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Buying real estate? Wait, read this first!

Investing in a pre-launch property is a good idea, but demands caution on part of the investor. Here's why.

Harsh Roongta

06 Dec 2006

I got few tips from this article below. Everyone investing in real estate should have these basics.

With the real estate sector booming, builders, in a bid to lock up as much land as possible, have been enticing the end retail consumer to invest in their pre-launch projects. Should you, the lay retail consumer, get into such projects?

The answer lies in understanding the way these projects work. Pre-launch projects are ones where the builder acquires a piece of land, which, in many cases, is agricultural land. The basic idea is to construct a building, either commercial or residential, on this land. Such property holdings are characterised by:

  • Lack of zonal approval; and
  • Lack of an approved building plan from an authority.
So, you are expected to invest in a project when the process of transforming a possible 'blueprint' into reality has still not started. Though the builder has paid a price for the land, it is not clear whether the proposed building will come up or not. Some of the questions you need to ask before investing are:
  • Is the land in the non-agricultural zone?
  • How long will it take to get approval to build on this land?
  • Will the proposed building plan be approved as it is or will it change drastically?
  • And, the most important question, how long will it take for the building to be completed?
Given the potential of real estate, most builders get such projects funded by professional investors who understand the risk-return ratios of such investments and believe that though the returns may be delayed, they are sure to come.

Investing in a pre-launch project in the very first stage is like a venture capitalist investing in a project on the basis of the reputation of the management without knowing whether the venture will succeed. However, the trend has changed significantly in the last couple of years.

Instead of professional investors, builders are now targeting you, the lay retail consumer, who may not have the necessary experience (read expertise) to gauge the risks of such projects. More important, small investors are being lured into these projects with glossy brochures, attractive discounts and offer of free furniture and amenities.

Here are a few risks that you should take into account before investing in pre-launch projects:

Builder's title to the property. Often, it is not very clear whether the builder/ developer has clear title/possession of the land.

Possibility of zonal change. Land is divided into several zones: residential, commercial, industrial and agricultural. These zones are for specific purposes. Builders often buy agricultural land. It takes several governmental processes, speed money, time and a lot more to convert zones and obtain non-agricultural (NA) zone approval.

Risks involving plan approval. The construction industry is subject to laws and rules which keep changing according to the moods of the government and environmentalists.

Glitches regarding building plan. The blueprint of the final, approved building plan may vary from the one shown by the builder to the investor. Things like the number of floors and parking space may be altered in the final plan.

Banks would not give you a home loan for a pre-launch project. You should be extra cautious and invest in these projects only from your own investible funds. Get into this market only if you have invested well in mutual funds and stocks, have been insured properly, have the surplus funds to be a bit of a venture capitalist and will not be devastated if the investment turns bad. It makes sense for a lay retail consumer to invest only from his 'mad money' (the money that you are prepared to put in a high-risk investment in the quest of high returns).