentation is in place before you make the payments. A real estate consultant can help here with going through the papers. You could also refer to the past history of the builder.

4. Timeliness - Variations of around 6 months etc in completion. are common in today's real estate scenario due to lack of funds availability. Anything beyond this should raise a doubt or two in your mind about possible date of hand over. Some reputed builders in Kerala like Skyline and SFS maintain a great track of timely completion.

5. Safety over Price - If Safety is more important than price, one could look at a project which is ready for hand over within 3 to 6 months. This means than you would have to pay about 15 to 20% more than launch price , however you can be safely assured of the completion of your project.

Nandanam Consultants can help you overcome a lot of these difficulties with prudent advice and regular communications via newsletters and emails so that you can avoid such traps in the real estate market.