By: Ravi Sinha
Track2Realty Exclusive
“Supertech invites you to invest in a pre-launch project at an attractive discount,” this SMS has been sent at least 5 times within a week. The bulk SMS, however, fails to acknowledge that many of these unsolicited messages are being delivered to the wrong recipients, including media, in front of whom most of the developers deny to pre-launch the projects any more. As a matter of fact, ever since Supreme Court came down heavily on the pre-launch offer of the developers, various states including Haryana have banned such offers.
How come the developers are then flouting all the prescribed norms and ethics and sending bulk SMS for the project in the same state? All attempts to reach Supertech could not elicit any response. An email sent to their external communication agency also went unanswered.
However, Supertech is not the only developer to mislead the market with the pre-launch offers. Such unsolicited SMSes are part of the marketing kitty of most of the small and mid-size developers. Given the varying market dynamics, developers tend to follow this well established industry practice of pre or soft launches, where projects are floated in the market at a test/pre-sale price.
If the project is received well by the market, this price is usually increased by 10-15% in the next phase when project marketing commences through large scale advertising for a larger market audience. This trend is followed by most developers and price increase usually continues till the market can absorb this increase. While in the ideal scenario, given the inherent risks in such activity, considering uncertainty in obtaining all project approvals – this concept of pre-launch has burnt the hard earned money of many of the home seekers in the past.
Sachin Sandhir, Managing Director-South Asia of RICS admits that everyone is cognizant that this industry practice has been prevailing for many decades and is unlikely to seize until there is stringent regulation or regulatory laws/enforcement. Also, there is a high risk element associated with pre-launches as it entices investor speculation and results in unjustified price appreciation and also provides a mechanism for some cash strapped developers to raise capital.
“There is definitely an element of risk involved in pre-launch projects. Although for consumers, investing with larger and more reputed developers is considered a safer option in comparison to parking funds with fly-by-night operators. At this point, it is also pertinent to note that several consumers assume the role of a speculator/investor and actually use pre-launch projects to churn capital and generate return on investment. Therefore, we as consumers need to realize how projects are funded and how the industry functions. With project approvals remaining one of the biggest operational bottlenecks that developers continue to face, it is virtually impossible for any project to be delivered on time or without cost escalations. Therefore, if pre-launch projects are to be curtailed, we require the dynamics of the industry to change; where speculation is curtailed to as large an extent as possible and single window clearance mechanisms help reduce time to market,” says Sandhir.
From a regulatory standpoint, consumers have the option of avoiding numerous phone calls and messages from marketing agencies by registering for the do-not-disturb (DND) facility with TRAI. However, in practice this DND option has also been violated by routing the SMS through other countries’ number. While the realty sector talks about self-regulation, they have thus far failed to move towards creating a more consumer friendly environment by conducting business in a more ethical manner.
Many a time the developers shrug off the responsibility suggesting this to be ignorance of the brokers. However, in reality the developers have never issued any guidelines to the brokers and enforce a set of guidelines for brokers and intermediaries who work with them. Sandhir advocates that individual real estate agents be regulated through professional bodies that promote self-regulation. In fact, the RICS Real Estate Agency Standards have been formulated and are being promoted to provide best practice guidance for real estate agents and builders involved in direct sale of properties.
The standards inform agents on good practice in residential estate agency and provide detailed guidance on how they should act ethically and legally; securing instructions from clients and closing transactions; avoiding conflict of interest at any stage of the transaction; guidance on acting on behalf of a single client/party involved in the transaction (i.e. buyer or seller); complaints handling etc.
In 2007 a PIL was filed by Sanrakshak, an NGO, which highlighted the misleading and false campaigns by real estate developers. The Supreme Court had issued notice to the Central and State governments seeking guidance on mass media advertisements by the builders to protect consumers. A bench comprising chief Justice KG Balakrishnan, Justice P K Balasubramanyan and Justice R V Raveendran had also asked all Union territories to furnish their response. Various states have already banned pre-launch activities in their State statutes.
A buyer can file criminal complaint in case any developer violates such statutory provisions. Even if the buyer has booked a property under a pre-launch scheme, he can go to consumer court and seek compensation. Unless the developer has been granted license by the competent authority and has complied with conditions stipulated with the same, it is not permissible for a developer to book any property under such scheme.
The rationale before the issuance of the notice has been that there were instances where pre-launches were used a market check and in the event of non-feasibility of the project, project launch cancelled, leading to the loss of money by the gullible buyers. Unfortunately, as the SMS by Supertech shows, the trend continues. Some smart developers have rather changed the name of pre-launch to soft-launch to divert the attention of the bad publicity associated with the term, which hardly makes a difference to the unethical trade practices of the realty sector.
ENDS……
Risk Factors of pre-launch offers (Box Item)
It is important for the consumers to understand what are the circumstances leading a developer to pre-launch a project and the risk associated with such unethical/illegal offers—
Case-1
Pre-launch for land purchase—In such cases the developer signs agreements with local farmers after paying earnest money, but does not have funds to acquire land and often poor credit history makes him unworthy of raising money. Moreover, financial institutions don’t fund land acquisition and hence he starts selling the apartments at heavily discounted pre-launch price even before land has been purchased.
Risk factor—If the developer fails to collect the desired amount within the given time, the buyer is trapped because he has no right on the land and very limited chances of recovering his money. There could also be added complication if land ownership is controversial and hence acquisition fails to convert.
Case-2
Land with no money—In such cases the developer mostly owns the agricultural land and intends to get the CLU (Change of Land Use) permissions and other approvals. However, he lacks the funds to take off the project and hence he offers pre-launch on the agricultural land itself by landscaping the plot and advertising it with project elevations and graphics.
Risk Factor—Such developers with no project execution behind them are generally not experienced with the regulatory approvals and hence chances of project getting into a logjam are very high. This could also lead to budget overruns, and eventually pre-launch discounts are just honey traps, since escalation cost is ultimately passed on to the buyers. This case scenario, however, is applicable only if the project actually takes off.
Case-3
Liable to pay installment—In such cases developer acquires the land in auction from a development authority on the prescribed condition that the project will start by a certain time frame; pay the instalment and comply other mandatory obligations. In a hurry to collect money he starts selling apartments without getting the necessary approvals. Most such deals are done without giving any legal or technical documentation to the customers.
Risk Factor—The customer remains unaware of the hidden charges since there is no documentation with only a slip of the money paid. Then selling units at a discount will never get the developer the kind of margin he needs to break even, leave alone make profits. Therefore, the chances of the developer making money by changing floor plans and other additional charges are very high. As a result, the project’s execution is much inferior in quality and quantity to what was promised and the customer actually ends up paying more to protect his investment. Even legal recourse is often tiring and not fruitful since the buyer didn’t get documentation around floor plan approvals or contract when specifications were being promised verbally.
Case-4
Distress Pre-launch—The realtor gets legitimate possession of the land and approvals for the plans. However, he runs into a legal dispute either with the concerned authority or any other third party. With work stalled at the project and severe loss at hand, he sells apartments at throw away prices, collects as much money as he can, liquidates the asset and makes a run for it.
Risk Factor—With property disputed, your investment has gone down the drain and you are now part of the dispute whose resolution could take years and you have practically no right over the land.
