Tight money is prodding realtors to float smart schemes. The deferred payment home-buying offers with a “20:80” option — 20 per cent on booking and 80 per cent on possession — are being promoted quite aggressively. On the face of it, there is nothing wrong about these offers. The problem arises when gullible home buyers miss the fine print, or don’t quite grasp its import.
Most deferred payment schemes leverage the credit worth of the home buyer to provide money to the realtor. Here’s how most of them work:
A home buyer enters into a tripartite agreement with a financier and the realtor. Under this, the home financier extends 80 per cent of the home value as a loan to the buyer for payment to the realtor. The loan is taken by the home buyer, the amount is paid to the realtor and the realtor gives an assurance to pay the interest for a fixed period, say three years, on behalf of the home buyer. The realtor also promises to deliver possession of the ready home at the end of the three-year period. The implied win-win for the home buyer is that no interest needs to be paid till possession. The only payment to be made by the home buyer is the initial booking amount of 20 per cent.
This sounds like a good deal. But wait, here’s the catch. The loan is taken by the home buyer and therefore it is the home buyer’s responsibility to service it. Even if the realtor fails to deliver possession at the end of three years, the buyer will need to start paying the interest on the loan. Worse still, God forbid, if the realtor fails to make an interest payment, the home buyer will need to do so. The question one needs to ask before entering into such an arrangement, therefore, is: How much do I trust the realtor?
To answer this, it will also help to understand what’s in it for the realtor. A realtor needing funds will be able to raise big money up front at home loan rates with the liability to pay interest for only a fixed period. Besides, the money will be accessed based on the credibility of the buyer and not on the basis of the balance sheet strength of the realtor. A developer with a weak balance sheet may not be able to access funds at such rates from lenders.
The creditworthiness of the realtor and track record on project completions are two factors that must be considered before availing of any deferred payment scheme.
By all means go for a 20:80 scheme, but only with 20:20 vision.
