Saturday, October 3, 2009

The Stupidity of payment schedule from Developers in India

Hello there!. I am in Chennai for the last couple weeks. I was here due to an emergency and sudden ill health of my dad. Thankfully he has recovered pretty much and about 70% back to normal. Thankful to the almighty!.

I had never invested in India up until this second. Many of my relatives said i should invest here and the property values are going up like crazy again. So we decided to look at a few properties, now that its just 2 more days to head back home.

We looked at the following properties.

  1. DLF properties
  2. Opaline from Olympia
  3. Hirandhani Upscale
  4. Land Marvel
DLF is owned by Kushal Pal Singh, apparently 3rd richest man in India. He is very known for his buildings in Delhi. Its a contruction over 50 acres or property. The main issues i saw were lack of model homes. Apparently there was some rumors about some issues with land acquisition etc. In fact i think they are a large enough builder than can easily scale out of the problems. But yet, the construction seems a bit slow compared to other properties. The other major issue is the approach to the complex is very complex. You have to drive through some communities build for people affected by the Tsunami. It just doesnt look a pretty scene heading into the area.

Opaline had some neat plans, i didnt know much about the builder, but their models were cute and nice. This is what my first choice was. Well i havent looked at the other homes.

Hirandhani Upscale, owned by Niranjan an ENT specialist. He is also now expanding to build chain hospitals. The models were really cute. The plans were very nice. Our first visit didnt go well, as we ran into a lady who didn't sound like she was interested in talking to us. But we were interested in the building compared to others. Resulted in some escalation to their Mumbai office and someone responded back who was more accommodating than the person who we dealt with earlier. (Finally we sort of decided on investing here .. sort of...)

LandMarvel at Torraipakkam seemed like it made no progress the last year or so... Unfortunate to who all paid, since they are almost paid up completely and none of the apartments are complete.

Now finally the topic of the blog. For people who have purchased their homes in USA will find this process a bit of an instant heart attach... Reason?

The payment schedule is the worst i have ever seen and doesn't absolutely any logic. Iam surprised that no banks have protested yet and that even the government has completely ignored the issue.

  1. It starts like this.. Pay Rs. 5 Lakhs on booking. V.s just a token amount in USA typically only a few thousands.
  2. When the foundation is done, everyone pays ~25%. This is ridiculous since if they have 27 floors even before your floor has seen the floor you pay a huge sum.
  3. When the 1st floor is done, you pay another 25%.
  4. Subsequent floors bring in some additional %, and by the time they have reached the 10th floor most people have paid close to 80-90% of the total cost.
  5. If you miss a payment, you pay 18%, but if the builder skips the deadline its probably nothing.
The real bad thing is most builders take money from people who buy apartments and actually put that money as a seed for the next project. So you have to pray the next project gets sold soon, before they can get more money to put into to complete the project. This should be plain illegal, they should only start getting money as the platform/base for your particular floor is done and also have more stages.

I heard that DLF is almost constructed from money from ICICI, just that they were the preferred lender, and have funded close to 90% of the project. The Land Marvel at Torraipakkam is a similar story, and they are scores of such ill projects around town. Unfortunately there is no getting around the payment schedule in Chennai. You have to choose a better builder who is financially sound and wish he doesnt go broke before your project is done.

I have to admit.. that i have planned to become one of those people.. but have no choice.. i trust Hirandhani and hence have committed.. and i pray that they would be complete by 2011 June timeframe.

I wish this would change and the buyer experience becomes better over time in India.

Until next time...



Dave Stewart said...

Glad to hear your dad is doing better.

The property payment scenario you describe sounds like a bubble waiting to burst. Any time you are paying forward against some future property development which may or may not succeed means your developer can default on your investment and there is no recourse.

Typically, the bank assumes the default risk by ensuring that the borrower has sufficient capitol for any given loan. If they didn't insist on this, then the default of a given builder would have a massive impact. All of your investment would be gone.

This is similar to people investing in stock of a certain company (which you and I both know very well) and assuming that the stock will always go up and up and up. Remember the folks at Enron who had all of their 401k money invested in company stock?

Of course, with greater risk comes the potential of larger return, which are the basics of investment. You need to be prepared to take all of that money you are investing and throw it out the window. If you are comfortable with that, then it sounds like it could be a winner.

nmk said...

My experience with Landmarvel Chennai.
I and my friend had booked a flat with Landmarvel properties in their Chennai Tambaram project in July-2007, and we had to cancel the booking in October-2007 as there was absolutely no progress in the construction. Luckily we have not done the registration. Landmarvel agreed to pay the advance amount we paid (2.5L) in Nov-2007, we got the post dated cheques in Feb-2008 dated April-2008 to Jun-2008 in 10 installments. But none of the cheques were honored as there is no fund in the bank. Again we had received the post dated replacement cheques in another bank during mid of 2009. The same story repeated i.e. all the cheques were dishonored by the bank. This time the reason was the account was frozen. Still there is no visibility of getting the money back. The height is that the booked flats were sold to other parties. Now-a-days the partners of Landmarvel do not answer phone calls too. Every time new promise and non of the commitments honored by Landmarvel. I never come across such un ethical industry practice. And I cannot imagine, if I could have registered and continued with the contract!