Beware of assured returns schemes in real estate

It is hard to miss the big billboards, the full-page advertisements, the television commercials offering you a lucrative 12% per annum “Assured” return on an upcoming residential or a commercial project.  The offer of a 12% return on a long-term appreciating asset like real estate sounds too good to let go. The golden rule of investing is to question any deal that looks too good to be true; it often is too good to be true.

Assured Return In Real Estate

Assured return in Indian Real Estate is the fixed monthly return given by the builder on the amount invested by a person. This is mostly given on under construction commercial properties such as space in Business Park/IT Park, Malls, Shopping Plaza or Studio/ Service Apartments etc.

When an assured return is offered on a project that is under construction, a formal agreement or a MOU (Memorandum of Understanding) between the buyer and the seller is executed in which the seller promises to give the buyer an assured sum each month till a particular period of time. As our research, the assured returns are generally given for the following three flavors:

a) Assured returns till Possession
b) Assured returns till Possession + 3 years
c) Assured returns till Possession + till first lease

Why do builder offer such schemes?

The excess supply is making some developers less creditworthy in the eyes of the banks and private equity (PE) that traditionally fund the business. This is forcing developers to turn to various other funding options, such as getting hold of bank finance.

What is in for the investor?

In our view there is nothing much for the investors apart from the psychological satisfaction of getting monthly returns. The builder generally sells these properties at a higher rate and the investor ideally gets back the excess amount paid to builder back month on month.

For example, you would find that the developer is offering you 12 per cent assured returns at Rs 6,250 per sq ft for 2 years, while in the same project a non-assured return unit is available for Rs 5,000 per sq ft. So, the developer has taken an upfront Rs 1,250 per sq ft extra for the same property. Ideally, this extra money which is paid by you is given back to you over the next two years.

What are the risks involved?

Search on the internet and you would find numerous complaints from cheated buyers of such schemes. We have compiled list of some most common issues faced by buyers.

Cheque Bounce: First and foremost issues is the failure to pay assured return. In most of the cases, the assured return cheque starts bouncing after 8 months to 1 years max. By this time, most of the builders divert the funds and start making excuses. Some of the developers have now started offering assured return in terms of bank guarantee but the fact remains that it is your money(higher price paid) that is coming back to you.

Tax Impact: The return earned on the Assured return is treated as interest income. This income is not subjected to any standard deduction as is the case with rental income.
There a No Regulator: Unlike other markets, India does not have a real estate regulator in place as yet. So you are believing the good intentions of the developer and his ability to keep the promise of payment. Most of the time these promises falls flats and you shall be made to run from pillar to post.
No Control over tenants and renting: In a typical ‘Assured return project’, the Developer would sell each floor to multiple people in various sizes. At the time of leasing out, he may give complete floors to corporates. In majority of the cases, you would only have a fixed floor size on paper layouts, which would generate monthly returns. If the developers decides to rent it at lower rates than you may prefer, you shall have no control on it.
When a tenant is hard to come by, you may want to rent out the floor at a lower rate, but the rest may not agree with you. Moreover, you can’t take possession of the property and rent it out individually or utilise it for your own needs.
Difficult to resale: Because you purchased the property at much higher rates than the market, it is very difficult to  find a buyer. There could be legal problems in asserting ownership rights since your area is not properly demarcated.
Service Tax: Interest offered in real estate investment during construction is inclusive of service tax. In case the service tax is payable on interest/assured returns then it will be a part of 12% assured returns. Thus the effective return might be lower than shown.
Builders find innovative ways to cheat buyers. One of our reader shared his story with us. Developers offered him 12% assured return till possession. However, the assured returns suddenly stopped coming in. When he inquired about it from the developer, he was informed that building is ready for possession and they had received part completion certificate. However, the picture was totally different on ground. This office space was far from ready for renting and after 4 years it is still in the same shape.
Things to consider before purchasing such properties
  1. Does the builder have a good track record?
  2. Does builder provide bank guarantee for the assured returns.
  3. How long would the returns last. Till completion or till a first tenant is found?
  4. If the rental rate is lower than the promised rate of return, will the builder pay for the difference?
  5. What if the returns cheque bounces?
  6. Is there any lock-in period.

The Logical Buyer’s point of views

Unless you are a speculator and have the money, legal help and risk-appetite for such deals, stay away from the assured returns projects. They come in with very high-risk (almost 90% of the cost is paid upfront to the developer) and high-return category of assets. There is an investor for whom these will work, but if you are the average salary-earning and EMI-paying homebuyer, stay away.

Conclusion
Although there is nothing much for the investors in most of the assured return schemes. But there are always exceptions to the same. If one is going for the assured return scheme, one should go for the scheme which guarantees the assured return till first lease. Besides it is very important to ascertain that the builder is selling the property at fair market price and it should not happen that you are lured by the assured return and you buy the property at a price higher than the market price. Also ensure that assured return is in the form of bank guarantee.

2 thoughts on “Beware of assured returns schemes in real estate

  • January 12, 2016 at 2:52 am
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    I am along with 100+ NRIs and 900+ local residents are the victims of such a scheme called WTC Manesar ( World Trade Center Manesar , Gurgoan, Haryana. Assured returned was guaranteed until possession, and rent sub-lease was offered as first three years with right to renew twice for same terms. Meaning 9 years of sub lease at guaranteed rate of Rs.55/- per square fit. After paying one year assured returned, payment stopped, builder A.N.Builder asked investors to choose Lockable or unlocakble space , barring few , rest 95% went for unlockable (Virtual Space). In the same letter builder offered the possession of the building/space which was just a bare bone structure. From the date you accepted unlockable space , three years from that date was counted and committed as guaranteed first three year sub lease rent without building is actually being rented out. This was in 2011. Building is still empty. Agreement was totally one sided , then it was replaced by builder to lease deed which was registered and 1000% one sided. All he was able to do by stopping and not paying Assured Return .
    Now all NRIs are helpless and learned the lesson hard way that never ever to invest in India in realty sector .

  • May 24, 2016 at 10:06 pm
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    Mr. Lalit , I have come to know that some buyers have filed a case against M/S WTC in high court of delhi..
    BS Chauhan,delhi. 9718190147.

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