The best word when scouting around for a dream property has got to be ‘discount’. When that discount is to the tune of 20-30% over the prevailing market rate, only a fool would let go of the golden opportunity, right?
So what if it is for a real estate project that is yet to begin construction? Actually, you need to be wary if the sales pitch contains the term ‘soft launch’ because such projects come with a plethora of risks that may not be worth the discount being dangled.
What is a soft launch?
At the time of the ceremony inaugurating the construction site, many property developers face a liquidity crunch. To tide over the problem, they come out with a soft launch, where they offer the yet-to-be constructed commercial and residential project at a huge discount to a select few customers.
For instance, a couple of years ago, a leading developer was offering a pre-launch rate of just Rs 25,000 per sq ft for a property in central Mumbai, where the prevailing market rate back then was around Rs 60,000 per sq ft. Sources say that 80-85% of the property got snapped up even before construction began. Says Pankaj Kapoor, managing director of Liases Foras, a real estate research firm: “At times, the developer buys land paying only a token sum to the owner, and relies on such offers to drum up the balance amount.”
Such soft launches are rarely advertised in a big way. Customers are lured in by brokers known to the developer in exchange for a fee. In fact, developers pay brokers a higher fee—3-5% instead of the typical 1-2% per flat sold—to get their walk-in customers interested in soft launches.
While customers are baited by higher than average discounts, the developers get ready cash. This is because while some developers will ask buyers to shell out 20-30% of the property value upfront, others ask for the entire amount.
What are the risks involved?
Buyers need to be wary of the following risks.
Flying blind: Developers are not in a position to showcase anything of the project during a soft launch, not even building plans. Instead they rely on their past record. So, for any queries, say, regarding construction quality, you will be asked to check out the developer’s earlier projects as an assurance of his current one.
Incomplete paperwork: The biggest risk is that most of the permissions or approvals are not in place at this early stage, nor is there any guarantee that the project will be able to get all the necessary approvals.
No bank loan option: Banks take on customers only after conducting due diligence of the project in question. This is not possible at the soft launch stage due to the lack of official approvals and documentation. So customers have no option but to drum up the required cash themselves.
Project delays: The possibility of the possession date getting pushed back is higher in such projects. This is because nobody can predict how long it will take the developer to get all the required approvals from the various departments involved even before construction can commence.
Impromptu changes: No matter what the developer promises at the time of selling the property, the end product may be very different. You may find that the proposed building plan has changed or that some promised amenities are missing, but there is no legal recourse available in such cases because there is no proof.
Who can benefit from such deals?
Despite all these risks, the lure of the discount is so high that investors willingly take a chance. According to Naushad Panjwani, executive director of Knight Frank India, soft launches are ideal for speculators looking to make a quick buck.
“As the construction begins, the investor makes a decent appreciation in the property value. Most of the time, buyers just wait for all the approvals to fall into place and the construction to begin to offload their stakes,” he adds.
Once a developer has garnered the targeted investment required to start his project, and his approvals are in place, he comes out with an official launch. At this stage the rates go up dramatically, at par or on a premium to the ongoing market rate.
So a person who invests at the soft launch stage can make a profit by selling his stake either to a new investor or the developer himself. His risk is only to the tune of the upfront money paid to the builder. However, you would not want to try this stunt with unknown developers, or when you are buying a house to live in.