Buyback guarantee: Does it help or hurt the real estate industry?: Buyback guarantee: Does it help or hurt the real estate industry?
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21 November 2018 - 10:00, by , in Property Trends, No comments

When it gets to buyback schemes, which are designed to protect buyers against price variations, developers often include clauses that leave buyers at the receiving end, irrespective of whether property prices relish or not. We examine what home buyers need to look out for.

Many developers in the market, often come out with designs that can be deemed ‘suspicious’ & have the potential to harm the interests of home buyers. A ‘buyback guarantee’ is one such scheme, where the clients are given assurances against market fluctuations.

In such schemes, the developer offers an assurance that the property would appreciate at a certain percentage (say, 30 percent) over a specified period (say, three years) and if it does not understand to the promised extent, the developer would then repurchase the property at the promised appreciated price.

Such offers violate the SEBI guidelines, which state that no one can guarantee investment returns in India unless they are a financially regulated entity, which none of the builders is. The government has also revealed concern over such schemes & proposed a law -‘Banning of Unregulated Deposit Schemes’, which is supposed to put an end to such practices in the Indian real estate market. The bill intends to clamp down on realtors, jewellers & other deposit-seeking entities, as they will henceforth, require to be registered with the designated authority, provided under the proposed law.

Buyback Guarantee: A double-Edged Sword

  • Buyback guarantee is a double-edged sword, which can hurt home buyers evenly when the market appreciates or when depreciates.
  • If property prices appreciate, the developer may force the buyer to sell the property back to him at the contracted rate of return & not at the higher rate that the market offers.
  • If the property’s price depreciates, then, the developer may invoke some unreasonable clauses, to refuse the buyback to the client.

Buyback Schemes Act as a Business Model for Developers?

There is no doubting that buyback schemes, especially in the residential segment, have dented the credibility of the sector.

Developers maintain that such schemes are often the business model of Grade B and Grade C developers. Nevertheless, several leading developers in Gurugram, continue to sell their super luxury projects, with buyback guarantees. A consumer rights advocate points out that assured returns & buyback schemes were typically the modus operandi of commercial real estate developers. According to him, many of the investors in the retail segment were risk takers, & many of them made money while the market was on a rising curve.

The problem began, when such schemes made inroads into the residential real estate section, he explains. In the residential real estate section, the buyers do not have a much risk-taking appetite, & when they get cheated, they come for legal assistance. The developers have none but themselves to accuse, for turning their real estate product into a financial product, without having the legislative mandate for it. The proposed law will, hence, pinch many of them who have to return the money.

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