20:80 schemes are a win-win for all, says PARESH KARIA

The slowdown in sales has prompted developers to offer investor friendly 20:80 schemes (subvention). Such schemes help the developer to prop up sales without reducing the prices.

Subvention or 20:80 scheme is an innovative financial structuring which involves purchasing of under-construction property directly from the developer with financing from a bank/institution. Under this scheme, the property buyer has to pay only 20% of the cost of the property upfront and the balance payments are to be made in installments only after possession.

The subvention scheme is a variation of the normal home loan scheme, whereby, up to possession of the property, the EMI for the loan is paid by the developer instead of the buyer. This is how a typical 20:80 scheme works:

• The developer approaches banks/financial institution with the project which he wants to offer under the 20:80 scheme and gets the same approved.

• The developer then bundles this scheme with the property and offers it to potential buyers.

• The buyer purchases the property by paying just 20% of the total cost.

• The buyer gets home loan approved for the balance 80% from the bank.

• A tripartite agreement is made between the buyer, developer and the bank.

• The bank disburses the home loan amount to the developer at agreed intervals on behalf of the buyer.

• The developer pays the EMI on home loan to the bank, instead of the buyer, till possession.

• After the possession, the buyer starts paying EMIs to the bank.

One of the objectives of this scheme was to facilitate people staying in rented houses to buy under-construction property by taking a home loan. They could move into their own houses once they were ready and start paying EMIs instead of rent.

However, they have become more popular with property investors who would like to take leveraged positions on the property and sale the same on getting the possession.

In the past, investors have made handsome gains using this scheme. For e.g. under this scheme, apartments in Andheri East are offered say @10,000 psf. A 2 BHK apartment measuring 1,000 sq. ft. would cost one crore for which the buyer will have to pay 20 lakh only and no further payment till possession. The apartment is ready in three years by which time the rate is, say, 15,000 psf. The buyer now sells it for 1.50 crores thereby making a profit 50 lakh on initial investment of 20 lakh. This works out to whopping 2.5 times in three years.

Such schemes have worked well for the investors in the past since the property prices have been on the uptrend. However, if the property prices do not appreciate or start falling, the buyer will either have to exit at loss or hold on to the property and start paying the EMIs. Hence one should be cautious and invest in such a scheme only if one is in position to pay EMI post possession, just in case the market conditions are not conducive for exit.

Nowadays, most developers are using the 20:80 scheme in combination with the ADF (Advance Disbursement Facility). In case of normal home loan, disbursement is made by the bank to the developer in installments linked to construction. In case of ADF, a large part of the loan, say 80% to 90%, is disbursed in advance, ahead of construction. However, banks are very cautious in extending this facility to developers because of the potential for diversion of funds and usually only reputed developers with good track record are able to get this facility.

Another point to be noted is that under the ADF, since the large part of the loan is disbursed upfront, the interest cost during the construction will be higher. Under normal circumstances, this should not impact the buyer since the developer is paying the EMI till possession.

While on the face of it 20:80 scheme looks very attractive, one has to scrutinise the terms in detail and study the fine print to see if there are any hidden costs involved.

The main USP of the 20:80 scheme is that you don't have to pay any EMI (interest cost) till possession. One needs to see if the developer is bearing this cost in full or passing it on to the buyer by increasing the price of the property. Taking the example referred to earlier if the property rate in Andheri East is 10,000 psf and the developer is selling at the same rate under the 20:80 scheme, then it would be beneficial to the buyer. But if is selling at a higher rate say 12,000 psf then he is passing on the interest cost to the buyer. Also if the developer is availing ADF, his interest cost would be higher in which case he should be willing to bear the same.

One of the biggest advantages of the 20:80 scheme is that it puts pressure on developer to complete the project on time since they have to pay EMI till possession. Any delay in completion would result in increased cost for them. Hence this reduces the execution risk to a large extent.

However some developers offer 20:80 schemes under which they agree to pay EMI only for a specified period of time say two years from the date of purchase instead of from the date of possession. In this case, the EMIs would start immediately after two years irrespective of whether the construction is completed or not.

Considering all this, it would be advisable to go for 20:80 scheme wherein the property is being offered at close to prevailing market price and the buyer has to start paying EMIs only after possession.

To conclude, a fair and transparent 20:80 scheme is a win-win for all the players involved the property buyer, the property seller (developer) and the property financier (Banks/Institutions).

The property buyer is able to buy the property with limited cash outflow, the developer is able to increase his sales and the bank is able to lend more money thereby increasing its assets and profitability.

Source: Times Of India, 23rd March.

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