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Are pre-launch offers risky?

india Updated: Nov 25, 2007 21:24 IST
Varun Soni
Varun Soni
Hindustan Times
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Vikas Khokha, an MNC executive, usually buys property during pre-launch offers. The cheaper rates enable him to earn a cool Rs 2-5 lakh when he sells the property after the project's formal launch when there is a rise in rates.



Khokha is not an exception in this – many youngsters today are investing in property during the pre-launch period as the rates fall within their budget. The risks involved (such as a lack of regulatory and legal approvals or proper acquisition of land) do not seem to deter them. The future profit margins easily offset any misgivings.



A pre-launch booking means that the builder has purchased the land on which he is going to develop the project. It also means an offer to sell at a discounted price before formally starting the project. Though the law does not prohibit pre-launch offers, pre-launch bookings have been banned recently in some northern states just to curb malpractices by fly-by-night operators. Acting on a petition, the Supreme Court has banned developers to release advertisements about projects that do not have the necessary approvals. So, the pre-launch deals taking place these days are mostly on word-of-mouth considerations.



However, experts feel that while there is nothing wrong with pre-launch offers, there are risks involved that a buyer must be aware of.



For instance, in some cases, the builder may not have possession of the land; he may only have an agreement to sell with the owner of the land. And on that weak basis, he wants to sell apartments he will build on that land. After purchasing land, builders need money to pay off the owners and to begin work on infrastructure and construction. Instead of taking a loan or using their reserves, they prefer to take money from prospective customers. In addition, if they manage to sell a substantial portion of the stock by the time of the launch, they can claim that the project is a success. This helps sell the rest of the stock faster.



"Before getting into the economics of pre-launch offers, what an investor should look into is the credibility of the developer. How long have they been in the business and what has been their track record so far? However, it does make business sense for both the developer as well as the investor or end-user to book space in the pre-launch scheme. If the developer is exploring the market via a pre-launch, there is no reason why one should be apprehensive of such launches," says Sanjeev Aeren, managing director of AEZ Group.



"There is a risk for the buyer if the developer has not obtained the required approvals or has no control over the land. Also, there is the risk of oversupply that could bring down rates in the future," says Anshuman Magazine, Managing Director at international property consultant CB Richard Ellis.



Why do people still go in for pre-launches despite all those risks? "Because prices are low at this stage and they are escalating with each passing day. End-users feel that if they don't buy now, prices might spiral out of reach. For investors, investing at the pre-launch stage is a chance to buy cheap and sell at a profit at the time of the launch," says realtor Vikram Chopra.



As for disadvantages, Magazine feels that the primary one is that of risk of uncertainties concerning the future. "There is a possibility that the necessary approvals required for the project to take off may take longer than anticipated. Also, since a pre-launch offer is done without approvals, it can happen that the final product may be quite different from the option opted for by the buyer," he says.



As far as the advantages are concerned, if they are weighed against the risks that it entails, they could become irrelevant. For the wise buyer, pre-launch offers do provide opportunities, but there is a clear case to keep one's eyes and ears open before investing. And perhaps, keep one's fingers crossed.

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