Development companies use the buy-back guarantee as a way to collect capital from buyers for general construction costs. This is generally done by the developers who are in need of funding and the investors who expect an appreciated property return after a stipulated time period. This scheme also proves to be helpful in tough times like the recession and can be a helping hand to under-construction projects who have limited funds.
The buy-back property investment option has its own pros and cons. Let’s get a deeper understanding of the buy-back property investments and what it has in for you!
An overview of the buy-back guarantee
If you have been searching for a property in a prime location, and you expect ample capital appreciation to make an exit in a short period of time, a buy-back investment option might be the right fit for you. Let's assess.
‘Buy-back’ as the name suggests, is the property that a developer sells to an investor and ‘buys it back after a decided period of time at a pre-decided price which is usually an appreciated/more than the price at which you purchased the property.
Buyback schemes are like assured return offers. In this investment option, the developer assures buyers to buy back the property at, say, 30%-35% increased price. This is generally done at a stipulated time period of 18-36 months.
Some developers give buy-back and assured returns features together. For example, the developer has assured you to buy the property at a 30% increased price after 3 years. Additionally, he has also assured to give 12% annual returns. That means you get around 66% appreciation while selling the property, no matter what the market condition/market value of the property is.
A number of parts of India have witnessed a rise in buy-back property investments. For example, in Delhi NCR, especially in Gurgaon, many developers are raising funds through buy-back schemes.
Also in southern Mumbai, especially in the areas like Worli, Lower Parel, etc., people are keenly investing in buy-back properties.
Check out some benefits of the buy-back investments:
Listed below are a few key benefits of the buy-back guarantee-
- Secured exits:
The profitable exit from the property is already determined at the start of your investment. This reduces the risk by locking an appreciated price of the property from the beginning.
- Unaffected by market conditions:
The market prices fluctuate. Though the Indian real estate market gives a hedge over inflation to the property owners, new investors refrain from buying the property with raised price ranges. This leads to difficulty in buying a prospective buyer for the property. But with buy-back property, you are not at the risk of losing any prospective investor, as your investor is the developer who has already agreed upon buying the property for an increased rate!
- Long-term and short-term investment friendly:
If you are a short-term investment person and like to flip properties frequently, this is a great option to consider. Even for long-term investors, buy-back guarantees investments because they might get a good percentage of returns after selling the property to the developer without having to lock their money for a prolonged period.
- Beneficial to the developers:
The buy-back option also helps developers to raise funds. Raising funds from individuals involves low-interest rates and requires less/no collateral. Additionally, the buy-back guarantee proves to be affordable to the developers. How?
A few developers give annual returns of a certain amount to the investors. Let’s say, Mr. Raj (the developer) has agreed upon giving you an annual return of 12% for 3 years plus has promised to buy the property back from you for a 30% increased price. You are satisfied with the offer as you are receiving 66% total appreciation while selling the property.
Here, Mr Raj has leveraged too! He has received funding from you at a lower interest rate of 12%. Whereas if he had gone to the bank and received the same amount of funding, he could have had to pay an interest rate of 15% and above!
A few risks and measures to consider before investing in buy-back properties
a) Make sure, that the project is not delayed by the developer:
The word ‘under-constructed’ itself indicates a huge risk factor, and that is, if there is a delay in execution, you have to deal with the property yourself because you won’t find any investor for it in the future. But there is still a ray of hope if the property is RERA approved. You can then register a complaint on the RERA portal and get the case solved.
b) Make sure the developer has industry knowledge:
Developers who are new to the real estate sector are unaware of market trends and might end up giving unreasonable returns. Hence, a proper background and profile check of the developer is crucial to be on the safer side.
c) Make sure that the project is RERA registered:
As mentioned above, if there is a delay in the execution of the completed project or the project gets stalled, you can register a complaint with RERA. But if the project is not RERA approved, it will become difficult for you to retrieve your investment.
d) Delayed possessions:
A delay in possession might lower your returns, resulting in a loss in your investments.
Investing in buy-backs can be tricky. In spite of the many benefits, we cannot ignore the major risks as well! It is always wise to be well-informed about the risks involved in buy-back investments, even though they benefit the buyer.
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